Socal - South Bay Purchase Fixer + Build ADU Plan Critique

Socal - South Bay Purchase Fixer + Build ADU Plan Critique

Member since 2020 · 4 posts · 1 vote

Hi guys,

My plan was to purchase a 2bed 1 bath house in Hawthorne or Lawndale for ~500-600k. Live in it while I do cosmetic renovations for 1 year. In addition, at the same time, I would drop 80k-100k to build an ADU around 500 sq feet out of a detached garage conversion (detached garage is common in the south bay). I figure that an ADU can rent for at least $1500 and the main house when I would rent for $2200-2500. After the cosmetic additions and ADU, I could do a cash out refinance and take out any equity. Even with the cash out refinance, I would have positive cash flow of roughly $500-$1000 per month.

The houses that I saw were mostly from the 1920s to 1950s that fit in this criteria. I'll be the first to say that I am a bit scared especially of the electrical or plumbing or just being taken advantage by a contractor.

My skills are still very basic, I've helped my brother paint cabinets and do some flooring work. I feel confident enough to add recessed can lights but I don't feel comfortable doing any major plumbing or electrical work.

Would love any critiques of my plan.

Do you think I could build an ADU for 80k out of a detached garage?

Thanks so much

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Jon Schwartz
Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
6y
Originally posted by @David Chan:
Hi guys,

My plan was to purchase a 2bed 1 bath house in Hawthorne or Lawndale for ~500-600k. Live in it while I do cosmetic renovations for 1 year. In addition, at the same time, I would drop 80k-100k to build an ADU around 500 sq feet out of a detached garage conversion (detached garage is common in the south bay). I figure that an ADU can rent for at least $1500 and the main house when I would rent for $2200-2500. After the cosmetic additions and ADU, I could do a cash out refinance and take out any equity. Even with the cash out refinance, I would have positive cash flow of roughly $500-$1000 per month.

The houses that I saw were mostly from the 1920s to 1950s that fit in this criteria. I'll be the first to say that I am a bit scared especially of the electrical or plumbing or just being taken advantage by a contractor.
My skills are still very basic, I've helped my brother paint cabinets and do some flooring work. I feel confident enough to add recessed can lights but I don't feel comfortable doing any major plumbing or electrical work.

Would love any critiques of my plan.

Do you think I could build an ADU for 80k out of a detached garage?

Thanks so much

David, welcome to the party!
In broad strokes, it's a fine plan! Here are a few of my thoughts:
Regarding the cash-out refinance, ADUs aren't appraising for more than $50K in value these days. They're being appraised as an amenity, like a swimming pool or a deck, and most appraisers peg the amenity value at $50K. So, your ARV with the ADU will be whatever the prevailing ARV is plus $50K, no more. Make sure your numbers still work with that in mind!
Last year, I bought and renovated a 1920s duplex, which I'm now living in. Most of the plumbing and electrical had been updated, but there was some funky stuff to replace, especially as regards the electrical. Plumbing and electrical should definitely be done by pros. The rest is up to your appetite. Do you think you could figure out drywalling? If you can drywall, paint, and do floors, then you could hire subcontractors to install new piping and run new electrical. You'll be living in a bit of a shell for a few months, but then you can really lean into your own sweat equity and not rely on a contractor.
If you do hire a contractor, there are ways to protect yourself from being taken advantage of. David Greene's "Long-Distance Investing" has a lot of great tips -- even if working with a local contractor!
For the ADU, I think you'll need a contractor. That's a big operation. I've heard $100K is a more reasonable budget. I can recommend some ADU contractors if you'd like to ask them some question. Message me!
Best,
Jon

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Originally posted by @David Chan:
Hi guys,

My plan was to purchase a 2bed 1 bath house in Hawthorne or Lawndale for ~500-600k. Live in it while I do cosmetic renovations for 1 year. In addition, at the same time, I would drop 80k-100k to build an ADU around 500 sq feet out of a detached garage conversion (detached garage is common in the south bay). I figure that an ADU can rent for at least $1500 and the main house when I would rent for $2200-2500. After the cosmetic additions and ADU, I could do a cash out refinance and take out any equity. Even with the cash out refinance, I would have positive cash flow of roughly $500-$1000 per month.

The houses that I saw were mostly from the 1920s to 1950s that fit in this criteria. I'll be the first to say that I am a bit scared especially of the electrical or plumbing or just being taken advantage by a contractor.
My skills are still very basic, I've helped my brother paint cabinets and do some flooring work. I feel confident enough to add recessed can lights but I don't feel comfortable doing any major plumbing or electrical work.

Would love any critiques of my plan.

Do you think I could build an ADU for 80k out of a detached garage?

Thanks so much

>Do you think I could build an ADU for 80k out of a detached garage?

I think your estimate is close to accurate for virtually hands off cost assuming nothing unusual with the lot and standard new grade build.

>Would love any critiques of my plan.

@Jon Schwartz already pointed out the issue with ADU values for appraisals. The $80k ADU cost is unlikely to get an appraised value of $80k. This hinders any plan to extract value.
You also have an issue with your calculated cash flow assuming financed at an investment LTV. you have $3700 in rent for a up to $700k value. That is a 0.52% rent to cost ratio. That is going to initially have negative cash flow at an 75% or greater LTV. I typically use 0.7% as my break even number until I run a more accurate pro forma. It will rely on rent appreciation for achieving cash flow. Research rental expenses. Make sure you understand cap expenses. know what the 50% rule is whether you believe it to be accurate or not.
Good luck

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