All Forum Posts by: Justin R.

@Benjamin Mavity Yeah, there's basically no reason to build a traditional DU in a multifamily zone if you can accomplish your goals with an ADU.

The challenge in parts of IB (and other coastal areas) is often whether you can get the product you want -- unit size and height -- under the 30' coastal heigh limits.  If you're outside the coastal zone, it's way less of an issue.

As a general comment, I will add this, based solely on what I've learned in my life journey (put as much or little weight on that, given you don't know much about me): "Real Estate Developer" is a professional position as projects get larger.  There's no such thing as having money and investing in a project to build a bunch of units and hiring fee-for-time consultants to do it for you (or your client).  There are two questions with these projects:

1. What Should be Built Here?

2. Should we Build it?

Most people go straight to the question What Can be Built Here? which is interesting, but most people don't appreciate the difference between that question and #1 above.  They don't know what they don't know.  From an investor perspective, the two questions above are the only ones to focus on.

My friendly advice is just to help your client understand this difference -- they'll thank you for it eventually.  "Can I" is an easy question to answer.  "Should I" is exceedingly more important, more difficult, and more valuable to answer. 

@Robert Leitner First, sorry you found yourself in the rabbit hole.  If you and I were sitting down for coffee, I'd suggest what you should do.  Trying to do so in a forum is a fool's errand.  Here's what I'd say:

There's a big difference between data, information, knowledge, and wisdom.  Searching online generally gives us information, which really isn't helpful unless we already have the experience and intellectual context to turn that information into knowledge -- to understand it.  But, to act with confidence what we really need is wisdom -- an element of judgement to separate what *can* be done to what *should* be done.

I say this because earning commas and letters after your name means you've attained information and knowledge about an area.  It doesn't mean you have the wisdom -- the judgement -- to apply or advise.  Your situation, if that's all you have going on, is simple.  You've got a couple choices:

1. Become wise on this topic yourself.  Start by listening to 100+ episodes of this podcast, amongst others.

2. Find someone who is wise on it already.  Start by looking for someone successful doing the same stuff you're doing, and try to siphon their wisdom.  This is often the most productive path to take -- just walk in the footsteps of giants.

3. Pay someone for their wisdom, not their knowledge.  Start by finding a person who you know has the experience to make sound judgements on the topic.  THEN pay them for advice.  Just because someone is in the business of selling advice doesn't mean you should buy it from them.

And, since you asked for a recommendation on path #3, I would direct friends here for affordable professional advice in your situation.  GL.

If it's a temporary thing (like a flip), a JV agreement is probably fine because all of the income (or loss) is going to be current income for everyone. Once you start getting into holding real estate for rental, you should be looking at Operating Agreements and structuring as either an LLC (most common) or GP (less common, but something situation dependent to consider since you're in CA). Having title match actual ownership is helpful for both tax and asset protection purposes.

I'd suggest searching for "rental property LLC operating agreement" or something similar to see what you find. Or, reach out to people you have personal connections to -- the OAs I've honed over time aren't something I personally post publicly.

@Eric Leach For the fictional persona of average "Joe Investor" starting out in San Diego with long term rentals, I'd say this:

You have to work (much) harder to own properties that throw off current free cash flow in San Diego than you'd have to work in Othertown USA.

That's just the reality.  And, so, "investing" in San Diego is going to involve either a bunch of additional personal effort or a business operation that results in properties with stable rents and free cash flow.  Either way, that's not the definition of "investing" ... there's an element of work involved.

Why would people do this?  For some, it's probably unintentional and because they're ignorant of what else is out there.  For many (myself included), it's because of the natural tail winds you mention.

Many people think of these things as binary choices, as if one is exclusive of the other.  It's so tiresome.  Better to use AND instead of OR.  

