A Triplex Thought Experiment
One of the things I’ve heard a lot from YIMBYs is about the potential to add housing in single family neighborhoods by building more 2, 3, and 4plex developments. Setting aside the issue of cost, I found myself wondering: were there single family homes in Sunnyvale on R-2 or R-3 land, that could be replaced by a triplex, fourplex or small apartment complex? What would it take to make that happen? So I logged onto Zillow, and this is what I found (sign in required): https://www.zillow.com/homes/for_sale/pmf,pf_pt/19543825_zpid/0_singlestory/37.388419,-122.0068,37.359976,-122.052934_rect/14_zm/1_p/

393 Beemer is up for auction next week. This 2 bedroom home sits on an 11,000 square foot lot zoned R-2. R-2 zoning allows 12 dwelling units per acre, or one unit per 3630 square feet. Thus, this lot could in theory support three units (3630 * 3 = 10890, just under this property’s lot size). It’s also about two blocks from the Sunnyvale Caltrain station, and in easy walking distance to our downtown.
Building a Triplex
Now Zillow estimates its foreclosure auction price to be a cool $1.55 million — already far beyond anything I could hope to afford on my own. But, I decided to crunch the numbers anyway just to see. Assuming a 20% down payment (ha!) at 4.5% interest (what Zillow says is the going 30 year mortgage rate right now), I would be on the hook for $7,650 per month including 1% property tax and insurance. That’s $91,800 per year. Even dropping to 3%, I’d be looking at $6,600 per month, including a 1% property tax. For comparison, my old “luxury” two bedroom apartment (which I shared with a roommate) rented for $3800/month when I moved out.
One wonders why apartments are considered luxury housing but a home on an 11,000 square foot lot is not, but I digress.
But of course the goal is not to move into a 1923 two bedroom house. The goal is to tear it down and put up a triplex, adding two units to the neighborhood. What would that cost on top of the land? Well, most of the sources I’ve seen cite construction costs in the Bay Area at around $300 per square foot, as a minimum.
Let’s say we wanted our triplex to have three largish two bedroom units, at 1200 square feet each. At 300$/sq. ft., that yields a total cost of $1.08 million. Given the size of the project one might hope for economies of scale, perhaps through the use of modular construction techniques, so let’s generously chop 20% off of that. That brings us down to $860,000 in construction costs, plus $1.55 million in land costs, for a total of $2.41 million.
The mortgage on that — again assuming 3% interest and 20% down (that’s $482,000)— is an eyewatering $12,300 per month, again including property tax. Each unit would thus have to rent for about $4,100 per month just to pay the mortgage. To recoup the down payment over 20 years, I’d need to do the following:
$482,000 / (3 units * 20 years * 12 months/year) = $669 per unit per month.
That brings the total rent per unit to $4770 per month. That doesn’t include other costs, which we must assume will exist, so let’s round things out at $5,000 per month.
Munchkin: Developer Edition
We’re already in deep because of the price of the land, so we probably want to maximize our value for the property. So what happens if we go all out, and play Munchkin with the Sunnyvale zoning code? R-2 zoning in Sunnyvale allows for 40% lot coverage and 55% FAR for multi-family dwellings. So we can have a 4,400 square foot footprint and a 6,050 square foot project. But they’re capped at two stories. If we give each home a 1,000 square footprint (at say, 25 ft by 40 ft), we can max out the FAR with 2000 square feet per unit if we make them each two stories.
That also leaves 8,000 square feet for parking, driveway, green space, and swimming pool (this is California after all). In theory only three spaces would be required to be covered assigned parking and thus count toward FAR. Each covered parking space takes up 8.5 ft* 18 ft = 153 square feet. This thus drops our unit size to 1847 square feet. We would need to provide 1.15 unassigned spaces per unit, rounded up, for another four parking spaces. These could be uncovered and thus not count toward FAR. Section c indicates that additional unassigned parking spaces could be required, and given the size of this development they almost certainly would be. But again, these would be uncovered and thus not count toward FAR. Add another 1500 square feet for the drive way, and we still have 5,000 square feet for the yard and the pool.
Again assuming $300 per square foot in construction costs, this brings our total costs to $3.35 million with a down payment of $670,000, for a monthly bill of $14,000. To be clear, I am in physical pain simply considering these numbers.
Since the goal here is to squeeze as much value from this lot as we possibly can, we’d probably want each of these town homes to be 4 bedroom/4.5 bathrooms. With 200 square feet per bedroom and bathroom, that leaves 1,000 square feet of common space, stairs, hallways, etc. Tight, but doable. Assuming 1.5 people per bedroom, we’ve now fit eighteen people into this lot. We charge $6,500 per month per unit for a total monthly rent of $19,500, and everyone ends up paying about $1,100 per month in rent — a steal! That gives us a profit of $4,500 per month, a repayment window of 8 years for the down payment, and a 12% ROI.
