Building from scratch in Los Angeles

[Spencer Wardwell]

Hi all!

I'm looking to get some advice on my next real estate endeavor in Los Angeles.

My current goal is to not only make a wise investment, but I'd also like to upgrade my current living situation (I currently live in a 5br 2ba SFH in an "up-and-coming" neighborhood I purchased back in 2016, and want to live in a nicer neighborhood with fewer roommates).

Since buying in LA is insane right now ($900+ per sq ft.), I'm considering either buying a lot and building from scratch or doing an extremely extensive rehab on a very distressed property.

By the end of 2022, I expect to have about $250,000 in capital and have great credit. I figure I can get a loan of approx $1.25M and build / rehab a decent property with that money (where as simply buying wouldn't get me much).

Ideally, I'd get a 2/3br 2ba in a decent neighborhood and build an in-law-suite on the property, with the plan being to move into the in-law-suite and rent out the home.

Neighborhoods I'm looking at are in NE LA: Mt. Washington, Eagle Rock, Cypress Park, etc.

Any advice is appreciated!

Does anyone have any experience doing this? Any pitfalls I should be aware of or things to avoid? Is $250,000 enough capital to execute this plan? Pros & cons of building vs. rehabbing? Recommendations for build & design firms? Anything information helps!

[Rick Albert]

Hey Spencer,

I've been working with a developer for the last 11 1/2 years.  Building right now is about $400-$450/square foot.  You have to install sprinklers, rain barrels, and solar panels.  There are also linkage fees that may apply and can be as much as $15 per proposed square feet. For example if you were to build a 2,000 square foot home, that's $30,000 in fees that could go towards a new kitchen remodel instead.  All these things that aren't really giving you the return you are looking for in the neighborhoods described. The fastest I have seen builders go from the very beginning phases to completion is about 9 months. That is assuming all goes right with the city.

If you buy a small house and do an addition, once you hit over 50% of the existing house size, you are subject to new building codes (please verify has codes change all the time).

Your best bet is to find one that you can rehab.  Go with the lowest down payment, use the rest of the money for the rehab, and then refinance.  I've done that on both of my house hacks here in Los Angeles.