Remodel for $1m worth it? Please help!

[Elias Barend Westhof]

So a year ago me, my wife and her parents purchased a 4-plex in Los Angeles. We payed $1.35m for it. They now want to remodel it for $1m, in order to get $3000 a month from each unit. I, however, think we should rather spend $200k and get $2500 a month from each unit, and spend $400k building an ADU generating 3500 a month. The problem is, I am alone in this, and they are set on going through with the plans as we have payed for the plans and we are ready to begin moving forward with a contractor.

I am panicking a bit, as this doesn't make much sense to me. Could any of you give your input on what on earth I should do? What do you guys think?

[Dan H.]

There are many responses from people who are not Landlords in CA and therefore may be unaware of some of the CA subtleties.  By AB1482 a no-fault eviction can only occur if the remodel is large enough that they cannot be expected to occupy the unit for the remodel.  AB1482 requires the tenants to be compensated one month's rent.  Your jurisdiction could have an even more stringent rent control.

I am unsure that your smaller remodel would qualify as substantial enough to qualify for a no-fault eviction.

I agree with @Jay Hinrichs that the $1M remodel for four units seems excessive.  I have rehabbed many units as part of BRRRRs and my usual cost is <$50K per unit pretty much replacing everything except tubs.

The BRRRR brings up my next thought. Are the people who are advocating the $1M rehab expecting to refinance and obtain a valuation greater than $1M? When I do a BRRRR I desire an increase of value 2 times the cost of the rehab and this is because it is work and my rehabs are less than $50K/unit (so if I rehab 2 units at a total cost of $70K, I expect at least a $140K increase in value as established by the refi appraisal (in my market refi appraisals are conservative/low). If you spend $1M to obtain an increase in value of at least $1.1M such that in effect you have achieved a >$100K value add then this combined with the higher rent achieved could justify the $1M rehab. My only issue is the $1M rehab seems excessive.

I therefore am not against the $1M rehab if it returns a valuation greater than $1M.  I am leery of what sort of rehab should cost $1M for 4 units (I am thinking <$200K for 4 units).  Make sure you have received multiple quotes for this size rehab.

Good luck