Of course, this business model is not so much three 4BR townhouses but twelve SRO apartments, with every four bedrooms sharing a common space and kitchen. And staff would surely recognize that.
So, what if we simply sell the townhomes instead? Well, I think it’s safe to say, given their location and the prices of similar homes in the area that a 2,000 square foot new townhouse could easily sell for 1.5 million dollars. That’s a 28.6% return on investment, and a lot safer, as we have a much shorter time horizon to consider. It’s almost certainly the smarter approach.
And if we upzone?
So what would it take to get more reasonably priced rental housing built on this site? Well, the only real way to do so would be to upzone. R-3 would allow twice as many units and three stories; R-4 three times as many and four stories (one can already hear the wailing and gnashing of teeth at the idea).
What might an R-3 development look like? Well, it would be substantially similar to our Munchkined R-2 development, except instead of three 2,000 square foot 4 br./4.5 ba. units, we’d build six 1,000 square foot 2 br/2.5 ba units, and rent them out for $4,000 apiece. Because we’re only allowed six units at R-3, there’s no real point to going up to a third story.
Except.
Upzoning would also allow the state’s density bonus to come into play. At R-2 zoning, setting aside a single unit for low income housing would get us… one more unit. That doesn’t pencil. At R-3, though, we could set aside one of our original six units for low income housing. That’s 17% affordable, right there, and gets us a 30.5% density bonus. It would have to rent at 30% of 80% of area median income. 80% of Santa Clara County AMI is $94,450 / year for a family of four, which means this unit would rent at 30% of that per year, or $2360 per month.
The density bonus allows us to add an additional two units, and requires the city to grant us a concession of some sort. That could mean reduced parking requirements — we are two blocks from Caltrain after all. It could mean approving mixed use zoning for the site — how about a neighborhood cafe? Or maybe we could add a rooftop deck — who knows?
So now we’re talking about seven units renting at $4,000 per month, plus one at $2360, for $30,360 in monthly revenue. The two additional units that we built add an extra $600,000 to our construction price tag, bringing us to about $4 million. Our down payment is now $800,000, and our implausible 3% interest rate gives us a monthly payment of $17,000, tax included. Even at 4.5%, the monthly payment isn’t quite $20,000. This might just pencil.
Caveats
I have only taken into account a cursory reading of our code, and I’m sure there are things I’m missing that could be used to shrink or kill the townhouse-totally-not-an-SRO version of this project. I’d guess our planning department and commission would have strong opinions about such a development, with the word “no” featuring very prominently, because it’s clearly against the spirit of R-2 zoning.
Another caveat is that, as eyewatering as these costs are, one imagines that there are lower interest loans available to established developers, who will also benefit from economies of scale and should be able to leverage pre-existing relationships to help bring down construction costs.
On the other hand, the price tag I’ve laid out doesn’t include any fees levied by the city or local school district, which could end up being considerable. And I haven’t taken into account the cost of annual maintenance and management. Given the small size of the development, maintenance would not require a full time employee dedicated to this site; we could use contractors, or have its maintenance load shared with other properties in our portfolio.
I also have not considered time to approval. This is a major factor, because you have to own the land before you can get the project in the pipeline, and every month you wait for approval is a loan payment that you have to cover with revenue from somewhere else. That’s potentially a major problem.
Conclusions
It’s also worth noting that, for this to work requires that the approval process be snappy. Every month the developer has to wait is another loan payment they have to cover, without any revenue to do so. If the approval process takes a year, that could easily be around $200,000.
Project feasibility is also highly dependent on construction costs. Tariffs on timber or steel could substantially drive up costs and affect project feasibility. Conversely, allowing the use of modular construction could bring substantial savings.
Rental housing is inherently a long term investment for developers. It’s easy to see why, in many cases, they would prefer to put up townhouses. Once a townhouse is sold, it’s no longer your problem, and you’ve got a nice fat check. So you recoup your investment a lot faster and with a lot less risk. As such we need to work to make sure that we keep rental housing an attractive option for developers.
There’s been a lot of discussion in the pro-housing movement about the how allowing duplexes and triplexes in traditionally single family neighborhoods would allow us to add housing gradually and to slowly densify these areas. Unfortunately, it seems this approach is not feasible with Bay Area land prices what they are. The only way it really works is if you’ve got someone who already owns the land free and clear. But it’s really not a feasible approach for developers.
We may also want to look at reconsidering our R-2 zoning standards, to ensure that they are effectively promoting multi-family development. It may be worth considering an R-2.5, which would allow R-3 density and remove FAR restrictions, as in R-3, but would cap heights at two stories. It might also allow buildings to go to 45% of lot coverage rather than 40%. This could allow the construction of more of the low-slung style apartments one can find in the Washington Park neighborhood.
Lastly, though, I think this shows just how hard getting housing built can be, even in a friendly environment. Solving this crisis is going to be hard.
