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.