Turning a Sacramento Home Into a Soft Retirement Plan

MD/DC · Member since 2024 · 1k+ posts · 1k+ votes

There are many variables to consider like age, expenses, savings and social security projection. How is he with money? That is a lot of house for one person. I’m curious about the balance on mortgage it seems that should be lower. He is very fortunate to have the appreciation and you are correct that he should protect that nest egg. Once he sells he could invest the proceeds in stock/bond ratio that is appropriate for age, situation so it isn’t like the money disappears. I’ve seen more than a few cases where RE investments went sideways as people got older and weren’t able to manage so I’m generally in favor of liquidating for passive income before that happens. Lots of moving parts and extremely high stakes, I would probably turf this off up a good fee for service financial advisor.

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Dan DeppenBusiness Member

Erie, CO · Member since 2017 · 274 posts · 267 votes

1y

One option is to sell the property on owner finance, wrap the existing $250K loan, and rent a place for $2K.

I assume 2K monthly payment is PITI, so maybe the P&I is $1300??

Sell property for $800K, collect a $150,000 down payment and finance $650K to the buyer for 30 years at 6.5%. So you would receive $4108/mo.

Wrap the existing loan, continue to make the $1300/mo (assumed) P&I payments.

Monthly cash flow from wrap is $2808. With the other $2950/mo income the total income is ~$5750. Then rent elsewhere.

Pay tax on the $150K down payments, but it will leave him with a large cash cushion for future emergencies.

I know you'll ask what happens if the $250K loan gets called due on sale, and you absolutely need to have a plan in case that happens. There are people you can hire to help mitigate that, and if he absolutely had to he could sell the $650K loan and pay it off.

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

1y

Quote from @Brianna Billings:

Hello BP Fam!

I wanted to reach out for additional feedback on a retirement or soft FI strategy I’m helping someone think through.

My friend’s dad, who lives in Sacramento, wants to retire but currently doesn’t see a clear path with his 401(k) or other investments. Thankfully, he bought his home in 2001 for around $350K. He still owes about $250K, and the property would likely sell for around $800K today (I’ve rounded these numbers to the nearest $50K for simplicity).

He also has approved ADU plans, which would cost about $50K to build. However, he doesn't have the funds available right now to move forward with construction.

I’m trying to help him come up with a plan and have outlined a few options for him to consider. My initial thought is that he should find a way to rent out the property in some capacity since this home is already a secure and familiar asset. Once he sells, there’s no going back, so holding onto it and generating rental income seems like the safest option.

Facts:

Loan: $250k

Equity: $500k (Value - Loan)
Monthly Payment: $2,000

Home: 5 BR 4 BA w/ Garage. No HOA. ADU plans include converting garage and downstairs bed and bath into 1BR, 1BA ADU.

Analysis:

Option #1: Live in home, rent out studio; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $1,200/mo

Option #2: Live in studio, rent out home; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $2,950/mo

Option #3:Rent out home, rent elsewhere; Total Cost: $2,000 (general repairs); Monthly Income: $2,950/mo - (cost of rent)

Option #4:Sell then repurchase; Total Gain: $500k (untaxed if sold as a couple); Total Cost: Gains - $(cost of new home); Pros: Get rid of mortgage if you buy under $500k.

Note: Even when you "get rid" of mortgage payment by purchasing a home in cash, there will still be expenses such as property taxes and general repairs.

Other Ideas:- Rent out garage for storage ($150/mo); Rent out individual rooms (maybe $800/mo?)

Thanks in advance for any input!

Best Regards,

Brianna

Where did you derive the cost for the ADU? I suspect a more accurate total cost is $125k at the low end.

In general adding an ADU is a poor RE investment. Per NAR data from Nov 2021 an ADU in Sacramento added $75k of value. If we go with $85k of added value today, the ADU starts with $40k negative equity. This negative equity consumes the initial cash flow for years.

The average rent for a1 BR apartment is $1500, but this is new, etc so we will use $1800/month.

Using 50% rule (50% expense ratio), if there was no mortgage the cash flow would be $900. It would take 44 months to recover the negative equity. Note if the ADU is financed, the recovery time extends significantly.

Option 2: the home if it is over 15 years old will be rent controlled if owner does not live on the property. This makes dealing with marginal tenants more challenging.

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.

Now for your question: my vote is an option not presented. Continue to live in the home and rent extra bedrooms either MTR or STR maybe to foreign exchange students (I know 2 people who do this but neither are in Sacramento). Why this option? He maintains his prop13 property tax benefit. Note at end of life, prop 13 benefit continues if residence of deceased becomes residence of a child. He continues to live in a familiar home. He likely maximizes income. He gets to meet new people. I am unsure the rent differential between what he can rent his place for versus rent a different place justifies managing tenants.

