💼 Upzoning + Triflex [Advice for Investors]
briefcase | invest smarter | Issue #127
Can’t afford a home? Here’s a hack for you: Just change the locks on your Airbnb.
Speaking of housing hacks…
💡 Upzoning Wisdom for Beginners
“I want to become a real estate investor. I understand the benefits of investing through principal paydown and cash flow, but how does a newbie break into the investment world when prices and rates are so high? What advice would you give a hungry young up-and-comer wanting to break into the game in this environment?”
This is a great question, Kahun, which we’ve received many times.
BTW, can we call you Big Kahuna? Great, thanks Big K…But for starters, we’re really sorry about the Bucks tanking in the playoffs 🏀😢 . We hear it’s hard to get a full 4 quarters out of a buck.
Your question brings up an amazing opportunity for us to dig into what we believe will be one of the best chances for real estate investors over the coming years.
First…We must set the stage for how the global real estate regulatory regime will create massive opportunities for savvy investors. But we will get into that doozy shortly.
Big Kahuna has alluded to some benefits of real estate investing, but here’s a more complete list:
✅ Mortgage paydown from rents
✅ Asset price appreciation over time
✅ Cash flow
✅ Tax benefits (Depreciation)
✅ Leverage (Buying with mostly the bank’s money)
✅ Inflation eats away at your historical debt over time
With that in mind, there is something additional brewing under the surface of real estate. And it’s creating a special trend that we want you to implant into your grey matter.
That goes for you too Kahuna!
📢PSA: If you know anyone in your life who has shown an interest in getting into the real estate game, this is the playbook for them. Please forward this email and ask them to sign up.
Alright, let’s start with the sexy part…
1. Regulatory Environment
WAIT…Stay with us! We promise this is the most important and fun part of all.
Let’s start with a little history lesson.
Single-family zoning (aka R1 zoning) is a type of exclusionary planning restriction that only allows single-family detached homes to be built in most residential neighborhoods. And, this type of zoning makes up the majority of property uses in Canada and the U.S.
According to multiple sources, single-family zoning originated in 1916 in the Elmwood neighborhood of Berkeley, California as an effort to keep a Black dancehall and Chinese laundromats out of white neighborhoods.
Yea, seriously. Not cool.
Shamefully it was one of the methods real estate developers and city planners used to maintain racial segregation and inequality in housing.
R1 arose, at least in part, from invidious motives. It was built on arguments about the sort of people who don’t live in detached single-family homes and the harms that would arise if they mixed, socially or as fellow taxpayers, with those who do. R1 first proliferated after the Supreme Court struck down racial zoning in1917’s Buchanan v. Warleydecision. Buchanan made single-family mandates appealing because they maintained racial segregation without racial language. Forcing consumers to buy land in bulk made it harder for lower-income people, and therefore most non-Whitepeople, to enter affluent places. R1 let prices discriminate when laws could not. Contemporary observers denounced this regime of backdoor segregation, but in 1926 the Supreme Court upheld it. In Village of Euclid v. Ambler Realty Co. (1926), the court tacitly excused R1’s implicit racism by validating its explicit classism.
First off, wow. Second, if you don’t know what the word ‘invidious’ means, neither do we so don’t feel stupid, it means to discriminate.
Aside from a racist history, single-family zoning also negatively affects the cost and supply of housing units, as it limits the density and diversity of housing types.
Some studies have also linked single-family zoning to higher pollution and urban sprawl.
Currently, single-family zoning applies to about 75% of the lands in North America. Read that last sentence again please, we’ll wait.
This means building anything other than a single-family home without going through expensive and drawn-out rezoning is illegal. This has a number of negative impacts aside from its 🤓 ‘invidious’ origins:
❌ Increases Prices: R1 zoning increases property values of single-family homes and reduces the amount of land available for new housing development. This promotes urban sprawl.
❌ NIMBYism: It shapes the political culture of a community, as it creates a sense of exclusivity and entitlement among homeowners who may resist any change to their neighborhood ‘character’.
❌ Decreases Supply: R1 restricts the diversity and density of housing types that can be built. You can’t build duplexes or triplexes without expensive rezoning applications. This creates a mismatch between the demand and supply of housing, especially for middle-income and lower-income households.
