New Member in LA Looking for 1st Investment / House Hack
Member since 2022 · 2 posts · 1 vote
Hi All,
I'm new to real estate investing, based on the westside of Los Angeles. Part of my motivation is seeing the impact of housing scarcity and affordability in California.
Currently exploring 'lower cost' entry points into development - specifically opportunities to buy SFH or 2-4 unit MF and add 1 or more ADUs, in LA county.
Anyone have experience with ADU additions as an investment strategy?
I'm also open to moving and house hacking component depending on the location in Los Angeles. I'd consider medium-income areas of LA like East Hollywood, Koreatown.
Reach out!
Hi All,
I'm new to real estate investing, based on the westside of Los Angeles. Part of my motivation is seeing the impact of housing scarcity and affordability in California.
Currently exploring 'lower cost' entry points into development - specifically opportunities to buy SFH or 2-4 unit MF and add 1 or more ADUs, in LA county.
Anyone have experience with ADU additions as an investment strategy?
I'm also open to moving and house hacking component depending on the location in Los Angeles. I'd consider medium-income areas of LA like East Hollywood, Koreatown.
Reach out!
Hi @Sam Shapiro-Kline, welcome to BP! Jonathan makes more than a few great points. From my experience with my clients, there is less hassle finding properties like 2-4 unit properties, then finding a SFR and converting a garage to an ADU. Like Jonathan mentioned the costs can get pretty high, especially if you don't have a trusted contractor. He also mentioned he bought a triplex and converted a garage to an ADU. I recommend getting a clearer picture on how this works for financing. My understanding is that a multi-unit property with an ADU is non-conforming, which means when it comes time to refinance or sell the property, you might run into some issues with appraisal, with current finance regulations. This said, people do it, and if you're holding long term and not planning to take out equity, you may not run into any issues. Hope this helps!
@Sam Shapiro-Kline Welcome! I did exactly that. I house hacked a triplex, converted the garage into an ADU and now live rent free. This is a tough road in LA, to be honest, but it is doable.
I'd recommend looking at desirable adjacent locations (mid city vs K town) or Cypress park vs Highland park etc. If you do not have an ownership interest in any Real Estate, look in the NACA program (Neighborhood Assistance Corporation of America). I used this loan to buy and renovate my property with little out of pocket. It is designed for properties that need work but can be used on rent ready properties as well.
If not, FHA is another option (but with more red tape, similar to NACA process) or go the Conventional Owner Occupied route with 5% down on SFH, 15% on Duplex and 20% on tri/quad.
If you are doing an ADU, always ALWAYS budget waaay more than quoted. Every reno Ive done in LA (3 to date) not a single one came close to the original bid. Most contractors bid a small price to get the deal then death by change order and drag it out. Thats down the road but food for thought.
Welcome to BP, Sam!
Hi All,
I'm new to real estate investing, based on the westside of Los Angeles. Part of my motivation is seeing the impact of housing scarcity and affordability in California.
Currently exploring 'lower cost' entry points into development - specifically opportunities to buy SFH or 2-4 unit MF and add 1 or more ADUs, in LA county.
Anyone have experience with ADU additions as an investment strategy?
I'm also open to moving and house hacking component depending on the location in Los Angeles. I'd consider medium-income areas of LA like East Hollywood, Koreatown.
Reach out!
Hi @Sam Shapiro-Kline, welcome to BP! Jonathan makes more than a few great points. From my experience with my clients, there is less hassle finding properties like 2-4 unit properties, then finding a SFR and converting a garage to an ADU. Like Jonathan mentioned the costs can get pretty high, especially if you don't have a trusted contractor. He also mentioned he bought a triplex and converted a garage to an ADU. I recommend getting a clearer picture on how this works for financing. My understanding is that a multi-unit property with an ADU is non-conforming, which means when it comes time to refinance or sell the property, you might run into some issues with appraisal, with current finance regulations. This said, people do it, and if you're holding long term and not planning to take out equity, you may not run into any issues. Hope this helps!
