Investing Into a Rental Property in Merced, CA w/ ADU
Real Estate Agent · San Jose, CA · Member since 2019 · 10 posts · 2 votes
Hey Biggerpockets peeps,
I am looking to take on my first investment property EVER. I dont want to be stuck on analysis paralysis so I came here to hopefully get some insight on what I should be looking to expect from all kinds of perspectives.
I'm looking at a place in Merced, CA.
Some of the facts:
Has 3bd/1bth unit with 896 sqft built in 1983 and a lot of 7,405 sqft.
The ADU is 3bd/1bth, has 1450 sqft, and was built in 1987.
Closest comp sold at about $192k.
I plan to give them an offer @ $160k but dont mind negotiating up a bit.
Average rent in the area looks to be about $1250.
Tenants currently occupy both units. (Would like for them to reapply to be keep tenancy.)
The worries:
Am I seeing a possible $2500 in monthly income for rent?
Tax assessed value is less then half of their asking price. Would this be worrisome?
What precautions can I take on this kind of investment?
I don't know if the ADU is permitted by the city.
I ran some rough numbers through the brrrr strategy calculator and showed some cash flow potential.
Any kind of advice is welcomed. Would love any kind of guidance through this process.
Thanks,
Rafael Gallardo Jr
Hey Biggerpockets peeps,
I am looking to take on my first investment property EVER. I dont want to be stuck on analysis paralysis so I came here to hopefully get some insight on what I should be looking to expect from all kinds of perspectives.
I'm looking at a place in Merced, CA.
Some of the facts:
Has 3bd/1bth unit with 896 sqft built in 1983 and a lot of 7,405 sqft.
The ADU is 3bd/1bth, has 1450 sqft, and was built in 1987.
Closest comp sold at about $192k.
I plan to give them an offer @ $160k but dont mind negotiating up a bit.
Average rent in the area looks to be about $1250.
Tenants currently occupy both units. (Would like for them to reapply to be keep tenancy.)
The worries:
Am I seeing a possible $2500 in monthly income for rent?
Tax assessed value is less then half of their asking price. Would this be worrisome?
What precautions can I take on this kind of investment?
I don't know if the ADU is permitted by the city.
I ran some rough numbers through the brrrr strategy calculator and showed some cash flow potential.
Any kind of advice is welcomed. Would love any kind of guidance through this process.
Thanks,
Rafael Gallardo Jr
Verify the ADU is permitted. Hands off build of just the ADU would be higher than your offer price assuming it is permitted and built to code.
I like 3/1 for long term rental. I like 3/2 better but 3/1 is good. I like that both are old enough to likely have max value lost, but not so old as to be likely to have a ton of unexpected items. Both built in the 1980s likely means no asbestos and no lead paint. I recently placed an offer on a large house that my contractor estimated the abatement at $40K to $50K. I also, in the last year, had an abatement problem where we fired our initial abatement contractor at a time after all abatement was expected to have been completed. It put us a month behind right at the start. Then Covid. We will finish at around double our initial projected timeline. It would be nice to have a property where abatement is not likely to be a big issue.
In CA, the property tax assessment is often more a function of length of time owned than the current value. This should not bother you at all.
Your rent values look fairly close. Rentometer has a scaled down free version. Use it to see what the 50th percentile projects. Your rent to value ratio if purchased near your initial offer and the rents are accurate will be outstanding for CA. This would indicate likely cash flow, but still run a more accurate pro forma using an established calculator (BP has some that are OK, but make sure you allocate enough for maintenance/cap ex).
Get an inspection. Do not have the seller or their agent provide the inspector. Your agent recommendation would be fine. A good inspector will be a better precaution than anything I could tell you other than checking the rent via Rentometer.
Know the vacancy rate. Know the PM fees. I suspect total PM fees will be ~10%, base fee may be lower but then there will be more upcharges (inspection fees, contractor fee, etc.).
I know the Merced recent income growth. Do you? I think if you did, it would alleviate some of your concerns. Look it up if you do not know it.
Realize Merced growth is in significant part due to UC Merced. Covid is impacting all of the universities in CA. Take this into account. Past vacancy could be significantly less than current vacancy.
Good luck
Hey Biggerpockets peeps,
I am looking to take on my first investment property EVER. I dont want to be stuck on analysis paralysis so I came here to hopefully get some insight on what I should be looking to expect from all kinds of perspectives.
I'm looking at a place in Merced, CA.
Some of the facts:
Has 3bd/1bth unit with 896 sqft built in 1983 and a lot of 7,405 sqft.
The ADU is 3bd/1bth, has 1450 sqft, and was built in 1987.
Closest comp sold at about $192k.
I plan to give them an offer @ $160k but dont mind negotiating up a bit.
Average rent in the area looks to be about $1250.
Tenants currently occupy both units. (Would like for them to reapply to be keep tenancy.)
The worries:
Am I seeing a possible $2500 in monthly income for rent?
Tax assessed value is less then half of their asking price. Would this be worrisome?
What precautions can I take on this kind of investment?
I don't know if the ADU is permitted by the city.
I ran some rough numbers through the brrrr strategy calculator and showed some cash flow potential.
Any kind of advice is welcomed. Would love any kind of guidance through this process.
Thanks,
Rafael Gallardo Jr
Verify the ADU is permitted. Hands off build of just the ADU would be higher than your offer price assuming it is permitted and built to code.
I like 3/1 for long term rental. I like 3/2 better but 3/1 is good. I like that both are old enough to likely have max value lost, but not so old as to be likely to have a ton of unexpected items. Both built in the 1980s likely means no asbestos and no lead paint. I recently placed an offer on a large house that my contractor estimated the abatement at $40K to $50K. I also, in the last year, had an abatement problem where we fired our initial abatement contractor at a time after all abatement was expected to have been completed. It put us a month behind right at the start. Then Covid. We will finish at around double our initial projected timeline. It would be nice to have a property where abatement is not likely to be a big issue.
In CA, the property tax assessment is often more a function of length of time owned than the current value. This should not bother you at all.
Your rent values look fairly close. Rentometer has a scaled down free version. Use it to see what the 50th percentile projects. Your rent to value ratio if purchased near your initial offer and the rents are accurate will be outstanding for CA. This would indicate likely cash flow, but still run a more accurate pro forma using an established calculator (BP has some that are OK, but make sure you allocate enough for maintenance/cap ex).
Get an inspection. Do not have the seller or their agent provide the inspector. Your agent recommendation would be fine. A good inspector will be a better precaution than anything I could tell you other than checking the rent via Rentometer.
Know the vacancy rate. Know the PM fees. I suspect total PM fees will be ~10%, base fee may be lower but then there will be more upcharges (inspection fees, contractor fee, etc.).
I know the Merced recent income growth. Do you? I think if you did, it would alleviate some of your concerns. Look it up if you do not know it.
Realize Merced growth is in significant part due to UC Merced. Covid is impacting all of the universities in CA. Take this into account. Past vacancy could be significantly less than current vacancy.
Good luck
Wow awesome info!
I'm sorry to hear about the hold-back with the abatement issue. I will be looking to avoid issues relating to abatement!
One of my big reasons for choosing a rental property in Merced is because of UC Merced. That is true about the students doing online training as of now because of Covid-19 so vacancy will more than likely be higher throughout the rest of the year and maybe well into next year.
As of now the previous owner has two tenants currently occupying the two units. ADU is bringing in $950 while the main unit brings in $850. These numbers are giving me a rough estimate of income from rent which is $700 less per month than i expected. Would also like to have tenants reapply for tenancy.
Excited to see if this is a play to make.
Thank you Dan,
Rafael