Since buying a multi-family in Los Angeles is ridiculous from a cash-flow standpoint, I am looking to possibly develop additional units on the same lot. I have expanded my search to look for properties that are on a larger lot with room and zoned to expand. I talked with some contractors and they said that it is usually $80/sf to build an additional 4 unit on the same lot. To me this seems low which I am assuming is for a grey shell building. Is it more reasonable to assume it costs $160/sf to build instead(everything included)?
@Thomas Alexander $160 seems a little high, but I don't know what type of units you are looking to build, or what permits and fees in Los Angeles are. $80 does seems low. Style, size of units, materials, etc. all factor in. Are you doing mid range, upscale or ? The devil is in the details.
Well I wanted to do the typical square Spanish style building and pretty basic, just enough to rent out in the Mid-City area north of the 10 freeway. My real estate agent totally shut me down when I mentioned the idea of buying a property that will give me the option to develop on it. He is the one who told me it would cost about $160/sf to develop with all costs in including appliances. He said if I wanted to buy a 4 unit and develop another 4 units to make it an 8 unit total, he said it would be cheaper to just buy an 8 unit then. I don't believe him when he says that buying an 8 unit would be cheaper but is there any reason for him to lie about that? I am also buying a property with a FHA loan which I know means i can only acquire 4-units or less, but I have someone who will partner with me to do an construction loan after to develop.
@Thomas Alexander Since I'm not familiar with your specific market, I can't tell you if it would make more sense to do it the way you are thinking about, or just purchase the 8 units already built. If there are properties with the number of unitls available, and the numbers make sense, why do you want to build new?
@Thomas Alexander Ok so say you are buying the 4 units on a lot, and want to build an additional 4 units. You're saying that the 4 units that are built will have an FHA loan on them, meaning you won't own them free and clear. Would you be splitting the lot for the 2nd 4 unit property and paying off the holder of the note? If not, then the person doing the construction loan is going to be in 2nd position to the FHA loan. Also, I have never had an FHA loan, but you may need to get their permission in order to build the additional units, because if something were to go wrong, they then become liable for removing or finishing the new units if you don't complete them. Am I missing something?
Good call on the FHA permission. I will need to research that more. Ultimately, I will be using a partners money to do the development part of it. I have to do some more research if FHA will allow this.