❌ Pollutes: R1 contributes to higher pollution and urban sprawl, as it encourages car dependency and low-density development. This has negative impacts on the environment, mental health (anyone commuted lately?), and transportation efficiency.
❌ Missing Middle: R1 creates a housing market of two: tall skyscrapers or suburban McMansions. This generates a gap in missing housing stock, aptly referred to as missing middle housing.
But there’s a happy ending to this story. After a century of increasing use of single-family zoning, we are now witnessing a fabulous revolution.
Politicians and local governments are wising up to the reality that we need to build more to improve our housing supply. Yea, it’s as simple as that. Build more!
*Peter the Intern reacts to the above statement*
And in order to promote supply, local and state governments are ‘invidious-ing’ the draconian single-family zoning rules en mass. It’s what we call upzoning.
Upzoning: When a local government upzones they allow property owners to build higher density by legal right. So, as you read through the upzoning initiatives below across North America, you’ll see a pattern of allowing up to 4 legal units on previously zoned single-family lots. This means you don’t need to rezone or ask permission, you can ‘by right’ add additional density to your property.
Texas: Houston is the OG of anti-single-family zoning with North America's most permissive planning regime. And it’s been a massive success.
Arizona: Senate Bill 1117 will bring a full suite of zoning changes, including scraping minimum parking requirements, easing up on mandatory setbacks, and legalizing ADUs, duplexes, and triplexes across the state.
Montana: Governor Greg Gianforte proposed SB 245, which would legalize mid-rise multifamily buildings in all commercially zoned areas. Another bill, SB 323, would legalize duplexes and triplexes in all residential areas.
Ontario: Not to be left behind, the Canadian province of Ontario passed Bill 23, which upzones the entire province (15 million residents) to allow for up to 3 units on any lot and reduces development fees municipalities can charge builders.
British Columbia: B.C. Premier David Eby unveiled the Homes for People plan, a multi-billion-dollar effort to improve housing supply. As part of the plan, the government committed to introducing legislation to allow three to four units on any single-family lot this fall.
New York: Gov. Kathy Hochul is pushing new rules that would allow the state to overrule local municipal bylaws to reduce barriers to construction and ultimately increase the housing supply.
More: Following these trends, cities Like St. Petersburg, Florida, and Arlington, Virginia, approved changes to allow duplexes, triplexes, and fourplexes on lots zoned strictly for single-family homes.
The game-changer here for property owners is that they can now legally build 3-4 units on an R1 (single-family) lot. No expensive rezoning process or charges, and you’re allowed to do it while still adhering to local requirements like height, parking, and setback restrictions.
So What? Investors can build more for less, and this creates an interesting opportunity for those looking to maximize their ROI and get into the real estate investing game.
2. New House Hack: The Triflex 💪
We call this move the Triflex. Runner-up nicknames were: Triple Decker, Triple Cherry, Tri Harder, Triple Upzone, and LevelUpzone.
Because of the increasingly permissive regulatory environment, investors across North America can (or soon will be able to) purchase an underutilized single-family home and convert it to a triplex without expensive rezoning requirements.
Ask any investor, and the rezoning process is extremely expensive and nightmarish.
But through upzoning, there is no more need for rezoning.
Triflex Gamplan: Investors can purchase an underutilized home with either a basement or a second floor, and convert that home into a legal duplex with an entrance for each unit.
Following this, the triple cherry on the cake is to ensure the lots are big enough to accommodate a coach house in the backyard. What was once a single-family home, can be a triplex with only the cost of renovations, not rezoning.
Now, this move isn’t for the faint of heart, there are a lot of construction and planning considerations, which is why you need to work with an experienced construction crew and legal team to ensure you’re not falling into any traps.
Let’s look at the execution.
3. Triflex Execution
Every location and property is different, but here’s the general playbook a newbie real estate investor can deploy to ensure a successful Triflex.
1️⃣ Location Selection: You need to choose a state, province, or local municipality that has already passed upzoning laws such as those noted above. Or, one that is looking to do so imminently.
