PDX - existing SFH, build additional 3 units in back...?

Question

Purchased a SFH in Portland Oregon zoned RH (multifamily) in January that sits on about half of a 3700 SF lot.

The house was in poor condition, but did pass appraisal and qualify for a loan (after laying temp carpet and stick on vinyl squares myself one weekend and doing some painting on some facia boards...), and has good bones.

1 BD - 1 BA - 600 Sq ft.

Purchase price ~190k

Renovations ~30k - new kitchen, remove chimney, knockdown and redo walls around chimney/kitchen, new ductless HVAC, hardwoods, Redo bathroom, full interior paint, Full replumb, updated electrical. Rented as of mid April.

All in - ~220k

Cash invested ~80k

PITI - ~$950

rental income ~$1300/m

I figure about break-even cash flow going forward , and could likely sell as a SFH without consideration of development potential for ~250k conservatively.

So far so good.

Due diligence with the city has led to the understanding that I can build up to 3 additional units in the back of the lot, with a building permit, as long as we meet development standards, setbacks etc. We are lucky that it is a corner lot, so there is access to the back via another street. There are obstacles to splitting the lot into separate town homes etc, so it appears having a quadruplex or Triplex will be the only option.

With setbacks taken into consideration, I have approximately 38' x 32' of space to BUILD on.

Grappling with these questions now -

1) more units better always? Even if meaning fitting 3 vs 2 means they are a little cramped, less private, less desirable. This will never be as desirable as some areas in Portland, although the location is convenient, it is right next to the I5 freeway sound wall.

2) plans/architect - I'm assuming we will need custom plans drawn up by an architect, vs having some generic design plans. It's a small space to fit 3 units, and with a sound wall facing you, some design consideration seems needed.

3) Build to hold and rent - construction financing - putting together a proforma - Have talked with umpqua bank about construction loan....seems basically only available in a non owner occupied if I can stay below Jumbo (417k total), my thought is if I go this route, I would pay out of pocket whatever the difference is to stay below this threshold.

1st draft proforma

build costs at ~300k,

total invested of ~520k, lets say ~550k all in. - PITI = ~$3000

4 units gross rents estimated at ~$5000.

4) VS build to sell. Obviously opens up more opportunities for investor financing etc.

Build costs ~300k

total invested ~550k

Estimated Sales Price - ~750k (very few comps on anything like this, this is super guess).

5) GC - act as it myself......? Bad idea? I don't have construction experience beyond this renovation.

My thoughts are that if I can fit into a traditional financing situation to keep and hold, long term this will pay off a ton. I will have hopefully manufactured a cash flow positive situation in a place where current cap rates make that hard to do.

Thanks for any thoughts on this.

Account Closed · Answer

It sounds like you already renovated the 1/1 SFR so at this point razing it to build new would waste that reno cash. Near a freeway, you're probably better off holding/renting. The differences in sale prices near freeways vs non-freeways are much bigger than the differences in rents near freeways vs non-freeways. e.g. a condo might sell for $75k less but rent for only $75/mo less due to proximity to the freeway. Also renters are more tolerant of the noise and pollution because they're not making a huge long term commitment in renting the place. Different story for a family buying a place in which to live. I'm rehabbing a rental on Columbia Blvd and have done a lot of research into sound proofing. Happy to share what I've learned over coffee. As far as maximizing use of the site, it makes sense to add as many units as possible if you're holding or selling to another investor. Without having any info about the specific location (but it sounds like maybe Arbor Lodge on the west side of I-5? Piedmont on the east side is zoned R5) my guess is that, without razing the site and maximizing the lot for construction of attached rowhouses, it may not be ideal as owner-occupied spec housing. Being close to the air pollution is something families tend to want to avoid, so you might consider a plex that's designed with young singles in mind. But I think RH is still based on units per sf density rather than on FAR, so it makes sense to build larger units. It might pay off to design units that are condusive to roommates, with bedroom/bath suites and a shared kitchen. You could rent out "suites" separately and earn higher rents than if you just rented a 3br apartment to a family.It depends on the lot, but you might also be able to subdivide and put in skinny attached houses facing the other street. A well-designed space that's 15' wide can seem ample and even spacious. A designer would be able to help. Happy to give my opinions if you'd like.

Derrick Aragon · Answer

Have you thought about demoing the house and maxing out the lot, i dont know what that looks like 5-6 units or multip SFR with adu. Even though you already renovation, 220K for the lot while it breaks even during development process is not bad,. my .02

Account Closed · Answer

What @Derrick Aragon said makes sense. I looked up RH and density is actually based on a 2 to 1 FAR, so a 3750sf lot allows a 7500sf building at 85% lot coverage up to 65 feet tall. Without taking any common area into consideration, divide 7500 by 19 units (20 units triggers inclusionary zoning/below-market rents) and you get an average of about 395sf per unit. Smaller micro-apartments make sense in this location IMO because near MAX but right next to the freeway would probably attract single people without kids. I haven't developed anything in Portland yet, but based on what I've heard, it can take years for permitting and design review, so having a tenant in there at market rent makes sense in the interim. Looks like you scored a great property!

Randy Johnston · Answer

@Julian Illingworth Congratulations, sounds like you found a nice property for development. One thing you will also need to consider is LTIC (Local Transportation Infrastructure Charge). This is a new fee adopted by the city last July and it applies when you have a lot for development and there are no curbs or sidewalks along the property. The charge is $600 a linear foot, so if you have a 50-foot frontage, the cost of this fee will be $30,000 just to start, and in your case it may be more since you have a corner lot. That said, based on the calculation from Account Closed, it would be worth the addition costs if you can get 19 units. BTW, you can either pay the fee or build out the half-street improvement yourself.As for the time-frame, you can expect anywhere from 18-30 months, just to get approval to build.Acting as GC without a contractor's license is really frowned upon in Oregon and could lead to hefty fines. Besides, on a project of this scale, it would be wise to hire someone with experience.Just my 2-cents worth. Good luck and keep us posted.

Julian Illingworth · Answer

Yes North Portland. Yeah we already renovated, I understand it isn't the highest and best use, and likely ultimately leaving some money on the table . In fact we were approached shortly after closing with an offer significantly higher than what we paid, and they would surely have torn down to build on the whole lot. If we had the capital and knowledge it would have been a tear down and build for sure. This option allows us to reduce carrying costs and figure out the next step. Good points on sale-ability vs rent-ability of units in undesirable locations. I think very unlikely someone would buy this as an owner occupied investment prop. We aren't able to subdivide due to the fact that the minimum density for this zone is 1 unit/1000 sq ft, and the house sits on ~2000 sq ft, so for it to be allowed to seperate, it would need an ADU in the basement somehow. We considered it, but has major design and space challenges. thanks for the replies

Neal Collins · Answer

What part of the sound wall? Sounds like it may be in North Portland? If so you may want to go look at some of the new developments that have either been recently built or are going in now. Look at price per square foot comparisons for the land. A 600 sq ft house in RH just is not the highest and best use.