Good luck

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Scott ScovilleBusiness Member

Real Estate Agent · Sacramento, CA · Member since 2019 · 502 posts · 276 votes

1y

Quote from @Brianna Billings:

Hello BP Fam!

I wanted to reach out for additional feedback on a retirement or soft FI strategy I’m helping someone think through.

My friend’s dad, who lives in Sacramento, wants to retire but currently doesn’t see a clear path with his 401(k) or other investments. Thankfully, he bought his home in 2001 for around $350K. He still owes about $250K, and the property would likely sell for around $800K today (I’ve rounded these numbers to the nearest $50K for simplicity).

He also has approved ADU plans, which would cost about $50K to build. However, he doesn't have the funds available right now to move forward with construction.

I’m trying to help him come up with a plan and have outlined a few options for him to consider. My initial thought is that he should find a way to rent out the property in some capacity since this home is already a secure and familiar asset. Once he sells, there’s no going back, so holding onto it and generating rental income seems like the safest option.

Facts:

Loan: $250k

Equity: $500k (Value - Loan)
Monthly Payment: $2,000

Home: 5 BR 4 BA w/ Garage. No HOA. ADU plans include converting garage and downstairs bed and bath into 1BR, 1BA ADU.

Analysis:

Option #1: Live in home, rent out studio; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $1,200/mo

Option #2: Live in studio, rent out home; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $2,950/mo

Option #3:Rent out home, rent elsewhere; Total Cost: $2,000 (general repairs); Monthly Income: $2,950/mo - (cost of rent)

Option #4:Sell then repurchase; Total Gain: $500k (untaxed if sold as a couple); Total Cost: Gains - $(cost of new home); Pros: Get rid of mortgage if you buy under $500k.

Note: Even when you "get rid" of mortgage payment by purchasing a home in cash, there will still be expenses such as property taxes and general repairs.

Other Ideas:- Rent out garage for storage ($150/mo); Rent out individual rooms (maybe $800/mo?)

Thanks in advance for any input!

Best Regards,

Brianna

Hey Brianna, what neighborhood is the property located? I had a similar property in Sacramento, SFH with an ARV in the $800ks, and we added a 700 sq ft ADU with a separate entrance on top of the existing garage. It rents as an MTR at $2k+. While we didn't get a dollar for dollar on value by adding the ADU, it has created considerable cash flow. Happy to chat more about this if you're interested.

[email protected]415-933-2202

Scoville Realty & Investments LLC

Website View Page

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Brianna Billings

OP

Rental Property Investor · San Diego · Member since 2021 · 37 posts · 23 votes

1y

Thank you all for the detailed responses! I’m always so grateful (and impressed) when I post in here. I sent this info to my friend’s dad and told him to follow up with any questions.

Also, I should've clarified: the ADU is actually a Jr. ADU just turning the garage and downstairs bed/bath into a 1BR, 1BA, and that was the quote he received for the work.

1 Reply

Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
1y
Quote from @Brianna Billings:

Thank you all for the detailed responses! I’m always so grateful (and impressed) when I post in here. I sent this info to my friend’s dad and told him to follow up with any questions.

Also, I should've clarified: the ADU is actually a Jr. ADU just turning the garage and downstairs bed/bath into a 1BR, 1BA, and that was the quote he received for the work.

$50k seems way too low even for a JADU. My $125k was for a garage conversion ADU. Ground up ADU construction would be more. I do not know what is missing from the bid, but I believe (virtually certain) the bid is not all inclusive.
Do you know that JADU add significantly less value than the ADU? They may be worth nothing or less than nothing. I have heard of cases where sellers remove the JADU to obtain best value. The primary reason JADU are worth nothing is that JADU require owner occupancy which significantly reduces the buyer pool. I highly recommend going with the ADU as long as state rules mandate JADU be owner occupied.
Good luck
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G. Brian DavisPro Member

Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 905 votes

1y

Hi @Brianna Billings, One approach could be a phased strategy: start with smaller, lower-cost ways to monetize the home, like renting out the garage, a room, or the existing studio, while deferring the full ADU conversion until cash flow supports it. This reduces upfront capital risk while testing how much active management he's comfortable with.

Another layer to consider is tax efficiency. Renting the property triggers potential depreciation benefits, but selling under a primary residence exemption could free up significant untaxed capital. If he’s not pressed to move, holding for long-term appreciation while incrementally generating cash flow could provide a soft FI path without losing the home.

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Turning a Sacramento Home Into a Soft Retirement Plan

Turning a Sacramento Home Into a Soft Retirement Plan

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