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Jordan Ray
  • New to Real Estate
  • San Diego, CA
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New Investor. ADU rental vs out of state rental?

Jordan Ray
  • New to Real Estate
  • San Diego, CA
Posted May 17 2022, 21:44

First post here on the bigger pockets forums and new to real estate investing.

I live in San Diego California and with increasing home prices have acquired a large chunk of equity quickly.

On my property I have the potential to add an ADU that I would use for long or mid term renting. In my City we have one very close hospital with another even closer being built in the next year both with a lot of traveling nurses in addition we have a college for potential midterm student renters.

My other option would be to invest my money out of state into BRRRR deals with insight from another investor who invests in the area I'm looking into.

In either scenario I will be using a HELOC to finance and would appreciate the input of everyone paving the way for a rookie investor!

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Jared Hottle
Pro Member
  • Real Estate Agent
  • Cedar falls IA Waterloo, IA
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Jared Hottle
Pro Member
  • Real Estate Agent
  • Cedar falls IA Waterloo, IA
Replied May 18 2022, 04:47

Either strategy will work if done right! If it were me I would probably do the ADU first. Especially with the access to hospitals you could get it with traveling nurses pretty easily and the values out there will continue to rise. BRRRing in the midwest is great though. Cash flows well and modest appreciation.

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Jordan Ray
  • New to Real Estate
  • San Diego, CA
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Jordan Ray
  • New to Real Estate
  • San Diego, CA
Replied May 18 2022, 09:23

If I use a Heloc to fund the ADU rental what are my options to acquire that money back so I can use my Heloc for further details?

Thanks!

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Twana Rasoul
  • Real Estate Agent
  • San Diego, CA
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Twana Rasoul
  • Real Estate Agent
  • San Diego, CA
Replied May 19 2022, 08:36

Since you are in San Diego, easy answer: build the ADU. Aside from San Diego being a much better overall quality market than whatever markets you could possibly look at, your cashflow numbers will also be better.

Good Luck!

  • Real Estate Agent California (#02026495)

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Brian Larson
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  • Investor
  • San Jose, CA
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Brian Larson
Pro Member
  • Investor
  • San Jose, CA
Replied May 19 2022, 09:38

@Jordan Ray - I had a similar dilemma when I got started a few years ago. I am in downtown San Jose, CA. I ultimately went with an ADU at my property first and then I purchased out-of-state when we performed our cashout refinance. During our debit consolidation, we took out about $80K AND paid off the HELCO which we had used to construct the ADU. The timing was almost perfect for this.

I have some regrets but I think it will work out overall.  I regret not investing out-of-state and taking advantage of the pandemic bump.  However, I believe that the long-term appreciation of our property in San Jose (and probably yours in San Diego), will put us way ahead in the next 5-10 years.

FYI - Appraisers are jerks and probably won't give you a high assessed value for the ADU construction. But the rents collected and the amount you recoup at the time of sale will far outweigh that obstacle. Just keep this in mind during your ADU planning and calculations.

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Emy Bernardo
  • Investor
  • San Diego, CA
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Emy Bernardo
  • Investor
  • San Diego, CA
Replied May 19 2022, 10:57

I would build the ADU - it's easy to manage and will give you so many options down the road. For example, maybe you move into the ADU one day and rent out the main house, or rent both out and have enough cash flow to cover your mortgage or rent somewhere else. Or, maybe one day you will need to move your aging parent into it or your college age kid. There are many pros to having the ADU aside from the cash flow!

That said, you might be stuck paying off the HELOC a while... The cool thing about a HELOC is as soon as you pay the money back, you have it available to use again. So, if you put all your rent from the ADU towards paying it down in the first year or two, you will have those funds to redeploy to your next investment. Not sure if there are companies that would finance your ADU build? Maybe you could use the Heloc for a portion of the ADU build and keep some of the money to use for a down payment on another property?