With the incoming (some say current) recession that we will be facing, discretionary income will be lower. For the "smaller" mom and pop type families that want to add a master bathroom/bedroom, remodel their kitchen, or add a second story, they will likely not have the means, or want to jump into such a project during these uncertain times. How will this effect sub contractors and the smaller scale general contractors? I'm not talking about the large infrastructure projects or larger apartment units by bigger well-known developers. On the smaller scale projects, the demand for these types of projects has to drop right? Sub contractors are likely to be lowering their bids in order to get work for their guys right?
I had been working with three GCs prior to covid and had already secured bids for a smaller SFR addition and new 2nd unit addition. One of the GCs has been constantly reaching out to us to see if we'd made a decision as he does not have any jobs currently lined up. It sounds like another GC has three teams and currently has work. I'm thinking in a few months once all of the current projects finish up there will likely be a lack of jobs available.
How do I navigate these difficult times and ask for a re-bid, taking into account the likely decline in labor costs without coming off as a jerk? Is it wrong for me to think I could get a little bit shaved off my bids? (This is my first project by the way...)
-potentially insensitive jerk investor
My partner and I currently had a couple of bids setup for a small expansion of an SFR and addition of a back unit in LA County. Both bids were received "pre/early corona virus". I've since spoken to these GCs and others (perhaps biased) who have all stated that there is much uncertainty and that for the time being prices are stable with regards to materials and they are uncertain as to how the future will unfold.
Lawrence brings up the same exact economics play that I was thinking GCs and subs can't ignore. With the millions of jobs being lost and huge hit to the stock market, I can't see how "small" mom and pop type home renovations/remodels/additions and construction projects won't suffer. I understand there is a need for housing and perhaps the bigger developers can fill this void but as far as the "smaller project GCs" (the ones that focus on one SFR project at a time), how can they not be worried? Presumably the lack of jobs would cause subs to lower their rates and have project labor be less wouldn't it?
We have the capital ready to move forward but I feel that it would be stupid for me not to reach out to the two GCs and have them revise their bid given the current state of COVID-19. However, I'm uncertain how to go about this without coming off as an insensitive investor who is trying to take advantage of my GCs.
Sorry, for my semi-response/semi-question post.
bump!
@Brent Coombs thanks! yeah... unfortunately we can't subdivide the plot. so it wouldn't be able to be sold off as two separate parcels.
yeah i think the mills act will save us about 4-5k per year in property taxes.... thank you!
Hey BP,
Long post, thanks in advance to whoever sticks it out and reads it through! If you don't want to read all the details. Skip to the bottom for the TL:DR!
Background info-
I’ve contacted multiple planners from building and safety and have gotten the green light that a rear unit can be added as long as it passes through historical commission (yes I know this can be a headache) and as long as it meets parking requirements.
I currently have a short and sweet background in real estate appraisal for tax purposes but not so much for real world investing that have real ramifications. My question to all of you savvy investors is how I should be looking at whether or not it is worth building the rear unit. Like I mentioned before, we live in Long Beach, California so the prices/rents are on the higher side.
Analyze via Market approach?
Analyze via Income approach
-Quick and dirty duplex comps in the area show a GRM of 15-18. If the back unit can get a GRM of anything substantially less than the market rate GRM then it's a good idea? Is that good logic?
If the rear unit say could get conservatively $2,600/month x 12 months = SGAI of 31,200
Cost to build= $325,000 / $31,200= GRM of 10.4
Or am I looking at that wrong because I’m only taking into account the “improvements” of the rear unit and not the 670k sales price of the front unit + land value?
Should I be evaluating the property as a whole? We will be living in the front unit but someday hope to move out and keep the duplex as our first rental. Should I be looking at the GRM of the whole duplex? If so, the numbers don't look as great.
Front unit= conservatively $2,900
Rear unit= conservatively $2,600
Both units SGAI= $66,000
Purchase price of $670k + cost to build $325k= $995k/ SGAI $66k= GRM of 15.08 which is at the lower end of the GRM range. Granted, my rents are probably pretty conservative but who knows.
Analyize via a DCF and IRR?
- How reliable is this to even try to estimate a 5 or 10 year holding period with rents/expenses/cap ex/vacancies?
I tried running an IRR with the first year being the 670k + 325k and both sides being rented out (even though we're living there).
