Understanding zoning creates big gains

[Michael Trees]

Investment Info:

Large multi-family (5+ units) other investment.

Purchase price: $300,000
Cash invested: $75,000

Live in fix and flip of a demolition house on a quarter acre in the path of progress in a hot market zoned fourplex. Reconstructed house through a second story addition, added a single two storey stand alone apartment in rear corner of yard. Lobbied to have the site rezoned to an 18 apartment site to four storeys. Current development profit opportunities of $1m - $2m. Profit to date $325k.

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

I understand zoning laws. I decided to buy in a B/C neighbourhood 1/4 mile from a train station in an area which state policy suggested should be redeveloped by 2030 to a much higher density. I moved there to avoid capital gains tax. Others thought I was crazy but I saw a likely upside of 400k before the big money apartment developments required in future years. I plan to pay no tax on my gains.

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

The property was advertised on the local version of zillow. My grandparents lived on the next street when I was a kid and my dad still owned their house. The area was suffering from urban blight. It offered the best value for money we could afford across the whole city. The statement that sealed the deal was 'better the ghetto we know'. The agent we bought from was surprised that a young professional couple were buying the house as their own residence. no negotiation reqd.

How did you finance this deal?

Conventional loan 20% down

How did you add value to the deal?

Owner built reconstruction of existing falling down house including second storey addition to live in. Owner built 2 storey studio apartment at rear. Lobbying local government for zoning changes expanding site yield from four to 18 units. Design of master planned development. Phase 1- new rear yard six plex. Phase 2 - House demolition, new 11 unit building. All 2x1 on one title appealing to retirement market on our primary residence site not attracting capital gains allowing us to keep profits.

What was the outcome?

Ongoing. We are almost ready to start construction on the six-plex but need to decide the extent we want to capitalize on the project.

Lessons learned? Challenges?

If we had a good deposit we may have structured this deal differently, however I think we have done well under the circumstances. If I was confident I was going to get the zoning change when we brought the property I would not have added a second storey to a house I was going to demolish. I hedged my bets for comfort. I am unsure if I would have done it differently in hindsight.

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

Apart from our mortgage man this has been almost exclusively a sweat equity deal.