New to Bigger pockets - New to Investing
Member since 2024 · 3 posts · 1 vote
New to Bigger pockets - New to Investing
3 Replies
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes1y
Quote from @Kevin Robert Highgate:
The ability to invest in property and replace your W2 income quickly is tough. Anyone who managed to do this probably did it 5+ years ago when the market was very, very different.
If you borrow $200,000 to build an ADU, I suspect you would need to rent it for $5,000 or more to make the numbers work. That's tough to do, even in California.
Even if you borrow the equity from your current property, the bank doesn't give you that money for free. You are "borrowing" the money and using your current home as collateral. You have to make payments on the borrowed funds, which is then deducted from the money you are making on the investment. It can work, but you have to really study the numbers to see what makes sense.
Generally speaking, if you borrow money at 7% interest and your investment is earning a 10% return, 10% - 7% = 3% and you are not growing faster than inflation.
The DIY Landlord Book4.7248 Reviews - 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Kevin Robert Highgate:
Hello Everyone,
Let me say it out LOUD . IM DONE !!!!! 9-5 !!!!! I do not want to do this anymore !!! I have been in the books and came accross Bigger Pockets, i would like to dive head first into real estate investing but the un known is a little scary. I own a single family home in Socal that my wife and i currently living in. I would to use my equity in my current home to start investing but my current property needs work, like a full rehab. Looking for a creative way to either turn my current property into a rental or a flip or any other way to make a profit.
Does adding a ADU create value in a property vs. the price of the adu build?Mostly a single ADU added in a single family zone area will add less value than the cost of the hands on addition.
Depending on the financing my underwriting with a high LTV (80% LTV) for $200k would be cash neutral at a rent point at about $2200 when allocating for all expenses without including any land value. There are many reasons that adding a single ADU in southern CA is a less than ideal RE investment (i will post a list at the end) but the negative initial equity is a primary reason as the initial negative equity position consumes the initial cash flow and can take many years to recover.
As for converting your home to a rental…. There are pros and cons but i believe for most properties the cons out weight the pros. I have one of my ex-homes in my portfolio. Here are the pros as i see it: easy (no purchase necessary, you know the property), likely prop 13 property tax discount, possibly below current rate loan. The cons as i see it include loosing the 2 of 5 year cap gain exception, typically not an ideal rental because the emphasis at purchase was buying a good home for your family and not a rental with optimal return (my ex-home consistently has the lowest cash flow for equity in my RE portfolio), not disconnected enough from the property causes addition angst on damage and may result in over improvement. At this time the interest rates may make keeping your existing home a better option than times when rates have not risen as substantially. In normal times i would think selling is typically the smarter financial choice, but at the current time keeping may have a significant finance (due to low interest rate) advantage.
Here is a list of why adding ADUs in my CA market is typically a poor RE investment:
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 by the ADU (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?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.Good luck
- 1yZeona McIntyrePro MemberReal Estate Agent · Boulder, CO · Member since 2015 · 284 posts · 226 votes
Quote from @Kevin Robert Highgate:
Hello Everyone,
Let me say it out LOUD . IM DONE !!!!! 9-5 !!!!! I do not want to do this anymore !!! I have been in the books and came accross Bigger Pockets, i would like to dive head first into real estate investing but the un known is a little scary. I own a single family home in Socal that my wife and i currently living in. I would to use my equity in my current home to start investing but my current property needs work, like a full rehab. Looking for a creative way to either turn my current property into a rental or a flip or any other way to make a profit.
Does adding a ADU create value in a property vs. the price of the adu build?I was able to become financially independent in 2 years with two properties. It can be done quickly but it depends on your willingness to get uncomfortable. The fastest way in my opinion is house hacking with Airbnb. I wouldn't build the ADU just yet because like it was mentioned it cost more than you can really make a good return on. I would rent out an extra room, basement and yep, deal with a part time roommate. Luckily Airbnb roommates are much better because they are gone a lot and you can take breaks / just rent in high seasons, etc. I would use the income to slowly improve the house and once you get it to a good spot, HELOC out some money for a down payment on another place rinse and repeat.
When you buy a property with the intention to Airbnb Househack, you can find a better layout to make it more separate / private but start with what you have, Get temporarily uncomfortable so that you have a comfortable future. Its got to be better than sitting at a job.
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