Zoning

One thing to consider when deciding on your best and final offer for a property is the zoning. If you’re buying a duplex on a 8,000 sq ft lot, the zoning makes a huge difference in terms of the property value. If it’s R2, the duplex is all you’ll get, so there’s not much hidden value beyond the obvious: rents, appreciation, future market rents.  If the zoning is R3, a developer can build one unit for every 800 sq ft of lot space.  So in this case, that’s 10 units.

There are other restrictions involved. Here are some basics:

– Max height = 45ft.

– Setbacks = 15ft. front and back. 10% of width on the sides.

– 1 parking space per 1-bedroom apartment; 1.5 parking spaces per 2-bedroom apartment

For more details, see the L.A. City Zoning Appendix.

Our sample lot here is 160 feet by 50 feet.

One parking space is 10 feet by 20 feet.

Unless our developer is building 3 stories or an underground parking garage, we can only truly fit 8 1-bedroom apartments here because of the parking requirement and driveway.

So a reasonable estimate for the value of this new property will be:

8 units X $1,600 monthly rent ($19,200 yearly) = $153,600

11 X GRM = $1.69 million

If a developer buys the duplex for $400,000, builds for $840,000, that’s a $460,000 profit.

So if you’re bidding $360,000 (12x GRM) on a duplex with a rent roll of $30,000 / year, remember what the developer paying all cash stands to make.  The good news is, that developer might be there again when you sell.

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Comps

One thing I often do when a client wants to buy a particular property is offer a list of comparables. I’ll list all the properties that are active, in contract, and that have been sold in the last year in the same area, including relevant details.

Comps show the price per square foot that properties are listed, and at what price they’ve sold. This way we know how low we can reasonably offer (in a seller’s market there are often counter offers).

While price per square foot can indicate upside value, rents will tell you immediate value. In real estate we ask: what’s the GRM? The GRM (gross rent multiplier) is the fastest way to determine an apartment building’s immediate value – divide the price by its yearly rents. The lower the GRM, the better the cash flow.

Comps tell you a story of a neighborhood, but they don’t tell you the whole story. Market activity can shift within months – inventory can dry up, more buyers enter the market –  and what you could buy 8 months ago isn’t always what you can buy today. That said, it’s good to use as many tools as you can when making an investment, and comparables just make you wiser.

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