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Rebecca Schenck
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ADU or other investment

Rebecca Schenck
Posted Dec 23 2022, 07:54

My husband and I refinanced our home with a cash out loan for $60,000.  Our house was assessed at almost $1,000,000.  We currently owe $343,000 on the home. We locked the loan in at a 2.875% interest rate. We live in Bozeman, MT.  We did this approximately one year ago, right before the interests rates started to increase.

We have yet to invest this money. Our original plan was to use it to build an ADU on our property (we live next to a large university, hospital and downtown). But, with the increasing rates, we procrastinated and have done nothing. My question now is, does it make any sense to take a loan out to build an ADU with such high interest rates? Would it be better to wait until the interest rates come down again and instead invest the money in areas other than the real estate market?

Any input would be greatly appreciated. 

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Jacob St. Martin
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Jacob St. Martin
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Replied Dec 23 2022, 08:39

Hello Rebecca, 

If I were you I would calculate your expected return on investment from the ADU. As long as you have a solid ROI (considering your interest payments on the loan) than it is worth it! While interest rates can affect your ROI, I think rates shouldn't stop you from proceeding with a good deal when it arises and the numbers make sense. Additionally, I think trying to time the market and rates is rarely a wise decision. Time in the market is more important than timing the market as david always says!

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Tanner Pile
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Tanner Pile
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Replied Dec 23 2022, 08:48

@Rebecca Schenck

Rebecca, 

What have you considered investing the money in other than the ADU? Viewing the ROI on the ADU vs your other investment will be the analysis to take. Seems like you're in a great location to do this and it could pay off well!

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Alex Larcheveque
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Alex Larcheveque
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Replied Dec 24 2022, 01:19

Like what others have said, you need to run the ROI numbers.

However, I just wanted to add that an ADU as a STR can sometimes do very well, depending on the city/location. Make sure to run those numbers as well!

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Henry Clark
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Henry Clark
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Replied Dec 24 2022, 03:55

Your question can't be answered from an REI forum.

Don’t answer the following on a forum

1.  How old are you.  
2.  How far to retirement. 
3.  How long do you plan to live in your house.   
4.   How secure are your jobs.

5.   What is your investment mix?  $700k net house, sticks bonds $???!, pension plans$???? Per year, other$???!!

6.   What is your risk tolerance

7.  Do you have other needs taken care of. Term life, college funds, assisted living, extended health care, etc

8. Are you in investment growth mode or wealth preservation? If growth mode you need to leverage your current house heavily, which I don't recommend if you're just starting out in REI. Do it as you need it. If your in preservation mode then pay back the $60,000


9. Example. Let's say you're 61. I would buy an assisted living policy for $100,000 for each of you. You pay $100,000 each. This checks off a box for you. Saves the one spouse selling the house to pay $10,000 per month. Bad from an REI standpoint. With $200,000 today you should be able to make another $800,000 in 20 years, but your not experienced REI

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Nathan Gesner
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Nathan Gesner
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ModeratorReplied Dec 24 2022, 05:26
Quote from @Rebecca Schenck:

Welcome to the BiggerPockets forums!

You pulled out cash and then sat on it. You said you had a plan to build an ADU, but that wasn't a plan. It was an idea with no concrete, actionable steps.

If you want to invest wisely, you should spend a little time educating yourself on how to analyze a property to determine the return, then you can decide if it's a good investment or not. Below is my basic starter advice. Maybe you'll find something of use in there. One thing I will point out: people invested in real estate the last 60 years and did very well for themselves even when rates were 7% and higher. 7% loans will not get as good a return as a 3% loan, but they can still be good investments.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the BiggerPockets podcasts. This will clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. BiggerPockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.

5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

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Allan C.
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Allan C.
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Replied Dec 24 2022, 21:16

@Rebecca Schenck if you haven’t done so already, get all of the cash into a high yield account while you figure out next steps. You can get 3 - 3.3% yield at the moment with high liquidity (3 day transfer max). Alternatively, you can put it into revolving 4 week T-bills and get ~4%.

I'm not a fan of ADU, especially if you have capital to work with. ADUs tie up money as pre-productive capital until the project is complete. It also comes with execution risk if you are not versed in the process. Why not just buy an asset that can cash flow immediately?

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Replied Dec 24 2022, 21:46
Quote from @Rebecca Schenck:

My husband and I refinanced our home with a cash out loan for $60,000.  Our house was assessed at almost $1,000,000.  We currently owe $343,000 on the home. We locked the loan in at a 2.875% interest rate. We live in Bozeman, MT.  We did this approximately one year ago, right before the interests rates started to increase.

We have yet to invest this money. Our original plan was to use it to build an ADU on our property (we live next to a large university, hospital and downtown). But, with the increasing rates, we procrastinated and have done nothing. My question now is, does it make any sense to take a loan out to build an ADU with such high interest rates? Would it be better to wait until the interest rates come down again and instead invest the money in areas other than the real estate market?

Any input would be greatly appreciated. 


I don't know about your market but the smarter idea is to buy a house that already has ADU, why? because the appraisal usually doesn't price the ADU appropriately. I see all over Zillow with actual ADU listings, there's no advantage to building ADU. Getting house with an existing ADU is a big yes.