Single Family zoned R-3, want to build 3 duplexes or 2 triplex

[Derek Vaughn]

Good morning friends! Wondering if there is anyone in the Central Valley area of CA that is familiar with building duplexes or triplex. There is an old house for 159k in downtown Bakersfield (which would need to be scraped) that I have had my eye on. The lot happens to be zoned R-3, and I figured that we could build either 3 duplexes or 2 triplexes. Either way, we can fit 6 units....Is it more cost efficient to build 2 triplex as opposed to 3 duplexes? Can anyone steer me in the right direction or helpful tips? At 1,000-1,200 per door rent (demand downtown here is crazy), I am trying to see if it would make sense. I usually get a gut feeling about something, but this one has me all over the place. Thanks everyone!

[Mike Wood]

@Derek Vaughn No experience in CA.  Is it one single lot that can not be subdivided? If it can not be subdivided, then you are talking a commercial loan (assuming you not paying cash for everything, which means higher equity requirements, high loan rates, ARMS, etc, since you are over 4 units.  

If you need to build six units (I would limit it to 4 units for better financing options and easier to sell to an owner occupant), then it should be cheaper to build one building, with six units.  

Also, $1200 per door might sound good, but if your in CA and your build costs are $200/ft2 (which alot of CA guys on BP are stating is the norm), I am not sure this would make much sense.  For the sake of discussion, lets assume each unit is a 2/1, 800ft2, so the total project is 4,800ft2 for six units.  You land costs are $160k, demo assume $20k, that puts your total costs around $1,140,000, with income of only $7,200 per month ($86,400 per year).  My guess that would be a very low cap rate property (assuming 50% expenses would be a cap rate of 3.78%).

That would not be something I would be interested in. But I'm not in CA, so I dont know if something like that would be acceptable.   

[Karen Margrave]

We aren't going to be able to give you enough information for you to make a decision, there are too many variables. The fact a property has a specific zoning doesn't mean that you can actually get that number of units on it. 

• What is the size of the lot? 
• What will the costs be to tear down and haul off the house? (once you know that, you'll have a better idea of your true lot costs) 
• Does the house have asbestos? 
• what are setbacks required for sidewalks, landscaping, parking requirements, etc. 
• Are there any easements on the property? 
• What are height limits? 
• what is the lot coverage allowed, etc.? 
• What are design costs going to be (architectural and engineering)

Those are just a few of the things that need to be figured out. In addition, as to the cost of construction, it varies widely, depending on the style of the building, materials being used, finishes, etc. 

I could go on, but you get the picture. Once you know what can actually be built there you can begin to figure the numbers and decide if it makes sense. 

[Derek Vaughn]

@Mike Wood - thanks for the info.... Good to know that people are saying about 200/ft is about average for out this way. That all makes total sense because we were talking about doing the 2/1. It is a single lot that is only 8,523 sq ft. My realtor brought this to me and needed a quick answer, so I appreciate the fast response. Looks like it may not give me the kind of return that I am used to. 

@Karen Margrave - lot size is 8523. Talking about 4800 Tear down should be able to get done for about 20k. No asbestos, and my realtor has had talks with the city about diagonal parking in front of and on the side since it is a corner lot. There are already sidewalks in place, I am checking on how far the structures need to be from the sidewalks and figuring about 200/ft2 to build. Seems like if this other realtor is pressuring mine to hurry that it may not be the best deal for us. I appreciate the detailed response. 

[Karen Margrave]

@Derek Vaughn it may be of benefit to you to go talk to a civil engineer and find out what they think as far as what you'd be able to get on the lot. You need answers quickly, and don't have time to teach yourself the ropes. Don't be pushed. Make sure you are comfortable with the numbers. 

[Max Gradowitz]

I'm an agent in Bakersfield.  For some reason, nobody seems to think demolition and rebuild is a good idea here.  Most of my clients are investors like you.  When they get the itch to demo a building (and downtown has a LOT of dilapidated buildings as we both know) they always look into the costs of new construction permits, costs of engineering/designing the structure(s) and getting them approved by the city, and the costs of hiring private construction contractors to build a brand new structure...  Forget demolition costs - that's pennies compared to everything else!  After they add everything up, it ends up being a poor investment decision.  I've had plenty of investors dip their feet into these waters and none of them end up pulling the trigger on actually doing it after doing the math.  Not trying to discourage you from building the investment property of your dreams, just giving you my experience with this kind of thing.

[Derek Vaughn]

@Max Gradowitz - I agree with you, it seems like multi family units that are already established and could use a little TLC have much more ROI than a tear down in rebuild that may work better in areas with higher rent. I appreciate the honesty. Mike's numbers above kind of put things into perspective.

[Mel Jeffrey]

@Max Gradowitz I agree with you a 100% @Derek Vaughn you really need to make sure that the deal will pencil.

[Karen Margrave]

@Derek Vaughn if  @Max Gradowitz is in that market, he knows it better than we do. There's so many factors to weigh when you are building new construction. Aside from the costs of construction you need to understand the local market and the demand. Even in a local market there are neighborhood variances.  If demand is strong, and supply little, rents are high, etc. that's when you start looking at new construction. Bakersfield was hit hard when the market crashed, it's probably still awhile before new construction on any scale is going to make sense, but, like I said, I don't know your market. 

[Manolo D.]

Max Gradowitz Every thousand dollar counts. Demolition costs are part of the expenses, you can't simply, forget it.

[Max Gradowitz]

Originally posted by @Manolo D.:

Max Gradowitz Every thousand dollar counts. Demolition costs are part of the expenses, you can't simply, forget it.

I agree!  What I meant was that in my experience many people think the demolition and construction costs are going to the be major expense of a new construction project like the original poster described.  I've noticed that, in reality, while demo expenses are a big part of it, oftentimes people severely underestimate the other costs involved, like getting everything drafted/designed properly and getting every part of the construction permitted by the City.

My overall point was that demo costs are more predictable and foreseeable, whereas people that consider demo and rebuilds oftentimes underestimate the other costs involved, which tend to add up to so much upfront cost that demo/rebuild projects end up being a not-so-great investment decision after you crunch all those numbers.  This is just what I've noticed in Bakersfield anyway...

[Manolo D.]

@Max Gradowitz I recently demolished an old house, i priced it at 5k plus bins. the owner went through 7 bins, at 600-700/bin, that's still a 10k ticket. 10k is 10k, I don't know about you but 10k from my pocket is still heavy. I can't wrap my head around forgetting a 10k ticket.