Used the 2900 and 2600 rents respectively. 12% or 45 days worth for V&C. 5% repairs and 5% cap ex (comes out to $275 each). Using a lower repairs/cap ex since the back unit will be new. And the front unit has been remodeled with pretty much everything updated. Threw in 10% for property management. Included taxes, direct assessments, insurance, debt service. Even though LB had a 7% y-o-y rent increase. I used a 2% rental increase over the 10 year period with a reversion of $1,650,000 (I totally estimated that one based off a time trend over what I think it could sell for today. I don't think it's outrageous by any means, but what do I know). That gives me an IRR of 5.03%. I know some investors say anything between 8-10% isn't bad. "go throw your money in bitcoins or the stock market if you're only going to get 5%" I know some other investors won't even touch anything that isn't north of 15 or 20%. but hey we're just mom and pop starting out here.
| initial | -995000 |
| year 1 | 513 |
| year 2 | 1400 |
| year 3 | 2325 |
| year 4 | 3255 |
| year 5 | 4209 |
| year 6 | 5181 |
| year 7 | 6168 |
| year 8 | 7180 |
| year 9 | 8208 |
| year 10 | 9261 |
| reversion | 1650000 |
Cash-on-Cash
Let's assume the same numbers
SGAI= $66,000
12% V&C @ $-7920
Effective Gross= 58,080
Less op ex
-taxes (assuming assessed value somewhere in the range of 900k), DA's= 10,700
-insurance @ 900
-repairs 5% @ 3,300
-capex 5% @ 3,300
prop mgt 10%@ 6600 (even though we'll be managing it ourselves)
op ex at -24,694
NOI= 33,386
debt service ($2,460 monthly) @ -29,520
pre tax cash on cash return of $3,866
investment down on original SFR= 168k
NC cost of rear unit = 325k
all in cash amount = 493k
CoC of .78% ....
If you take out prop mgt of 6,600 (because we'll be managing it) its 2.12%...
Is it safe to say that COC is not as useful in sub-markets/properties where the properties don't necessarily cash flow great and lots of the upside rests in the rental growth and appreciation? Thus a metric more like IRR is perhaps a better indicator of value (if you're somehow able to guestimate each years income stream and reversion value?....ha)
I should also mention that we are going to be applying to become a mills act historic property which should slash our property taxes by about 60-70%. When we build the rear unit it’ll be strictly based off the front unit via some percentage/math equation. But still that’s something I’m not taking into account and it’ll just be icing on the top.
Also if you’re going to ask me where we’re coming up with the 325k to build and why we just didn’t buy a duplex/triplex in the first place. Well, originally we wanted to build on our own time frame at our leisure. We we’re thinking we’d probably be able to save up enough $ in about 3-5 years. Unfortunately, LB is going through some general plan and zoning changes and thus have moved up our time line considerably in order to make the cut-off date of being down-zoned.
I guess the answer is also, what is it worth to me? What percentage yield do we want? If this is our "first" attempt at REI then go for it because we'll learn a lot? Stay away, sell your SFR for a profit in a few years and then purchase a duplex that hopefully we can afford then?
TL:DR- how would you analyze whether or not to add a second detached income unit on a large SFR lot zoned for 2 units in a decently desirable "hipster" area that has seen high y-o-y rental growth although technically doesn't cash flow that great because we're in a 'good' neighborhood in southern California?
Thanks BP!
forgot to throw in the cash on cash return calc
let's assume the same numbers
SGAI= $66,000
12% v&C @ $-7920
Effective grosss= 58,080
less op ex
-taxes (assuming assessed value somewhere in the range of 900k), DA's= 10,700
-insurance @ 900
-repairs 5% @ 3,300
-capex 5% @ 3,300
prop mgt 10%@ 6600 (even though we'll be managing it ourselves)
op ex at -24,694
NOI= 33,386
debt service ($2,460 monthly) @ -29,520
pre tax cash on cash return of $3,866
investment down on original SFR= 168k
NC cost of rear unit = 325k
all in cash amount = 493k
CoC of .78% ....
if you take out prop mgt of 6600 (because we'll be managing it) its 2.12%...
is it safe to say that COC is not as useful in sub-markets/properties where the properties don't necessarily cash flow great and lots of the upside rests in the rental growth and appreciation?
thus a metric more like the IRR is perhaps a better indicator of value (if you're somehow able to guestimate each years income stream and reversion value?....ha)
Hey BP,
Long post, thanks in advance to whoever sticks it out and reads it through!
