Recently I began marketing a triplex requested to be off the MLS by my clients. It is their longtime owned triplex in the Hermosa Beach Sand Section. Well located south of the Pier, it is in a prime position sandwiched between the Hermosa downtown scene and the proposed Redondo Beach Pier redevelopment.
It is always tricky selling cash flow real estate by the beach because, well, it rarely cash flows. But we believe this property is compelling for an owner/user or a shrewd investor looking to cash flow now and develop in the future.
Our team believes the property needs to be updated in order to achieve maximum rents. No one has been inside of the units (entry/inspection allowed upon acceptance of an offer), but by our estimation, we feel $100,000 is a reasonable budget to update the property. A local property manager told us nicely updated units in Hermosa Sand Section should fetch around $2,500/mo.
If you are a well-to-do-renter paying $2,500/mo currently and have saved up a sizable down payment, then taking on the assumptions above, here are what the numbers might look like for an owner/user:
$5,000/mo in Rent (the owner/user to live in the 3rd unit)
$200 maintenance reserve
$100 water/common area utilities
$100 misc and landscaping
$0 property management as the owner will live on-site
Come out to…
$2,225/mo in net operating income aka cash flow
But, that is assuming you are an all-cash buyer which we know is not always realistic, however, if you plan to own in the Sand Section then it is safe to assume you can afford a sizable down payment. Let’s use a rate of 4.25% on a $1 million loan which is the maximum loan amount for the primary residence mortgage interest deduction (not including $100,000 equity line on top)…please check with a tax professional on this.
That mortgage payment comes out to $4,900/mo.
So essentially, you are in the hole $2,675 per month after payments on a million dollar mortgage. If you are renting for $2,500/mo this “in the hole payment” does not seem so bad, and when you factor in loan amortization and potential tax benefits it actually works out to be a better investment on paper for some individuals.
The thing you have to consider…is it worth bringing $1.1 million down plus $100,000 in renovation money? Could you earn a better long-term rate of return on your equity elsewhere? I think a majority of long time beach property owners would say it is one of the best investments they have made.
For an owner/user, this property is just a more expensive version of our blog post on this Fixer of the Week in Redondo Beach.
As far as development potential, this property has a lot going for it. Located on a 2,500 sq ft corner upward sloping lot, you could max out the lot with close to a 4,000 sq ft home depending on a survey, or go a bit smaller on a new build to make room for an epic rooftop deck with panoramic views that would likely never be obstructed with today’s Hermosa building codes (we have pictures of the views if you want to see them).
From a value standpoint on new construction, it is pretty much an accepted fact of life that new Sand Section view properties go for a minimum of $1,000/ppsf. If one were to build 3,600 sq ft, I think a $3.6 million retail price is more than fair. Dirt value at $2.1 million ain’t bad, and you have a nice little triplex that pays you until the time is right to build.
Take a look at 132 28th Street that recently sold at $3.999 million that was built in 2008 and virtually the same size lot. There are other recently closed and on-market properties that give additional worth to the $1,000/ppsf assumption.
Build now, or get paid to wait and build later. See our past blog on Income Properties that Pay You to Wait…we feel this property fits that mold for the right buyer.
There are multiple positive factors going for this property including, 1) the lowest priced triplex west of Monterey Blvd to hit the Hermosa Sand Section in almost three years, 2) the owner/user potential is tremendous relative to other options, and 3) basically a land value price that pays you to wait (and develop later). We think this is a fantastic property priced to sell before the holidays.
Give us a call!
It’s Your South Bay. Own It.