SB 9 To Lot Split Or Not - LA City
Hello Everyone,
I own a single family home on a 1 acre lot in NELA. There are two building pads, one has an 1100 sqft house and on the other I recently completed a freestanding 1200sqft ADU. I Looked into a lot split before I decided to build the ADU but it was too expensive.
I spoke to LA City Planning this week and found that I have a few options using SB9.
1. I am allowed to split the lot and build units on the newly created vacant lot, but the existing home and ADU must stay on the same lot(RSO applies now, apparently). This option is more expensive as it will require a large retaining wall. Combined lot values would be $3,300,000 building cost $600,000.
2. Or I can do an addition to the existing house and make it a duplex, I can also convert the garage into a JADU giving me a triplex. This option is much cheaper, the area is flat and unused, plus has a favorable Soils Report. 4 units on a lot bringing in $15,000/month, build cost $400,000
I plan on selling all this when the 3 year occupancy period expires as we will want a bigger home. Traditional logic would be to build a single family home on the new lot and sell it(Option 1), but the other day I saw cap rates on loopnet(no idea if that is a reliable site) for multifamily investing in LA and those numbers were actually more desirable(Option 2).
My question is what is the better option? What cap rate would I be looking at if it sold as a multi-family investment? Would it be comparable to a multi-family? 3 of the 4 units would be new construction and the old unit would have an extensive remodel. Any Advice is appreciated!
For 4 units or less per lot the cap rate is not used to set value. The value is based on comps. Cap rates do not apply in your case. Comps will be difficult to find. This typically produces low appraisals.
I am a little perplexed on your statement about RSO. I am not an expert on L.A. Rent Control, but Costa Hawkins should apply with regard to any local rent control ordinance. Combine this with the state rent control ordinance and you should be exempt from rent control for 15 years after the completion of the unit that first made the unit a multiplex (your recently completed ADU).
In general, JADUs lower the value of the property. It definitely does not make the property a triplex. It can only be rented with owner occupancy. I suspect this will be a negative value add option (meaning cost to add the JADU is more than the value that it will add).
I suspect splitting the lot will produce the better return, but you have to run the numbers.
Good luck
Thank you for your reply. The original home is subject to RSO but not any new structures. I'm aware of the owner occupancy requirement for the JADU but I'm betting that will change as it did with the ADU owner occupancy requirement. Either way the structure already exists and it will make $1,500 a month in this neighborhood so it will pay for itself in the three years I have to live here, then if it has to become a part of one of the duplex units it will just add to that square footage.
Admittedly your response is what I expected and did not want to hear, haha, no offense! I’m just having a hard time wrapping my head around why 4(or3) on a lot is so much different than 5 or more. The property will pull in $180,000 a year and they’re almost all brand new structures, why does 1 unit make so much difference? I see tons of LA properties on loopnet with fewer than 4 units asking for a cap rate of 3% and below. Are these just completely overpriced?
while cap rates do not traditionally apply to 4 or less units, people purchasing multifamilies are looking for a return on investment, thus a cap rate is pragmatically applicable. Whether you benchmark the property to sale value, rental yield, NOI or some other economic factor, other investors are doing the same thing.
CA income properties are often priced on reliable performance and expectation of future appreciation, thus NOI vs purchase price is expected to be <4%. The more desirable the area the lower the ratio.
Not sure about the over price, but if they are getting a conventional loan the properties that are 4 units and less will be valued on comps and not on cap rate and NOI. If you do not require a conventional loan, you can value it whatever way your lender will permit.
As for 4 units being valued by comps and 5 units or more being valued by cap rate and NOI it does seem arbitrary. Just recognize most buyers of 4 units or less will want to use conventional financing at some point (even if purchased all cash) and using any other valuation than comps will not work with the conventional loan.
If you want to have a property valued on NOI and cap rate, purchased a property with 5 or more units.
Good luck
Hi Daniel - I am curious if you offered the original home for rent and that is why it is subject to RSO. My understanding is if it is owner occupied then RSO doesn't apply. I am in a similar situation, so I am very interested in what you heard.
