Building from scratch in Los Angeles
Hi all!
I'm looking to get some advice on my next real estate endeavor in Los Angeles.
My current goal is to not only make a wise investment, but I'd also like to upgrade my current living situation (I currently live in a 5br 2ba SFH in an "up-and-coming" neighborhood I purchased back in 2016, and want to live in a nicer neighborhood with fewer roommates).
Since buying in LA is insane right now ($900+ per sq ft.), I'm considering either buying a lot and building from scratch or doing an extremely extensive rehab on a very distressed property.
By the end of 2022, I expect to have about $250,000 in capital and have great credit. I figure I can get a loan of approx $1.25M and build / rehab a decent property with that money (where as simply buying wouldn't get me much).
Ideally, I'd get a 2/3br 2ba in a decent neighborhood and build an in-law-suite on the property, with the plan being to move into the in-law-suite and rent out the home.
Neighborhoods I'm looking at are in NE LA: Mt. Washington, Eagle Rock, Cypress Park, etc.
Any advice is appreciated!
Does anyone have any experience doing this? Any pitfalls I should be aware of or things to avoid? Is $250,000 enough capital to execute this plan? Pros & cons of building vs. rehabbing? Recommendations for build & design firms? Anything information helps!
#2 House Hacking Contributor
- Real Estate Agent
- Los Angeles, CA
Hey Spencer,
I've been working with a developer for the last 11 1/2 years. Building right now is about $400-$450/square foot. You have to install sprinklers, rain barrels, and solar panels. There are also linkage fees that may apply and can be as much as $15 per proposed square feet. For example if you were to build a 2,000 square foot home, that's $30,000 in fees that could go towards a new kitchen remodel instead. All these things that aren't really giving you the return you are looking for in the neighborhoods described. The fastest I have seen builders go from the very beginning phases to completion is about 9 months. That is assuming all goes right with the city.
If you buy a small house and do an addition, once you hit over 50% of the existing house size, you are subject to new building codes (please verify has codes change all the time).
Your best bet is to find one that you can rehab. Go with the lowest down payment, use the rest of the money for the rehab, and then refinance. I've done that on both of my house hacks here in Los Angeles.
Originally posted by @Spencer Wardwell:Hi all!
I'm looking to get some advice on my next real estate endeavor in Los Angeles.
My current goal is to not only make a wise investment, but I'd also like to upgrade my current living situation (I currently live in a 5br 2ba SFH in an "up-and-coming" neighborhood I purchased back in 2016, and want to live in a nicer neighborhood with fewer roommates).
Since buying in LA is insane right now ($900+ per sq ft.), I'm considering either buying a lot and building from scratch or doing an extremely extensive rehab on a very distressed property.
By the end of 2022, I expect to have about $250,000 in capital and have great credit. I figure I can get a loan of approx $1.25M and build / rehab a decent property with that money (where as simply buying wouldn't get me much).
Ideally, I'd get a 2/3br 2ba in a decent neighborhood and build an in-law-suite on the property, with the plan being to move into the in-law-suite and rent out the home.
Neighborhoods I'm looking at are in NE LA: Mt. Washington, Eagle Rock, Cypress Park, etc.
Any advice is appreciated!
Does anyone have any experience doing this? Any pitfalls I should be aware of or things to avoid? Is $250,000 enough capital to execute this plan? Pros & cons of building vs. rehabbing? Recommendations for build & design firms? Anything information helps!
Spencer,
For sure your best move here is buying a ramshackle SFR and renovating. Building from scratch is expensive and slow; you'll be in permitting for months and months before breaking ground.
I'd look for single-family homes with an existing structure that can be retrofitted and permitted as an ADU.
$250K makes for a tight budget to buy and renovate if we're talking about creating an ADU. You'll want to keep you down payment low, and currently, the conventional borrowing limit for LA County is $970,800. If you stick to the conventional minimum of 5%, you're looking at a max purchase price of $1,021,895. With closing costs, you'd be putting $71,500 into the purchase, leaving you with $178,500 for the renovation.
Buying a duplex would allow you to borrow up to your limit, but you'd have to put 15% down, so you'd have much less left over for the renovation -- though you'd need less if you're not creating an ADU!
Best,
Jon
#2 House Hacking Contributor
- Real Estate Agent
- Los Angeles, CA
@Jon Schwartz, I've had clients buy a duplex with 3.5% down using the FHA loan. So that isn't as much of a concern.
If the thought is to build an ADU, right now it is about $120K depending on what you have the contractor do versus outsourcing. There are creative ways to keep the costs down.
Happy New Year. I have been lending in Los Angeles for the past 9 years. In terms of financing and access to traditional and private capital I would agree with prior two posts from @Rick Albert and @Jon Schwartz that the rehabbing will be much easier endeavor than attempting to finance ground up construction for a new property.
Thank you for all the advice, everyone!
I'll definitely keep that all in mind as I continue my search.
Any advice on finding a distressed off-market home for renovating? Or on how to find a reliable contractor to take on that type of job here in LA?
Hi @Spencer Wardwell - Personally we bought a distressed MLS detached duplex in Central LA (3.5% FHA), renovated both homes with cash, moved into one and rented the other, then refinanced several months later. Several months later we applied for a HELOC and a 2nd appraisal where the value on the property jumped again and then we could build an ADU (making this property a detached triplex - three little homes). When we rent all three units things look pretty solid.
So yes, per the advice above, I would suggest finding a distressed property with room to grow via value adds (additions of bedrooms/bathrooms, overall renovation, ADU(s)). Happy to share recs for contractors etc - let me know. Cheers
Thank you @Christopher J Driscoll! Congrats — that sounds like a very solid plan, and will likely follow in those footsteps.
I would love recs for contractors!
As a contractor and developer/investor, I have done several ADU's already and have several ongoing so I speak from first hand experience.
@Will Barnard thanks for the advice!
About how much capital should I aim to have before starting?
I currently live in a property in West Adams that I purchased in 2016 that I have about $500,000 equity in, so it's possibly for me to get more.
However, I'm trying to avoid having the mortgage rise by too much, as I want to hold onto the property, but need it to, of course, be cashflow positive once I move out.
Hey @Spencer Wardwell, I realize it's been a long time since this original post but I messaged you about a vacant lot with approved plans my partner & I are selling. If you still are interested in building a custom home, our hillside Highland Park lot could be very appealing to you since it'd save years of waiting for LADBS approval. Check your inbox. =]
@Spencer Wardwell...best 1st step ....get pre approved for a 2-1 const loan in order to 1) confirm you can get financing for the scenario and 2) educate yourself as to the amount of cash you will need ...I beleive Washington Federal is in CA and they have a great 2-1 const loan program