Background info-
I’ve contacted multiple planners from building and safety and have gotten the green light that a rear unit can be added as long as it passes through historical commission (yes I know this can be a headache) and as long as it meets parking requirements.
I currently have a short and sweet background in real estate appraisal for tax purposes but not so much for real world investing that have real ramifications. My question to all of you savvy investors is how I should be looking at whether or not it is worth building the rear unit. Like I mentioned before, we live in Long Beach, California so the prices/rents are on the higher side.
Analyze via Market approach?
Analyze via Income approach
-Quick and dirty duplex comps in the area show a GRM of 15-18. If the back unit can get a GRM of anything substantially less than the market rate GRM then it's a good idea? Is that good logic?
If the rear unit say could get conservatively $2,600/month x 12 months = SGAI of 31,200
Cost to build= $325,000 / $31,200= GRM of 10.4
Or am I looking at that wrong because I’m only taking into account the “improvements” of the rear unit and not the 670k sales price of the front unit + land value?
Should I be evaluating the property as a whole? We will be living in the front unit but someday hope to move out and keep the duplex as our first rental. Should I be looking at the GRM of the whole duplex? If so, the numbers don't look as great.
Front unit= conservatively $2,900
Rear unit= conservatively $2,600
Both units SGAI= $66,000
Purchase price of $670k + cost to build $325k= $995k/ SGAI $66k= GRM of 15.08 which is at the lower end of the GRM range. Granted, my rents are probably pretty conservative but who knows.
Analyize via a DCF and IRR?
- How reliable is this to even try to estimate a 5 or 10 year holding period with rents/expenses/cap ex/vacancies?
I tried running an IRR with the first year being the 670k + 325k and both sides being rented out (even though we're living there).
Used the 2900 and 2600 rents respectively. 12% or 45 days worth for V&C. 5% repairs and 5% cap ex (comes out to $275 each). Using a lower repairs/cap ex since the back unit will be new. And the front unit has been remodeled with pretty much everything updated. Threw in 10% for property management. Included taxes, direct assessments, insurance, debt service. Even though LB had a 7% y-o-y rent increase. I used a 2% rental increase over the 10 year period with a reversion of $1,650,000 (I totally estimated that one based off a time trend over what I think it could sell for today. I don't think it's outrageous by any means, but what do I know). That gives me an IRR of 5.03%. I know some investors say anything between 8-10% isn't bad. "go throw your money in bitcoins or the stock market if you're only going to get 5%" I know some other investors won't even touch anything that isn't north of 15 or 20%.
| initial | -995000 |
| year 1 | 513 |
| year 2 | 1400 |
| year 3 | 2325 |
| year 4 | 3255 |
| year 5 | 4209 |
| year 6 | 5181 |
| year 7 | 6168 |
| year 8 | 7180 |
| year 9 | 8208 |
| year 10 | 9261 |
| reversion | 1650000 |
I should also mention that we are going to be applying to become a mills act historic property which should slash our property taxes by about 60-70%. When we build the rear unit it’ll be strictly based off the front unit via some percentage/math equation. But still that’s something I’m not taking into account and it’ll just be icing on the top.
Also if you’re going to ask me where we’re coming up with the 325k to build and why we just didn’t buy a duplex/triplex in the first place. Well. Originally we wanted to build on our own time frame at our leisure. We we’re thinking we’d probably be able to save up enough $ in about 3-5 years. Unfortunately, LB is going through some general plan and zoning changes and thus have moved up our time line considerably in order to make the cut-off date of being down-zoned.
I guess the answer is also, what is it worth to me? What percentage yield do we want? If this is our "first" attempt at REIthen go for it we'll learn a lot? Stay away, sell your SFR for a profit in a few years and then purchase a duplex that hopefully we can afford then?
TL:DR- how would you analyze whether or not to add a second detached income unit on a large SFR lot zoned for 2 units in a decently desirable "hipster" area with high y-o-y rental growth?
Thanks BP!
Hey BP,
Long post, thanks in advance to whoever sticks it out and reads it through!