Thank you for your input Allan, that’s what I’m thinking someone will see. Dan I see that now thank you, they would need non traditional financing or cash, could be a barrier. Either way I have realized that because if Prop 13 I should probably hold onto this asset indefinitely.
Jonathan, my house is owner occupied and I have never rented it out! I’m furious at the city’s interpretation and intend to take this situation up to my local congressperson.
Quote from @Jonathan Smith:
Hi Daniel - I am curious if you offered the original home for rent and that is why it is subject to RSO. My understanding is if it is owner occupied then RSO doesn't apply. I am in a similar situation, so I am very interested in what you heard.
I finally talked to the RSO Department. My ADU is detached so it is not RSO. But the main house is, and any other units I attach to it will be RSO.
Quote from @Dan Heuschele:
For 4 units or less per lot the cap rate is not used to set value. The value is based on comps. Cap rates do not apply in your case. Comps will be difficult to find. This typically produces low appraisals.
I am a little perplexed on your statement about RSO. I am not an expert on L.A. Rent Control, but Costa Hawkins should apply with regard to any local rent control ordinance. Combine this with the state rent control ordinance and you should be exempt from rent control for 15 years after the completion of the unit that first made the unit a multiplex (your recently completed ADU).
In general, JADUs lower the value of the property. It definitely does not make the property a triplex. It can only be rented with owner occupancy. I suspect this will be a negative value add option (meaning cost to add the JADU is more than the value that it will add).
I suspect splitting the lot will produce the better return, but you have to run the numbers.
Good luck
I think it depends, in terms of JADUs or ADUS value increase/decrease. My SFH has a JADU and an ADU and a house down the street similar to mine, recently sold for $1.15 Mil, in a neighborhood with average comps of $550k-$600k. The comps used for the property were triplexes. I spoke with their appraiser and he said since SB 9 eliminated residential zoning, he was allowed to use mulit family's as comps for properties with ADUs and JADUs.
hey @Daniel H. ! My company is closing escrow on a SB9 project out here in the Valley! Would love to connect and talk more about this offline.
But in regards to your question, I love NELA due to the fact that it yields great rents! What is also great about SB9 is that you will essentially be creating a new APN and thus have two separate APNs on one lot. So if your intentions are to sell in 3 years to buy a bigger home, I would run the numbers and see how much and how long both projects would take. Maybe try and keep one of the parcels (or refinance and keep both parcels?). Or sell the vacant lot with the RTI ready plans to a builder who would like to take on the build cost and use the proceeds to purchase your bigger home. You have tons of options with that much land in a good area. Hope this helps!
Quote from @David Maldonado:Thank you David that info is great to have! It's funny, years ago when I built my ADU I saw people on this website saying it could never be valued anywhere near the original home. I knew they were wrong, and tons of comps in my neighborhood are proving that. But I did not know appraisers were now realizing Single Family no longer exists in CA.
Quote from @Dan Heuschele:
For 4 units or less per lot the cap rate is not used to set value. The value is based on comps. Cap rates do not apply in your case. Comps will be difficult to find. This typically produces low appraisals.
I am a little perplexed on your statement about RSO. I am not an expert on L.A. Rent Control, but Costa Hawkins should apply with regard to any local rent control ordinance. Combine this with the state rent control ordinance and you should be exempt from rent control for 15 years after the completion of the unit that first made the unit a multiplex (your recently completed ADU).
In general, JADUs lower the value of the property. It definitely does not make the property a triplex. It can only be rented with owner occupancy. I suspect this will be a negative value add option (meaning cost to add the JADU is more than the value that it will add).
I suspect splitting the lot will produce the better return, but you have to run the numbers.
Good luck
I think it depends, in terms of JADUs or ADUS value increase/decrease. My SFH has a JADU and an ADU and a house down the street similar to mine, recently sold for $1.15 Mil, in a neighborhood with average comps of $550k-$600k. The comps used for the property were triplexes. I spoke with their appraiser and he said since SB 9 eliminated residential zoning, he was allowed to use mulit family's as comps for properties with ADUs and JADUs.