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SB-684 Gives First-Time Investors a New Way to Build Wealth

SB-684 is opening the door for first-time investors to turn their lots into multiple rental units, creating a steady and rewarding income stream. By simplifying the lot-split process and allowing for smaller, more manageable housing developments, the law gives new investors a chance to enter the market without the massive upfront costs of traditional real estate projects. But before getting the reward, they should know the important things to consider to avoid financial setbacks.

1. It’s About Cash Flow, Not Just Real Estate

SB-684 makes it easier to build multiple housing units on a single lot, but the real value isn’t in the land, it’s in the income those units generate. Owning property is part of the equation, but what really matters is making sure rental income exceeds development, maintenance, and financing costs.

To keep an SB-684 project profitable, you need to factor in cash flow: Income minus Expenses. Unit sizes are capped at 1,750 square feet, and you’ll need at least one off-street parking space per unit unless you’re near transit. That means pricing your rentals right and understanding local demand is critical.

2. Don’t Overestimate Income. Vacancy Costs Matter

Basing income on gross rent alone leads to bad math. Many landlords assume annual income is just monthly rent × 12, but that ignores vacancies—an unavoidable reality. A more accurate formula is:

Annual Income = (12 × Monthly Rent) – Vacancy Cost – Expenses

Vacancy costs come down to how long it takes to fill a unit and what you have to spend to get it ready. Let’s say your tenants typically stay for just one year. Every time someone moves out, you’re not just losing rent, you’re also covering turnover costs like cleaning, repairs, and upgrades. If your property costs $3,000 a month to carry, sits vacant for 3 months, and needs $800 in renovations, your vacancy cost adds up fast:

Vacancy Cost = (months vacant × carrying costs) + renovation costs

$9,800 = (3 × $3,000) + $800

A property that attracts long-term tenants (5 years or more) will have much lower vacancy costs than one with frequent turnover.

3. ROI and Cash Flow Are Just the Starting Point

Focusing only on initial ROI and cash flow can be misleading. A property might look great on paper today but lose value over time if rent appreciation is low or vacancy costs are high.

For example, consider two potential sites:

  • Site 1: Lower initial rents but located in a city with high rental growth and strong demand.
  • Site 2: Higher rents at the start but with limited appreciation and higher vacancy costs.

At first glance, Site 2 seems like the better deal. But over time, Site 1 could outperform due to:

  • Higher rent appreciation – Rents steadily increase each year.
  • Lower vacancy costs – Strong demand means shorter turnover times.
  • Regulatory advantages – Some cities process SB-684 applications faster, reducing delays and costs.

If you only focus on year-one numbers, you risk missing out on a far more profitable investment in the long run.

4. Long-Term Growth Beats Immediate ROI

Some investors insist on choosing properties based on day-one cash flow. But that mindset ignores key factors like rental growth, inflation, and shifting demand, things that can make or break an SB-684 project.

Take Agoura Hills, for example. Smaller SB-684 units (max 1,750 square feet) might generate modest rent at first, but future rent growth, transit expansion, and demand for smaller homes could drive long-term profits far beyond what today’s numbers suggest.

Instead of dismissing properties with lower initial returns, smart investors look at long-term rental trends, local policies, and economic growth. In cities with strong demand and favorable regulations, SB-684 projects can become far more valuable over time.

Conclusion:

Building under SB-684 isn’t just about adding units, it’s about creating a steady and profitable income stream. Choosing locations with strong tenant demand and understanding how costs impact profitability can turn an SB-684 development into a long-term asset rather than just another real estate investment.

Find out what you can build, the budget, and the ROI for your property following SB-684