Hello and excited to get started

[Julia Harmon]

Hi BiggerPockets community,

I've been listening to the Real Estate Rookie podcast of the last few weeks and decided that it's time to get started on this REI journey! I'm a W2 employee working in tech for many years and ready to plan my future of escaping the 9-5 grind and being in control of my own destiny. I'm willing to work hard at this and have realist expectations.

I'm not completely green. My husband and I bought our 1st home in San Diego in 2015, fixed it up while living in it and growing our family, then sold 2 years later and bought another true fixer upper that we've been living in for the last 7 years. We've done a mix of DIY and contractors (when it was beyond our expertise) for both houses. We've stayed in this house because life has been busy and because we love this location and our community. Plus, the property taxes here are insane and if we sold and bought new in this area our taxes would increase drastically.

My idea as a next step is to 1) Purchase a STR property in CA in 3-6mo (almost ready w the deposit, talking to lenders and agents); 2) Build an ADU on our current property and do a LTR. Since we already own the land and rents are high I think this is a good plan. 3) Expand into more rentals (thinking buy and hold) and build a portfolio.

I've always been interested in real estate and design. I'm addicted to Redfin and Zillow and constantly doing real estate math as I drive around neighborhoods and see fixer uppers. I'm not adverse to risk and currently have a decent size paycheck. I want to be out of the corp world and focused only on REI within the next 7 years. I think I'm more interested in BRRRR as I'm not ready for the risk / cost of flipping yet. (Although, I think I'd be good at it.) I'm ok with net zero cash for a few years while building equity but need a strategy to get me to an investor only life that is close to or more than my current W2. I'd love to invest in my own community of San Diego, but it's so expensive that I'm starting to think I need to do long distance investing to build a portfolio faster.

I'm planning to attend BPCon to start building my network and absorb all the info I possibly can. If anyone has suggestions, wants to connect or lives in San Diego and wants to meet up, I'm open to it all.

Thanks for reading and excited to join this community!

-Julia

[Dan H.]

I am a San Diego RE investor with a son starting on that journey ideally in San Diego.  I am too busy for any get together before BPCon, but maybe we (wife and/or I) can meet you at BPCon.

A lot has changed in the market in the last 7 years in real estate.   It is significantly more challenging today than 7 years ago.  This is everywhere, not just local.

NAR released data of certain cities from Nov 2021 of properties sold with an ADU versus without an ADU. San Diego was near the lowest value added by an ADU. It was less than $14k added value. Adding an ADU in many markets is a poor RE investment. In most markets it is a bad RE investment due to the initial negative equity position. San Diego is an extreme in the initial negative equity position. Let's stay that in the 4 years since the NAR data the value of local ADUs has risen 50% so less that $21k . A garage conversion ADU at $150k would be over $129k negative equity. Ground up at $200k would be $179k initial negative equity position.

If there is notable at the bottom showing values, try a different browser as it does not work correctly for me from Safari

https://www.nar.realtor/magazine/real-estate-news/study-adus...

Note the property tax increase will be based on what you pay to add the ADU and not the value added by the ADU. Example if you pay $200k for ADU, you can expect a property tax increase of between $2000/year to $2400/year even though the NAR data shows that the ADU on average added less than $21k of value.

Here is a list of why adding a single ADU in single family zoned areas 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 than building a single ADU.
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 an 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