Where to borrow money for remodel?

Question

Bought a house for 1M with about 230k down at 2.9 interest for a 30 year mortgage. House includes a non permitted, detached ADU in the back where I live. The main house is being rented for $3,700. My mortgage payments including property insurance, interest, etc is about 4,333.00. I want to add a second bedroom to the 1 bedroom "ADU". The cost is about 80k. We are looking into refinancing and pulling cash out. Our appraisal came in at 1.15M one year after purchasing the house. Is there a better way to borrow money for the addition? Our broker sent us new rates ranging between 3.5% - 3.75% and our payments would jump $300/month plus closing costs. This is for a 30 year fixed mortgage. Thoughts?

Kerry Baird · Answer

So you have $230,000 invested, and you have cash flow of -$633 now. And you want to spend an additional $80,000 to increase the mortgage payment by another $300, for a total of -$933? What will the ADU rent for?

Bridget Ariel · Answer

Hi Kerry, We are in Los Angeles so it's really challenging to find a property with positive cash flow. We just started and this is our first property. The low interest rates helped. We live in the back house and rent out the front house. When we get the back house legally permitted as an ADU we can easily rent it out for $2,500. The back house has an epic 180 degree view of the ocean so we can rent it for a premium.  We room share with our 1 year old and the second bedroom we want to build will be for him. There's time to decide but we don't yet know if we will rent the back house and move to another similar property or just buy another property while continuing to live here. $1,000 is cheap rent in Los Angeles for an ocean view property if we can make it work as a family.

Bridget Ariel · Answer

Hi Tim, Will ask. I didn't know that was an option but yes, that sounds like a much better plan.

Kerry Baird · Answer

@Bridget Ariel, thanks for your response. I better understand now. The value will increase with a legal permitted ADU. Kudos for being willing to do a challenging thing in the early years, so you can hopefully start building generational wealth.

Will Barnard · Answer

Bridget, your $80k budget may or may not be enough. Keep in mind that if it is not a legal unit and was not built to current codes, you could open up a whole can of worms here. Additionally, to be legal, it MUST have a direct sewer line connection, currently I am willing to bet it is tapped into the main house line. It also needs gas, water, and electricity (you can skip the gas if you go all electric) and the gas and water supply must be direct connected to the meters. This requires excavation, install, and backfill plus fixing any hardscape (or if your lucky, soft scape) that was removed. Utility connections alone can be in the $30k plus range and the pre construction costs can be $15k-$25k.

To the others quoting the negative cash flow, you are missing the intent of the owner here. She is subsidizing her mortgage by renting out the main house and having a lower cost of living, plus building equity over time. This would be considered a BRRRR strategy with additional potential upside of legalizing the ADU (and possibly increasing it's room count and size.

Dan H. · Answer

His cash flow is far worse than -$633 because he is only including PITI which means he is not counting a lot of expenses such as maintenance/cap ex, vacancy, PM (even self managed this should be included because it is work and investors deserve compensation for their work), etc.

however, they are living in one “unit” (nota legal uniT, but …).  Rents in LA can be substantial.  His saved rent should be factored into the equation on the cash flow.  The thing I cannot get around is why one additional bedroom would cost as much as $80k.  Is a 2nd sorry being added to maintain the foot print for this second bedroom.  Pre-covid that would have been almost enough to do a small hands off ADU garage conversion.  Hav3 you gotten multiple bids?

Good luck

Gina Stern · Answer

A HELOC is a great idea but you may want to consider a silent partner who just wants some sweat equity in the deal and will want to loan you the money for a percentage of the profits. You sometimes have to jump through hoops to get a HELOC it is a long process.

Tim Johnson · Answer

Can you get a HELOC based on your equity / new appraisal to cover the new addition..... and leave the mortgage in place?

Where to borrow money for remodel?

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