Multiple units on one lot a good idea?

Question

Hey -- new to the forum. Hoping to get the opinion of some experienced investors regarding the value of multiple (2-3) detached properties located on the same lot. It seems to pretty common in the more metro neighborhoods of San Diego. I'm considering purchasing a multi-unit duplex or triplex in order to live in one and offset the cost with the other unit(s). What are you thoughts on investing in a 2-3 unit (separate structures) property on the same lot? If it cash flows all sounds good, but in a market that has historically appreciated and had its 10 year swings, what are your thoughts on this type of property?

Thank you

Matt

Thank you

Matt

Jeff B. · Answer

You might investigate a city waiver to partition from one property into three separate APNs.  Down the road, you could then sell them piece mill in different tax years to reduce you tax hit.

For me, it got complicated on a silly issue, lineal footage on the street, but this is VERY city specific.

Matthew Livesay · Answer

Thank you all for the feedback/advice! Much appreciated.

Dan H. · Answer

@Matthew Livesay

What I have seen on code enforcement is that it varies significantly based on the area.  Normal heights seems to allow obvious code infractions.  Cities like Poway raise a stink if the recreation vehicles are not parked per the rules.  I even experienced a violation because of a firewood pile being too big (yes they have a rule on maximum size firewood pile).  It would be best if all the structures/units were permitted but if they are not the next criteria is to evaluate if your unit is more out of compliance than virtually all of the other RE.  I was in Normal Height a few months ago and a flipper was creating a granny flat that he knew the purchaser was going to rent out as a separate unit.  He pointed out the both properties next to him already had this violation and was not being enforced.

I think house hacking a duplex to quad is a great way for younger people to start on REI.  You will learn so much.  I have 2 recommendations: 1) make sure you understand cap expenses prior to purchase.  Many inexperienced investors believe their investment cash flows when in practice it will not.  Cap expenses are a much bigger hit than vacancy and maintenance.  Without knowing the size of the 3 detached units I would use $750/month for cap expense.  More if they are bigger than typical rental size and a little less if 1 BR units or studios.   2) Make sure your comps are of sold properties.  for duplex to quad do not use listings.  In my area of expertise there is a huge difference between duplex to quad listing prices and sold prices.  In my area virtually every duplex to quad that has sold in the last 6 months cash flows (@Lee Ripma).  The listings do not reflect this but the sold units do.

Good luck

Andrew Johnson · Answer

@Matthew Livesay As others have said, you better make sure all of those structures/units are permitted and comforting.  Who knows what was done in the past but you could get into quite a pickle with code enforcement as well as getting financing for the property if everything isn't what it should be.  Appreciation is a little different one multi-unit properties where you're looking at multiples on net-income or free cash-flow.  So appreciation could/would come along with the ability to raise rents (regardless of what SFRs are doing in the area).

Sarah D. · Answer

I'm biased because my husband and I just purchased a 4 unit and are living in one unit, renting the others.  It's a great idea!  The properties you describe tend to be good rentals, because it allows someone to have a SFH for a lower rental price; hence, they are also highly sought after.  Personally, we have also found it to be a less steep learning curve to the rental/rehab world.

I agree with @Walter Roby jr, don't bet on appreciation.  Make sure the numbers make sense for your goals.

Lee Ripma · Answer

You found a cash-flowing triplex in San Diego?!? Amazing! Maybe this is just theoretical but I think if you can find anything with three units on a lot (assuming they are all LEGAL) then it's a great idea!

Walter Roby jr · Answer

If it cash flows it cash flows. Don't bet on the appreciation and let the vehicle take it's course. If you are positioned well going in and a swing comes, you can ride it out and it won't have any effect on you. If the market appreciates then that's icing on the cake.