Hi All,
I'm new to real estate investing, based on the westside of Los Angeles. Part of my motivation is seeing the impact of housing scarcity and affordability in California.
Currently exploring 'lower cost' entry points into development - specifically opportunities to buy SFH or 2-4 unit MF and add 1 or more ADUs, in LA county.
Anyone have experience with ADU additions as an investment strategy?
I'm also open to moving and house hacking component depending on the location in Los Angeles. I'd consider medium-income areas of LA like East Hollywood, Koreatown.
Reach out!
Sam, Hello! Welcome to Real Estate Investing! My name is Leona; I am a Realtor and CEO of Leona Estates. My team and I work as property acquisition and disposition specialists for investors. If you need any help, feel free to contact with me. Leona
Hey Sam,
Welcome to BP! Also, congratulations on deciding to take the plunge into the world of real estate investing. You're brave, and wise! I started with a condo in Los Angeles, and eventually did what you're hoping to do: I bought a duplex (east Hollywood, in Melrose Hill), and I'm living in the tiny back unit, while I rent out the large house in front. We have a garage on site for future ADU conversion. I actually became a real estate agent after this process, because the agent who was initially helping me turned me onto house hacking, but he ended up being quite rude and not very helpful otherwise. Make sure you work with someone who really deeply considers your personal needs, alongside the broader economic conditions of the country, AND the local laws. The agent who helped me in the past was trying to get me interested in a triplex that was rented to tenants protected by rent control (one was previously non-paying due to COVID). And he wasn't realistic in calculating the potential danger of such tenancies. Definitely check out local laws, and buy a completely vacant property if you can. If the property isn't vacant, make sure you understand what your rights are as a landlord in the specific neighborhood on which the parcel lies. He told me I was passing up a great opportunity (which is quite funny, because that property is still on the market more than 365 days later, lol!). I became an agent so I can help detail-oriented people like me get into the weeds of the analytics and strategy, without feeling judgment.
I recommend finding a multi-family property that has a decent garage already on site, because paying for a conversion will be much cheaper than building an entirely new building. Let me know if you ever want to chat!
@Sam Shapiro-Kline I am actually trying to do something similar. My time horizon is longer though. probably in one or two years. Would love to know what you ended up getting in terms of area and property.
Hi Sam, welcome to BiggerPockets!
I recently relocated to San Diego, CA. Would love to connect.
I'm also looking into doing the same thing! Seems like it is a trend now.
@Sam Shapiro-Kline I am actually trying to do something similar. My time horizon is longer though. probably in one or two years. Would love to know what you ended up getting in terms of area and property.
It's good to see that others are including @Ammar Muhammad, @Felix Piper @Kenan Heppe and @Jonathan Taylor! There's a pretty clear value-add to ADU construction on multi-family from a cash flow perspective, but I'm certainly concerned about the ability to refi post-construction or get the right valuation on an exit.
Hi All,
I'm new to real estate investing, based on the westside of Los Angeles. Part of my motivation is seeing the impact of housing scarcity and affordability in California.
Currently exploring 'lower cost' entry points into development - specifically opportunities to buy SFH or 2-4 unit MF and add 1 or more ADUs, in LA county.
Anyone have experience with ADU additions as an investment strategy?
I'm also open to moving and house hacking component depending on the location in Los Angeles. I'd consider medium-income areas of LA like East Hollywood, Koreatown.
Reach out!
In many CA RE markets adding an ADU has been one of the worse RE investments that you can do. Here are some of the reason ADU additions are such a poor R3 investment option:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
If you choose to add an ADU, make sure you understand the added value. If you cannot find appropriate comparable, assume the ADU will add a pathetic value. In my market, ADUs without comps typically add a value of $50k to $70k (this is much less than the cost to add an ADU when not doing the work yourself).
Good luck