Quad Development project in South Pasadena CA

[Richard Mercado]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $1,560,000

Current development project adding two 2BR /2BA ADUs to an exiting Duplex in South Pasadena, CA. Will also add two bedrooms to the existing Duplex making them 2/1 on each side.

What made you interested in investing in this type of deal?

Opportunity to have 4 cash flowing units in the highly sought after area of South Pasadena. Great schools and conveneitn location close to Metro Line, and nearby hospital.

How did you find this deal and how did you negotiate it?

Found it on the MLS. Realtor negotiated.

How did you finance this deal?

Conventional financing 20% down.

How did you add value to the deal?

In process adding two 2BR /2BA ADUs to the exiting Duplex two additional bedrooms to the existing Duplex.

What was the outcome?

I'll be able to answer that better in 6 months when the project is complete.

Lessons learned? Challenges?

Getting approval from the City has been very challenging due to the historical considerations.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I highly recommend my Realtor Brad Gilboe at BWG and my lender Elijah Aldinger at Cross Country Mortgage.

[Steven S.]

@Richard Mercado

Congrats on the project! I see you bought https://www.zillow.com/homedetails/521-Mission-St-South-Pasa... at the right time... 3.11% rate loan for $1.2M, congrats on that, it saved your deal's cashflow.

I ran the numbers on your deal for fun (with my best-guess development scheme): By turning this into a 4-unit property, spending ~$500k on the construction, and renting it out for top-of-market rents, you'll be holding this property at a 5% cap rate with a 4.7% Cash on Cash return.

With all-time high rents right now, you are at least getting about the same return as a current money-market savings account, ~5% CoC return.

Your risk is if you need to sell once it's built, it looks like you will end up breaking even or loosing on the deal (at today's values). It's a $2.25M all-in cost project, which will sell for $2.0-2.25M at the end of the day (see the bottom-right of the model above). Sure, you have cashflow available once you stabilize the 4-units due to your low interest rate loan, but the value of the property you will deliver will likely be below what someone else is willing to pay for it. You won't get a 5% cap buyer on a 2-4 unit property. Unfortunately, they just aren't valued like that unless they are 5+ units.

I suppose you are planning on appreciation building up the value over time, so it will become a net-positive value deal? It's interesting to say the least, would be glad to understand why you chose this & what you intend to do with it (to hold for rental CF once built, to flip it once it's built, to hold it for 3 years then flip it, etc). Looks to me like the only option you have is to hold it and hope rents & value go up over time, as you won't be able to sell profitably without that occurring. What are/were your projections/intent?