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Income Properties that Pay You to Wait

A lot of our clients today are little spooked by the market. Some clients are worried about the upcoming elections, some clients are afraid of The Fed and ultra-low interest rates, and other clients are worried about local statistics of rising home inventory by the beach.

Nonetheless, clients still want or need to buy real estate. So what is one to do in a tricky real estate market and uncertain macro-economic times? My advice: buy properties with growth that pay you to wait.

There are two examples by the beach that offer good case studies below. And remember, there are options like these at lower price points throughout greater Los Angeles…you just have to know where to look.

First up is a duplex on a corner half lot at 1613 Highland Avenue in Manhattan Beach. This property came to market in August and was snatched up in only four days. Let’s look at why this older property moved so quickly even though it was priced at an expensive $1,377 price per square foot (PPSF).

The closest comparable is a single family home sold for about $2.4 million at 209 15th Street. This location is somewhat similar to Highland in that 15th Street is busy as well (not quite as busy and with better views), and the square footage of the home is only about 125 sq ft bigger. In theory you could convert 1613 Highland to a single-family home for only a couple hundred thousand dollars and be in it for less while having similarly located sand section property.

So not only is that comp compelling in that you are buying in close to downtown on the cheap, but there is also tremendous value in the land long term. Just a couple weeks ago another half lot at 129 15th Place sold for $2.050 million and is rumored to be a development project for the new owner. With another half lot new construction at 216 9th Place* projected to close in two weeks and an asking price of $3.799 million…what would the recently sold $2 million lot at 129 15th Place be worth brand new? With lesser views being a big factor yet a more subdued location, I think it would be safe to say it could fetch $3 million.

Going back to the $1.55 million Highland Avenue prospect after looking at the above comps, you can see that surrounding sales and development make this a very intriguing property at a low price with development upside. Perhaps not a development right now, but as a duplex it pays you to wait long term while inflation and the next real estate cycle takes its course. Be patient. Build it yourself or sell it off to a developer at a nice price down the road.

*216 9th Place was developed by myself, Richards Haynes, with Elwood Capital Group, Inc. and listed by Manhattan Pacific Realty. Additional Note: 216 9th place was a duplex purchased for $350,000 in 1998 as an income property that “paid to wait” and was sold to us as a developer for $1.55 mil. The land owners could have opted to develop themselves and earn an even larger profit.

Another example is a duplex listing that hit the market this week located at 1703 Manhattan Avenue in Hermosa Beach. This is a large sand section lot of 4,500 sq ft that runs street to street. See where I am going with this? There is development upside in the future.

Take a look at new construction town homes at 1500 Hermosa Ave that sold for $3.4 million and 1501 Palm Drive that is pending at an ask price of about $3.4 million. These homes were a two-on-a-lot development on a very similar street to street lot that was smaller in size pushing only 4,000 sq ft. It would be fair to assume that you could build comparable town homes on this Manhattan Avenue duplex lot and yield similar sales today. So let’s walk through some numbers assuming a developer could build new town homes of this size for between $2 million and $2.5 million (these are estimates only)…
$6,800,000 (two town home sales)
Less
$3,000,000 land cost
$2,500,000 building cost
$350,000 selling cost

$950,000 in profit TODAY

Now keep in mind a $950,000 profit on a $5.5 million investment over a two year projected development timeline is not that great of a return, and certainly not something a developer would touch. But that is kind of the point. If you have to buy property (via 1031 exchange), prefer investing in real estate only, or for whatever reason need to get into the market, this property offers a higher and better use at a profit today… maybe not a significant profit, but a profit nonetheless and likely a significant profit with a long term investment horizon.

Lots like these are valuable because they do not appreciate at the price you buy them; they appreciate on the developed resale value. So if you bought in to Manhattan Avenue today and Hermosa Beach real estate appreciates 3% each year long term, it would not be 3% appreciation on $2.995 million, it would be appreciation at 3% on $6.8 million of brand new town homes on that lot. There will be hyper growth on your property long term. Think of this as a low profit yielding tech company with huge growth prospects.

In a real estate world that is harder and harder to come by a good deal, the above examples are some of the best bets you can make for growth, while still getting paid to wait.

 

It’s Your South Bay. Own It. 

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