2️⃣ Property Selection: Ideally the property will have a basement (or two levels) and two entrances. This will allow for easy conversion. The top level will be one unit, and the lower (ideally it’s already finished and has water for a kitchen and bathroom) will be your second.
3️⃣ Ingress and Egress: You must ensure each unit can be self-contained. They have their own entrance/exit to the exterior, bathroom, and kitchen.
4️⃣ Lot Selection: Review the setback and coach house (if there are any) requirements in your local municipal zoning bylaws. If you don’t want to do the work yourself, hire a local urban planner. Ensure the lot is big enough to have a coach house in the back, usually around 400-600 square feet.
5️⃣ Construction Planning: Who will do the work for you? Either yourself, a company you’ve worked with in the past, or someone who comes highly recommended by other local investors and real estate professionals. Get an estimate of the work required to achieve your plans.
6️⃣ After Repair Value (APV): Use a local appraiser or real estate agent to give you an estimate APV on the property.
7️⃣ Projected Rents: Use a local appraiser, rent data collection such as Rentometer, and your local real estate agent to get some projected rents which will help you understand the ROI of your Triflex.
8️⃣ Budgeting: Based on your purchase costs, construction budget, and estimated rents, does the current Triflex proposal make sense? Does the APV make this move financially feasible once all construction is complete?
Although this can vary widely, the conversion from a single-family home to a duplex on average costs $90,000. Here’s a breakdown:
Further, the average cost of a coach house can range from $45,000 - $65,000 or higher depending on the size and finishes. If you’re buying something that is modular or prefab you’re looking at a cost of $80,000 - $150,000, again depending on finishes and sizing.
9️⃣ Architect: Finally, you will need to work with a designer and/or architect to develop your renovation and coach house plans. This will be used to obtain building permits from your local municipality.
🔟 The Refinance: Once all construction is complete and the new tenants in your beautiful new Triflex are moved in, you can do a refinance to pay yourself back the construction costs given the APV is higher because you’ve created a triplex out of a single-family home.
💯 Team: You MUST work with an experienced real estate lawyer who understands zoning and your local real estate rules and regulations. Your team will be rounded out by an experienced appraiser, real estate agent, and construction leader.
😎 Bonus (Triflex Hacking): Bonus points if you live in one of the three units, as your down payment will be lower for an owner-occupied property.
😎 Bonus (Triflex Mini): If you're short on cash, you can do the simple single-family home-to-duplex conversion first, then refinance to get the capital to then build your backyard coach house.
This is the Triflex playbook, and it’s an accessible way for new investors to get into the game and immediately maximize their asset value. If successful, then we get into rinse and repeat mode.
We are by no means saying this is easy. In fact, the opposite. Real estate investing is hard, but the outcomes can be massive for those who want to get their hands dirty.
Be cautious, work with a great team, and if all else fails you can live in you’re new home as you build out your Triflex plans and timeline. Although this may seem complicated, the Triflex can be done in phases.
The Triflex
Weekly Real Estate News
😓 It’s All America’s Default: No deal yet on the U.S. debt ceiling as the June 1st deadline looms — CNBC
😨 Everything Is Fine: The impact on the housing market would be significant should a default occur, with interest rates rising quickly — HousingWire
❌ Cancelled: Disney halts plans on a massive development in Orlando that would have created 2K jobs — CO
Read More: Real Estate and the Disney-DeSantis Joust
😀 Once You Pop…: New Micron microchip factory in upstate NY is causing an increase in developer interest…Jobs = apartments — Biz Journals
🥊 It’s Getting Chipy: It completely unrelated news, China has banned Micron from operating in that country — BBC
🏢 (Lots Of) Office Space: The return to work trend is slowing as remote work entrenches, office vacancies continue to rise — WSJ
🚀 By Rise, We Mean Skyrocket: Office vacancies hit almost 20% in Q1 2023 — CBRE
🤯 84%: Of maturing office loans will have “trouble” refinancing according to Moody’s — Biznow
😤 Ohhh….Eyyyyy: Remote work will whipe out 44% of NYC’s office values — NBC
🏨 Extended Business: Hilton announced a new hospitality brand that would focus entirely on extended stays — Yahoo!