4-Plex Coded as SFR - Try To Buy?

4 Replies

Hi! I've been 'trying to buy a multi family for the past two years' and a few months ago after being referred to BP I realized what I really want to do is 'invest in real estate'. So now I feel like I'm starting from SCRATCH with my new words like NOI, ROI, COC, etc.

My issue I'm curious about, is I found a GORGEOUS (my price range is normally ghetto to gutted) 4plex for sale at a reasonable price. But it's been on the market forever because it's actually a SFR! The owner was/is a contractor and coded things as part of the main house, or 'laundry room' or 'turkey shed' to get them built, but none of them are honestly coded.

If I can figure out how to get private funding or alternative funding of some sort (price is too high for anyone to loan as a SFR), is it a good idea to buy it? The cash flow numbers are the only positive numbers I see in LA, so I KNOW it'll make money. But will the rents be legal?

CA enacted the Accessory Dwelling Unit law that says any SFR can have a 1200sq/ft building as an ADU, and I called the Assesors office and he said I could most likely get one of the buildings coded as an ADU BUT that may require ripping out the 2nd kitchen in the 'main house', which is a deal breaker. I don't care about the 4th unit because this would cash flow w/ just the main house/duplex and ADU.

I'd offer $850k
rents if legal would be conservatively $7900 minimum, more likely $8500 (plus could AirBnB the 1/1 or have mgr live there rent free)

Income: $7,900 (7426 after vacancy savings)
CapX: $2,952.50
PITI: $3,984.71

Cash flow: $488.79 - $1,168.58 (AND MORE if I Airbnb the 1/1!!)

All professionals I've spoken to say stay away because it's a SFR. But there's literally nothing I can afford that cash flows in LA, and it's so pretty.. Do I need to drop it?

Thank you!!!

They’re professional, you’re a newbie. City’s point of view will not bend over to what your opinion is. The law on ADU is not true to “ANY” property, whoever said that, stay away from his unprofessional advice, the law on ADU “can be” true to “some” of properties. Two things could happen, you convert it, you apply for permit, the city inspects it, city calls code enforcement to check on other parts of the house, decides to give you citation, then you fix that, chiching ; or, you don’t qualify, you get a citation, you are forced to fix it, double chiching. Now, as an investor, you HAVE TO think for the worst case scenario, and price and do your analysis that way, THEN, hope for the best. Now, I haven’t even touched about rent yet. With that said, will the numbers still work?

@Marie S.  

does the zoning allow for 4 units?

If yes,

Than figure out what it would take to get all 4 units legal add a buffer and then do it, but ajust purchase price for the risk cost and head ace. 

If no, than you could offer the price as SFR.

It is a risky deal so the price should reflect that and you need to know that going in to the deal. 

Maybe there is an owner finance option. 

If you dont make it legal than when you go to sell it you will have the same challenges and limit your buyer pool. 

Plus you have the risk of something happening to your tenants and it not being legal. 

If you could buy it for a steep discount and then get all units legal there should be a great profit there but know the risk, and the path to completion before entering into a deal like this one. 

@Derrick Aragon no, it is zoned only for 1 SFR. The ADU is the size allowable, so max I could rent out legally would be 2 units. But the main unit is being rented out as 2 units. If that's allowed then it cash flows. But as @Manolo D. said, if I can't get the ADU zoned I may have to rip a bunch of OTHER stuff up - which no Manolo, I could not afford to fix a gutted main unit. 

I did ask about seller financing, but they are hardlined on full price no matter what. I'm not sure how to run comps for the area, but the other houses in that area are not even in the $600k range, let alone $900k. I guess the best thing to do is watch it to see if they ever come down to a realistic SFR price.