Building rental units on my primary residence...

9 Replies

Greetings BP fam,

I am interested in building up to three units on my property. It sits on a 9000 SF lot in Lakewood, Ca and is zoned for MFR. I close on the property at the end of April. It's currently a 3 Bd 1 Bth 1,128 SF single family with a two car detached garage that has been converted into a studio apt with kitchen and bath, which I plan on renting out as soon as I move in. (not permitted)

 I am new to the world of real estate investing. I bought a condo in the Bixby Knolls area of Long Beach, Ca Back in January of 2016 for 260K and just sold it for 355K. Other than painting the kitchen cabinets and replacing the light fixtures, I didn't do much to it. 

 While in the process for looking for a single family home to purchase, I noticed myself more attracted to homes that were multi-family or had multi-family features. Long story short, I came across bigger pockets and made the decision to go all in. 

 I plan to do some immediate renovations to the house and turn it into a 3/2 with a nice master suit. Get it appraised and refinanced while prices are high, and either get a line of credit or pull cash out to help me build those additional rental units in the back of the lot. 

If you have any advise or know of good affordable contractors in the area of Lakewood, Ca I'd love to chat!

I'll post before and after pictures as the project progresses and keep you guys up to date on my journey. 

Thanks!

First step is to check with your building and zoning dept. You will have set back requirements from all lot lines and other restrictions that will determine what additional structures you can fit on it....just because it is zoned for say 4 units doesn’t mean you can actually fit them in the lot.

@Wayne Brooks You are absolutely correct Sir. When I called the city, they said I can build up to 4 units as you mentioned, but I'm sure there will be many restrictions as to what size of a building I can build. Especially considering that the lot already consists of a primary residence. The rest of the lot will most likely be good for another 2-3  one and two bedroom units, I'm hoping. My goal is to get around 4K a month in rental income. Here in SoCal, I think I can accomplish that with x2 two bedrooms and x1 one bedroom. Thanks for the advice! 

I knew an investor in San Diego (have not communicated with him in over a year) that purchased a duplex that was zoned for up to 4 units.  He had planned on placing 4 units on the property but the parking requirements (2 per unit) and setbacks limited him to 3 units and raised the cost of the 3 units.   He needed to sell at top dollar not to lose money.   He eventually sold the property but it took longer than he hoped for (in part because he needed to get top dollar) and therefore had higher holding costs than anticipated.

I suspect he suffered a small loss on this investment (maybe he broke even) in terms of financial but when you add in all the effort exerted and lost opportunities the loss was more substantial.

So determine early what limits there are due to other regulations (setbacks, parking, etc.) before investing significant time and money.

Good luck

@Jo-Ann Lapin

 Thanks for the advice. I think I will start by asking my neighbors who already built units on their lot and find out who their architect and contractors are. I still haven't pulled all of the zoning information from the city yet, but I have made a couple calls and I know that each unit requires at least one off-street parking spot. The neighbors have a two story building with single car garages on the first floor. I'll post pictures really soon. Thanks for your input. 

@Dan Heuschele

That's a great lesson to be learned. I will be sure to find out everything before even considering to build. I think with the research that I have done so far, I know I can at least build a good size duplex without running into parking or square footage issues. Of course the numbers will be the deciding factor at the end of the day. I'm just glad in this case, my main purchase was a primary residence and not just an MFR investment, but of course I would love to be able to have these rentals help me pay the mortgage. Thanks for the words of wisdom! Much appreciated.

Here is what the back lot looks like. You can see to the left, the neighbors built a two story building with either 2-3 units. Behind the white cottage shed lies a two car detached garage that has been converted into a studio with small kitchen and bath. 

4126 Andy St, Lakewood, CA 90712

From the cottage shed looking toward the back of the main house. 

4126 Andy St, Lakewood, CA 90712

4126 Andy St, Lakewood, CA 90712

@Ruben E Sanchez

I'd like to share an experience I had with a property similar to what you're aiming to make.  It may or may not apply to you and may or may not be an issue in your area.  Last year I was trying to buy a property that had a single family home with a duplex on the lot.  The big hurdle was how it would be appraised and treated by the bank.  The most economical way was going for me to finance it as my primary so I could live in one unit and rent remainder, then move out once terms of occupancy had been met so I could rent all units.  Since the duplex was on the same lot it wasn't going to be appraised as a duplex, rather as an addition of some sorts like a pool house. That was preventing it appraising to the price they were asking.  The alternative was to go commercial which of course required much more money down.  (15% for that lender).  

I don't know if I explained it clearly but basically, having the house and multifamily on the same lot made it more complicated and somewhat interfered with the potential of each.  Here's why:  Comparable single family houses in that same neighborhood were already selling for 250k plus WITHOUT a duplex on the lot.  This property was for sell for less than 250k.  Somebody ended up buying it with hard money.

  If you're planning on staying there forever, perhaps it's a non issue for you and the duplex you want to build will just help you live for cheap/free plus earn some income.

Did you say your addition is unpermitted?  I'd be concerned it gets noticed by an inspector when constructing the new property?  My understanding is they can find out about unpermitted additions and make you take them down.  

Can your lot be split so the new duplex is on a lot of its own?  would it be accessible without crossing the main house property (if not than maybe an easement if the lot can be split)

@Rodney Sums

Thanks for sharing that experience. It's definitely something to consider. 

I still have to find out all the info from the city regarding splitting the lot. That would be ideal if I can't get it appraised as a multi family residence without having to go commercial. The rental units would be accessible without crossing the main property. 

The current addition is a two car garage converted into a studio apt with kitchen and bath with no permits. I plan to rent it out soon after I move in. I would either convert it back into a garage before going into construction (about two years from now), or use it to add onto the new structure. Still need to figure out the parking requirements.

I did buy this as my primary residence and could see myself staying there for at least 15+ years. It's not my dream house, but I do see the potential with the possibility of adding the rental units. With the mortgage, I don't expect it to cash flow, but if I can house hack it and have it at least cover the mortgage down the line I will be able to invest more.

Thanks for your input!

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