• This now AND that later.  
• This first AND that next.  
• This in my current situation AND that in my future.  
• This while I have a job AND that once I've quit it.
  This until I finish school AND then that once I have more time.
• This for some of my money AND that for the rest.
• This so I feel secure AND that so I've got a chance for a big win.

Could be split 100/0, or 50/50, or 75/25, or whatever ... and could change as you grow.  Point is to get rid of the zero sum mindset, thinking you have to give up something to get something else.  If I end up teaching my kids one thing, that might be it ... I wish I had learned it earlier.

My 2 cents.

When you submit your project, you'll get to talk to a real person at the SDHC and it's a sort of give-and-take conversation.  In exchange for getting higher density, you're giving the community affordability ... they want to help shepherd that affordability to all who need it while making sure the project is successful.  End of the day, you need their approval and they need your housing ... you both need each other.

The last paragraph is actually an interesting question.  The reality is no one knows the ordinances better than developers who are building that type of product in those areas.  That's the key advantage you build over time as someone active doing this stuff and is a huge barrier to new people getting going with development.  Sure, there are a very few architects that specialize in certain types of building product and know these things really well too ... but in general this is one service that can't easily be bought.  Because, the people with the knowledge aren't in the business of selling answers.  They know the answers as a side effect of what they're actually in the business of doing.

City: You can get some answers to specific questions with the City, but (a) it takes a lot of effort to actually connect with them and (b) you have to know the specific questions to ask and (c) you have to hope you get an experienced person answering the inquiry.  In general, asking if you can do something is far less effective and asking them to approve something you want to do.

Architect: Everyone knows something, but few people know lots of things. And, experienced architects don't want to waste their time answering questions from someone who isn't a client. You may get an answer about an ADU from one person, but have to speak to someone else about CUPD zoning details. That's a lot of relationships to forge.

Land Attorney: Doubtful.  Unless they're in the game every day doing projects like the ones you're being asked about, it's unlikely they know answers to questions like this.

I'd sum it up as this: an answer is just an answer, it's not verification that it will actually get done.  Meaning, you don't know the value of an answer until you've actually submitted and gone through approval.

Which brings me to the reason I think this is an interesting question.  In my experience, there is an information economy for exchanging information is that doesn't run on cash -- it runs on reputation and favors.  It runs on connections.  And it runs on finding people who want to help you because they like you.  And getting people to like and respect you ... well, that's not something you buy or fake.  I feel like it's the whole "your net worth is your network" thing.

Anyways, something I didn't understand for the first 5 or so years I was doing this stuff, but I wish I did.

Lots of questions here.

- CUPD is not a favorable zoning for doing straight up traditional residential development at density. "Why" is beyond the scope of how much my fingers want to type right now.

- I don't know the answer about how bonus ADU density and FAR interplay. I can't @mention Matt D, who could probably answer that question.

- Complete Communities only makes sense if you're building a really big project. The affordable unit count requirement is set based on the base zoning and lot size, so in order to recover the financial hit from the affordable component, you need to amortize it across a large number of units. For example, a base density of 7 may require 5 affordable units. To make 5 affordable units pencil out in a traditional market rate project with normal capital stack, you'll need to be building 25+ units in the project.

- When you have deed-restricting affordable units, you are required to verify the income of potential renters. You can be audited. While it's possible to play games, ignore rules, or forge documents, it's not a good idea. I don't know what the penalties are if caught. The deed restriction stays in place when the property is sold, so it'll be valued based on the decreased income.

I would add that "affordable" doesn't necessarily mean low income. The same AGI level is used throughout the City (and maybe the County?), meaning that an affordable apartment Kensington is the same rent as an affordable one in a low-rent area. The affordable rent in a low-rent area might be close enough to market rent to still be palatable when underwriting a project.

Lots of questions here.

- CUPD is not a favorable zoning for doing straight up traditional residential development at density.  "Why" is beyond the scope of how much my fingers want to type right now.

- I don't know the answer about how bonus ADU density and FAR interplay. I can't @mention Matt D, who could probably answer that question.

