All Forum Posts by: Kevin Z.

Hi Colton,

I am not an expert on this topic, but I do feel like I have a lot more clarity than I did when I made my original post.  My understanding is if there are more than four units on the property, it will qualify for commercial lending and will not qualify for conforming residential lending.

In my case, I was not considering the owner-occupied concern, just that I did not want to go into a commercial lending product if I wanted to refi.  I have since refinanced the property at such a low rate that I am no longer concerned about having to go into a commercial loan if I want to refinance, as I don't think that will be an option again for quite some time.  My concern around a smaller buyer pool for 5+ size properties still stands, but I also am probably overly concerned about that in the Los Angeles market.

Hi,

I am interested in possibly converting my common area power over to solar, depending on costs.  This is a 4-unit, flat roof building with great sun exposure.  I am only looking to power my common area, which would include a small laundry room (gas dryer), some lighting, and a security camera system.  Usage is around 135 kWh per month.  Looking for someone who can advise on (i) equipment, (ii) any government rebates/ incentives, and (iii) ultimately perform or sub-contract the installation.

Thank you very much!

Hi,

So where things were left with my lender around 4 months ago was the additional ADUs would take me into commercial lending.  There is some grey area where for a conventional, conforming loan they would basically ignore the ADUs and lend only on the value of the original 4 units.  This would be fine in theory for refinancing purposes but would likely limit your buying pool to those with commercial lending.

Zoning is not in question in Los Angeles as they are "by right", meaning if they fit on the property, permission can't be denied due to recent legislation.

For me, I ultimately decided against the build because my property was a pretty tight fit for the ADU units driving the cost up and a number of negative factors for the rest of the property made it iffy for me to begin with. The lending complications pushed me into the no zone. That said, if you are comfortable with possibly a commercial loan, the ROI of the ADUs is pretty compelling.

Hi,

Thank you for your reply.  The property currently cashflow and is fairly stable with the 4-units in place.  I believe the property is zoned for more units and at one point, this building was actually 6 units (several owners before me).  The current CofO is for 4 units.

I am less concerned about relying on the ADU income for refinancing purposes but that I or a future buyer will be forced to use commercial lending with less favorable terms if the ADUs are in place.

Thank you again!
 

Hi,

Sorry if this has been covered before. The only thread I could find on this topic was pretty old ...

I have a 4 unit building in Los Angeles that I am considering adding two additional ADU units. I have heard mixed answers to the question of if I build these two accessory units, will I have to use commercial finance going forward, and or will this limit my buyer pool to those with commercial lending?

The bulk of the information I have seen is that we are in a sort of grey area, especially because the ADU laws around apartment buildings are fairly new in Los Angeles. Some have said that because these are accessory units not physically connected to the existing building that I can (i) maintain my current residential financing and (ii) I should not need to use commercial financing should I wish to refi/ a future buyer should be able to get a conventional mortgage. Others have advised that no, it will be considered larger than 4 units and thus require commercial underwriting/ loan.

Does anyone have any practical experience with this?  I will certainly consult with my mortgage broker when I am closer to pulling the trigger but am also hoping for a wider pool of experience.

Thank you very much!

Thank you for all the replies!  Lots of good ideas/ information.

@Account Closed , the apartment does have laminate throughout.  As to the cabinets I mention, the kitchen was redone but some of the storage cabinets throughout the unit have the older original ones with several layers of paint.  So I meant just replacing those for something nicer looking.

There is no question that any of the items on the list would make the apartment better.  It is just sometimes difficult to separate what we all know we would want in the places we live from which of these upgrades will actually yield a return.

I am very on the fence about the HVAC.  It is very expensive but my property manager has found in his experience that it is an amenity that people will pay more money for, especially when showing in hot weather.  I wonder if going with a few nicely installed window/ wall units would be a good compromise vs. central?

Because the apartment is 4 bedrooms, I am sure the dishwasher would be appreciated.  That said, I pay the water bill so I need to consider that.

Personally, I have found that a lof the basic cosmetic fixes actually go a long way for what they cost.  People just have a nicer first reaction if the unit looks nice.

Thank you again,

Kevin

If permits were not pulled/ there is not an amended certificate of occupancy, the systematic code enforcement inspectors will almost certainly order the units converted back OR require permits to be pulled and proof that the conversion was done to code (assuming that is even possible).

Additionally, under rent control, you will then need to credit the existing tenant for the loss of the amenity that occurred when they lost a bedroom.

Proceed with extreme caution as SCEP inspectors do not mess around . . . 

@Eddie T. Thank you for the reply!  Sorry, I should have been more specific:

The unit is under moderate rent control meaning that when vacant, I can raise the rent to anything I want.  Once a new tenant is in place, I am then restricted on how much I can raise them each year.  

So, it is definitely important to get the initial rent as high as possible as the new tenant could stay indefinitely. 

Hello,

I just had my first vacancy in a 4 unit apartment building that I have owned for about two years. It is located in Los Angeles, fairly blue collar, strong rental area a few miles west of USC. The building is subject to rent control.

The unit that is vacant is my largest and highest priced unit. The prior tenant was paying $2,200 /month for the 4 bedroom, 2 bathroom unit.

It is in reasonable shape and was upgraded by the prior owner to some extent. The level of workmanship is of a handyman quality level so could certainly use further improving.

Below is a list of possible improvements/ upgrades I could make to the unit and I would love any advice as to what improvements have provided the best return on investment in terms of commanding higher rents. The list is in no particular order.

• Remove popcorn ceiling, paint walls and ceilings flat white
• Recessed lighting throughout
• Central air with a rooftop package unit and over-the-roof ducting
• New cabinet over the stove with a microwave vent hood
• Dishwasher
• Shower enclosures (currently just has shower curtains)
• New white vinyl windows (remove and dispose of the existing window covering),
• Bead-blast the front screen door and spray-paint white (or just replace)
• Replace the few remaining original painted cabinet doors
• Switch to new Decora outlets and switches
• Basic handyman work like recaulking the bathtubs

Thank you for the help and looking forward to hearing about your experiences.

Best,

Kevin

Hi,

Thank you all for the replies.  All good points!

@Greg S. - Under rent control laws in Los Angeles, the only way I can motivate the tenant to leave is to offer to pay them to voluntarily leave.  No cause eviction is illegal under LA rent control.

I certainly can put in a new tenant without upgrading but I would not be able to lease the apartment at significantly higher rent.  Given that once a tenant is in, they are there basically as long as they want to be and rent can only be increased by around 2% a year it is wise to get the new rent as high as possible.

Thank you again,

Kevin