And… we’re back.
As you know, we’re in the process of “rehabbing” a 4plex in Echo Park right now.
I say “rehabbing”, because it’s effectively new construction, as you will see below.
When we started this project, I was mentally prepared to treat it like a standard rehab deal, except with slightly more risk and much better numbers (we expect around an 8% unlevered yield, which is ridiculous).
Interestingly, as it’s come out of the ground, I’ve found myself taking a ton of pride in what we’re building. There’s nothing rational there… it’s just cool to feel like we’re adding some housing to a very tight market and building something that will presumably stand for 100 years or so.
Here are a few pics:
Here’s a question that’s been popping up all over the place: Why do developers only build apartments for the rich?
The answer, as with most things in our business, is in the math.
Imagine you can buy enough land to build 10 units for $1MM, or $100,000 per unit.
Let’s say you have two options:
- Build 10 “workforce” apartments of 800 sq ft at a cost of $200 / sq ft that will rent for $1500 each; or
- Build 10 luxury apartments of 1000 sq ft at $250 / sq ft which will rent at $3000.
Here is the per unit math for Option 1:
- Buy land for $100k
- Build apartment for 800 sq ft x $200 / sq ft = $160k
- All-in for $260k
- Annual rent of $1500 x 12 = $18k
- GRM of 14.4x (eg terrible)
Here is the math for Option 2:
- Buy land for $100k
- Build apartment for 1000 sq ft x $250 / sq ft = $250k
- All-in for $350k
- Annual rent of $3000 x 12 = $36k
- GRM of 9.7x (eg awesome)
What’s going on is that, at any fixed cost per unit of land, you’re almost always better off building bigger, more expensive units. So, as long as land is hard to find and expensive, that’s what developers will do.
If you want developers to build housing for middle and lower income people without being subsidized, then you need to up-zone neighborhoods. By increasing the supply of buildable land, you decrease the per unit land cost. Then, once developers saturate the luxury market (because that’s still where the highest margin is), they will move on to saturate the middle and (possibly) lower income markets.
Am unreasonably excited today because we got the drawing below via email from our architect:
That’s his first crack at the interiors on the new fourplex we’re building in Highland Park.
Now, I’m quite certain that Jon is going to have a field-day marking this baby up (for example: that kitchen is pretty damn small!). So this is probably not what we’re going to end up with when we build the thing.
But it’s super exciting to know that this drawing (and several like it) represent the next steps in a journey that’s going to end with us having built our first ground-up project.
Here’s a ridiculous example of NIMBYism ruining our city.
You ought to be able to build lots of apartments in already-dense areas on major commercial streets near subway stations.
If you can’t build them there, where should you be able to build them?
And, if someone wants to an answer “nowhere”, then that person has to be honest with himself that he is personally responsible for the high cost of housing in LA.
Just finished a little triplex we renovated on behalf of another group.
When they bought it, it was a diaster: Two units vacant, one occupied but falling apart.
Now, it’s a beautiful little complex of three separate homes, each with parking and private outdoor space.
The pics are below. Two of the units are rented. The last is still available… contact Ilana [at] AdaptiveRealty [dot] com.