- Complete Communities only makes sense if you're building a really big project.  The affordable unit count requirement is set based on the base zoning and lot size, so in order to recover the financial hit from the affordable component, you need to amortize it across a large number of units.  For example, a base density of 7 may require 5 affordable units.  To make 5 affordable units pencil out in a traditional market rate project with normal capital stack, you'll need to be building 25+ units in the project.

- When you have deed-restricting affordable units, you are required to verify the income of potential renters.  You can be audited.  While it's possible to play games, ignore rules, or forge documents, it's not a good idea.  I don't know what the penalties are if caught.  The deed restriction stays in place when the property is sold, so it'll be valued based on the decreased income.

I would add that "affordable" doesn't necessarily mean low income.  The same AGI level is used throughout the City (and maybe the County?), meaning that an affordable apartment Kensington is the same rent as an affordable one in a low-rent area.  The affordable rent in a low-rent area might be close enough to market rent to still be palatable  when underwriting a project.

Adding on to what @Dan H. and @Doug H. said (both of which I concur with)...

There's a big difference here between single family properties and multifamily properties.  

A multifamily property (and, technically a single family property that is a duplex, but ignore that bizarre technicality for a moment) has legal separate dwelling units (DUs) for which the original builder paid DIF and other fees to create. Every one of those units can potentially be an STR under current city policy.

This is different from single family properties. In this case, only the primary DU (the original home) can be legally offered as an STR.

Basically, if someone didn't pay DIF fees to create a legal DU out of the unit, you can't STR under current policy. Both types of properties, however, can have ADU units (technically called "companion units") added to them. Those ADU units cannot be STR'd.

All this is a bit wonky, but it answers your main question: it's possible to take a multifamily property and legally STR all the units. It's also possible to illegally do it. And, to underscore what was said earlier, it's VERY unlikely to be able to legally do it starting sometime next year (unless you make other changes so it's legally treated as lodging or SRO use).

Please don't take this as criticism ... just advice coming from a place of helpfulness:

1. Add a picture to your profile.

2. Chime in on some other threads and try to give value to others.  Build a collection of work on BP that shows you're in it for the long term.  First post questions like this don't attract helpfulness.

3. Lots of AMBITIOUS people jump in with posts like yours.  Many are never heard from again because they are quickly distracted by something else shiny.  People don't like to help others who don't show staying power.

4. Your post is all about you.  There are 19 references to yourself.  And, literally, every sentence uses either "I", "my", or similar.  Adopt a mindset of how you can provide value to other people.  It will make them want to do the same for you... including opening doors for deals you won't otherwise see.

In general, I'd say keep your base source of income until you can trade your time for more money doing your own deals (in whatever slice of REI you choose). Unless you've already got the mindset and built an advantage over other investors, leaving your base income job is a net disadvantage, IMHO.

@Anjali L. I'm gonna go against the trend here.  I rent SOME of my homes to people without modern verifiable credit and background (read: undocumented residents or recent immigrants).  There's an ethical and a business reason for it:

1. We subscribe to the maxim that Everyone Deserves a Home.

2. Good people who have very few housing options are *very* likely to stay, pay rent, and cause no problems.  They have very few housing options, so they're protective of the option they're living in.

The trick, if you go this route, is to separate the good from the bad.  It takes more work than having a keyboard, and I wouldn't do it from a distance.  BUT, it's not like the US is the only country to figure out how to do trust-based commerce.  SSN and FICO scores are how mainstream business in the US works, but there's a huge part of US commerce that doesn't operate that way ... and a gigantic share of global commerce that doesn't.  You can stick to the mainstream and go after the same people your competition is (which is totally fine), but you can also build an advantage by figuring out how to capture the fringes that others ignore.

I'm not claiming that you *should* do this or that any of this is relevant to your situation since I don't know anything about you, but wanted to at least share the perspective behind how we think about it.