Advice on where to start
A little background first: wife and I have good jobs as professionals; live in the Los Angeles area; I have a CA real estate broker's license; Wife is w-2; I am self-employed; had a couple condos years ago, but did not enjoy the property management part; have been successfully investing in the stock market for a few years (even this year!); looking to diversify into real estate again, but not sure where to begin; should have about $300k to $400k to invest; here are the options we have been looking into:
1) Our top option would be if our landlord sells us the 4-plex we currently live in, but it will definitely not cash-flow. Had an idea of turning the garages into ADU's for extra income. Pros: possibly a good deal, since we're friends with the elderly landlord; could do less down with FHA, but payments would be double what we currently pay in rent (including the rent of other units) and would not cash flow; would have enough leftover to build the 1-bedroom ADU; Cons: no cash-flow;
2) Buy outside LA County, but still in California. Still with the idea of looking for a place to add an ADU to add value. Pros: better appreciation than other states; possibly positive cash flow; broker commissions; Cons: property management by others (added expense);
3) Buy outside CA. Pros: possibly could buy multiple or bigger property; better cash flow; Cons: property management; no commission; not familiar with areas;
I am mainly thinking out loud and jotted down some ideas. Any input would be helpful. Specially on good up and coming areas to invest in.
Thank you!
FHA have sustainability requirements for triplex and quad which makes it extremely unlikely you can use this financing. Fortunately there are other high LTV options.
Adding ADUs is often one of the worse RE investments. Here are some of the reasons:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
You hit many of the OOS issues but I will add one. People often go OOS for the lower entry cost. Some things to consider about this lower entry cost: what does it imply about appreciation? What do you think the rent growth has been? Many of those cheap markets have had appreciation less than inflation for this century (source neighborhoodscout). In inflation adjusted dollars these properties are worth less than they were in the year 2000. Same thing happens to their cash flow because rents ar3 coupled to property values. Some of these markets r3 Ts are less today in inflation adjusted dollars than they were in the year 2000. Unlike many markets, the cash flow in some of these markets does not increase with time.
Good luck
Quote from @Felix Piper:
A little background first: wife and I have good jobs as professionals; live in the Los Angeles area; I have a CA real estate broker's license; Wife is w-2; I am self-employed; had a couple condos years ago, but did not enjoy the property management part; have been successfully investing in the stock market for a few years (even this year!); looking to diversify into real estate again, but not sure where to begin; should have about $300k to $400k to invest; here are the options we have been looking into:
1) Our top option would be if our landlord sells us the 4-plex we currently live in, but it will definitely not cash-flow. Had an idea of turning the garages into ADU's for extra income. Pros: possibly a good deal, since we're friends with the elderly landlord; could do less down with FHA, but payments would be double what we currently pay in rent (including the rent of other units) and would not cash flow; would have enough leftover to build the 1-bedroom ADU; Cons: no cash-flow;
2) Buy outside LA County, but still in California. Still with the idea of looking for a place to add an ADU to add value. Pros: better appreciation than other states; possibly positive cash flow; broker commissions; Cons: property management by others (added expense);
3) Buy outside CA. Pros: possibly could buy multiple or bigger property; better cash flow; Cons: property management; no commission; not familiar with areas;I am mainly thinking out loud and jotted down some ideas. Any input would be helpful. Specially on good up and coming areas to invest in.
Thank you!
Hey, Felix, I prefer the first one. But need more details; if you want to discuss will be happy to talk,
Leona
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