1st investment property. Questions!

[Sarah Jukes]

Finally have a refi loan on our home approved. The amount can get us an average home in a slightly cheaper area or one of the lowest priced homes in a more affluent area... we want to rent the property out and ideally breakeven. However all 3 homes we are so far considering have either an illegal ADU/unit or unpermitted rooms. Common here in Santa Cruz County CA.

One is for sale by owner $550,00, officially a 1 bed home but actually has a 2 bed apartment upstairs currently renting at $2300/mth and downstairs a1 bed apartment that could rent for about $1600 (currently empty). This would give us the highest yield but to get the unpernitted spaces permitted could take about a year here and i have no idea what cost to bring up to code. Is it too risky to rent out illegal spaces?

The 2nd home is listed at $680,000 (wed lay up to $620,000) a large 3 bed with 2 ‘bonus’ rooms downstairs of which one is currently a ‘4th’ bedroom. If we advertised it as a 3 bed rental with 2 bonus rooms does that keep it above hoses even if tenants choose to turn bonus room into another bedroom? Whole house could rent up to $4000 & would only involve one rental agreement as one unit. But would bring in lowest return on investment. But is the more conventional choice.

The 3rd home is a short sale about to list for $650,000 a 3 bed house with an illegal 1 bed ADU in back yard, the ADU rents at $1200 currently and the house would prob rent for $3000.

The best rate in return is the one with most illegal space..::is that too risky?Do you negotiate price based on permitted space? Seems the county tax unpermitted sqft.

[Brian C.]

Hi Sarah..I'd check to see if that 2bd apartment can be legalized as an ADU, then decide after learning costs/requirements from the county. Things are changing regarding ADU's so get the latest info. It helps your husband is a contractor. The 'unpermitted extra rooms' shouldnt be a big deal as thats pretty easily solved if it becomes an issue later. That FSBO sounds pretty good depending where it is.