CA - My rough build/rent projections look accurate? 2 SF + 2 ADU

Rental Property Investor · CA · Member since 2011 · 82 posts · 32 votes

El Cajon, CA. 1 acre (rs-20) flat buildable lot owned free and clear with utilities. Will split lot (sb9?) and build 2 SF + 2 ADUs. Goal is to build and rent.

These numbers seem LOW to me. Is this fair or am I off? The ADU's have okay ROI, but the larger unit seems quite low at 2.5% RoC. I'd expect a better return since the lot is owned free and clear so not sure what I am doing wrong here. Any advice? Thanks!

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

Maintenance/cap ex is too low for your small unit count for the long term. The cap ex on a water heater in San Diego is $12/month ($1.8k/12.5/12). Cap ex Small kitchen is $40/month not including the appliances. Roof, flooring, plumbing, landscaping, fencing, hardscape, foundation, windows, appliances, etc. It adds up fast.

Are you including tenant turn over time in the vacancy or the maintenance numbers?

have you run the numbers using 50% rule? A quick look shows each unit is negative using the 50% rule ($600/month negative on the primary homes). The 50% rule is a bit conservative in high rent markets such as San Diego.

In general, properties in San Diego county start with negative cash flow. this is especially true of small unit new construction. However, the rents have been increasing at a very high rate. Your units will be free of rent control for 15 years. This implies your rent can be kept near market rent. On $4k rents, the market rent increase this year is over $200/month. You can see how this can quickly improve the cash flow? Properties have also been appreciating at insane rate for the last 10 years. What happens if this (rent increasing and/or property appreciation) stop? It will at some point, but when?

good luck

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Pavan Sandhu
Developer · Sacramento, CA · Member since 2016 · 464 posts · 143 votes
4y
Construction loan costs ?
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Rami W.
OP
Rental Property Investor · CA · Member since 2011 · 82 posts · 32 votes
4y
@Pavan Sandhu, have a rough estimate I can work in? If this build takes 1-1.5 years from ground breaking. Thanks!
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
Maintenance/cap ex is too low for your small unit count for the long term. The cap ex on a water heater in San Diego is $12/month ($1.8k/12.5/12). Cap ex Small kitchen is $40/month not including the appliances. Roof, flooring, plumbing, landscaping, fencing, hardscape, foundation, windows, appliances, etc. It adds up fast.
Are you including tenant turn over time in the vacancy or the maintenance numbers?

have you run the numbers using 50% rule? A quick look shows each unit is negative using the 50% rule ($600/month negative on the primary homes). The 50% rule is a bit conservative in high rent markets such as San Diego.
In general, properties in San Diego county start with negative cash flow. this is especially true of small unit new construction. However, the rents have been increasing at a very high rate. Your units will be free of rent control for 15 years. This implies your rent can be kept near market rent. On $4k rents, the market rent increase this year is over $200/month. You can see how this can quickly improve the cash flow? Properties have also been appreciating at insane rate for the last 10 years. What happens if this (rent increasing and/or property appreciation) stop? It will at some point, but when?

good luck
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Morgan Scott
Member since 2022 · 17 posts · 10 votes
4y
Hi Rami, at first glance everything looks like it is detailed well. Have you checked formulas in each cell to make sure that it's calculating correctly. If everything is, the. I come to the conclusion that you might be better building potrntially a smaller square footage building with less rooms. What does it look like if it you only built a 3/2 at 1800 sqft?
Also I think your cost per sqft is a bit light given the current market. I'd plan on $300-$325 a foot. Especially if you have to bring utilities to the lot.
Another interesting ideas would be to add a page and let this sheet feed to it so that you could run an IRR over a 10 year period, or whatever your desired holding period is, and see what type of return you get.
Great work on the details. It looks like you are getting to the core of the scenario. Good luck!

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