Background info-
I’ve contacted multiple planners from building and safety and have gotten the green light that a rear unit can be added as long as it passes through historical commission (yes I know this can be a headache) and as long as it meets parking requirements.
I currently have a short and sweet background in real estate appraisal for tax purposes but not so much for real world investing that have real ramifications. My question to all of you savvy investors is how I should be looking at whether or not it is worth building the rear unit. Like I mentioned before, we live in Long Beach, California so the prices/rents are on the higher side.
Analyze via Market approach?
Analyze via Income approach
-Quick and dirty duplex comps in the area show a GRM of 15-18. If the back unit can get a GRM of anything substantially less than the market rate GRM then it's a good idea? Is that good logic?
If the rear unit say could get conservatively $2,600/month x 12 months = SGAI of 31,200
Cost to build= $325,000 / $31,200= GRM of 10.4
Or am I looking at that wrong because I’m only taking into account the “improvements” of the rear unit and not the 670k sales price of the front unit + land value?
Should I be evaluating the property as a whole? We will be living in the front unit but someday hope to move out and keep the duplex as our first rental. Should I be looking at the GRM of the whole duplex? If so, the numbers don't look as great.
Front unit= conservatively $2,900
Rear unit= conservatively $2,600
Both units SGAI= $66,000
Purchase price of $670k + cost to build $325k= $995k/ SGAI $66k= GRM of 15.08 which is at the lower end of the GRM range. Granted, my rents are probably pretty conservative but who knows.
Analyize via a DCF and IRR?
- How reliable is this to even try to estimate a 5 or 10 year holding period with rents/expenses/cap ex/vacancies?
I tried running an IRR with the first year being the 670k + 325k and both sides being rented out (even though we're living there).
Used the 2900 and 2600 rents respectively. 12% or 45 days worth for V&C. 5% repairs and 5% cap ex (comes out to $275 each). Using a lower repairs/cap ex since the back unit will be new. And the front unit has been remodeled with pretty much everything updated. Threw in 10% for property management. Included taxes, direct assessments, insurance, debt service. Even though LB had a 7% y-o-y rent increase. I used a 2% rental increase over the 10 year period with a reversion of $1,650,000 (I totally estimated that one based off a time trend over what I think it could sell for today. I don't think it's outrageous by any means, but what do I know). That gives me an IRR of 5.03%. I know some investors say anything between 8-10% isn't bad. "go throw your money in bitcoins or the stock market if you're only going to get 5%" I know some other investors won't even touch anything that isn't north of 15 or 20%.
| initial | -995000 |
| year 1 | 513 |
| year 2 | 1400 |
| year 3 | 2325 |
| year 4 | 3255 |
| year 5 | 4209 |
| year 6 | 5181 |
| year 7 | 6168 |
| year 8 | 7180 |
| year 9 | 8208 |
| year 10 | 9261 |
| reversion | 1650000 |
I should also mention that we are going to be applying to become a mills act historic property which should slash our property taxes by about 60-70%. When we build the rear unit it’ll be strictly based off the front unit via some percentage/math equation. But still that’s something I’m not taking into account and it’ll just be icing on the top.
Also if you’re going to ask me where we’re coming up with the 325k to build and why we just didn’t buy a duplex/triplex in the first place. Well. Originally we wanted to build on our own time frame at our leisure. We we’re thinking we’d probably be able to save up enough $ in about 3-5 years. Unfortunately, LB is going through some general plan and zoning changes and thus have moved up our time line considerably in order to make the cut-off date of being down-zoned.
I guess the answer is also, what is it worth to me? What percentage yield do we want? If this is our "first" attempt at REI then go for it we'll learn a lot? Stay away, sell your SFR for a profit in a few years and then purchase a duplex that hopefully we can afford then?
TL:DR- how would you analyze whether or not to add a second detached income unit on a large SFR lot zoned for 2 units in a decently desirable "hipster" area with high y-o-y rental growth?
Thanks BP!
@Michael Noto- Wow. You nailed it. He pretty much did exactly that. He regurgitated the same rule that I quoted and left it at that.
@Mark Jones- Thanks for the insight. If they end up not liking our terms I think we'll be okay with walking away and letting someone else win. After reading all of the posts, having that contingency seems like the common denominator to have less of a headache.
@Roy N. , @Robert P. , @Deanna McCormick
Thank you to all of you for the help and insight!