Purchasing second property

5 Replies

Hello everyone! I have been following bigger pockets and reading a lot of posts for at least 3-4years. This is my first post. A little background about me. I bought a duplex at City heights in San Diego November 2016 for $450k with an FHA loan. I refinanced the loan to a conventional in May this year. I pay $2.8k a month. I rent one unit for $1500/month and I live in the other. If I got the market rate I could probably get around $1800/month.

That leads me now to my next purchase I am trying to make. I wanted to ask everyone in the community to give me their thoughts, insights, and experience with my next purchase. The subject property I am trying to acquire is in national city. It is a SFR with 1650square feet and 3bedrooms and 2 bathrooms. Last time it was updated was probably in the 70's or 80's. It was being offered between $525-550k. Realistically, the comps for that type of property is probably somewhere in the ballpark of $450k. The reason I would even be interested in this overpriced property is because it has a mixed use zoning. The zoning could allow for up to 11units. I have offered and counter offered and we are at a stalemate. I am at $520k purchase and $10k back in escrow. Sellers are at $520k and $5k back in escrow. $5k is not going to break the bank for me. If I purchase this property I plan to use an FHA 203k loan and add a 800sq foot ADU where the garage is. It will likely cost between $80-100k. My final cost for the property will be between $600-620k assuming a $520k purchase price. My mortgage will be around $4.4k/month for a $620k mortgage. I will rent the main house for the market rate of $2.4k/month and live in the ADU. So I will effectively be paying $2k/month for a 800sq foot 2bedroom/1 bathroom in National City. Looking at recently sold duplexes that have a very similar main house and a smaller granny/ additional unit the comps are around $675-750k. If the property were to be appraised around $750k and my mortgage was at $620k I would be able to refinance into a conventional loan and remove the FHA mortgage insurance. My monthly mortgage would then be at $4k. And my portion of paying at $1.5k for a 800square foot 2bedroom/1 bathroom is a lot more pallateable at that rate.

My main question to the BP community is this, is this a good deal? My main goals going into this next deal is that I get instant equity and that the rental income would cover the mortgage once I refinanced and rented the other ADU out. It seems if the property would be appraised for $750k after building the ADU then this property would be a great buy. If it apprasises under $700k, I believe it will still be a good buy but not a great buy. I will have instant equity but I will not be able to achieve the goal of covering the mortgage with the rental income right away. I understand that I should also be budgeting other expenses such as vacancy, repairs, and property management. Unfortunately, in San Diego's market I do not believe those properties exist unless you have 20% down which in this case I wouldn't have 20% down. My FHA and the mortgage insurance handicaps me a little in achieving rental income covers mortgage. The trade-off is low down payment. Anyways, I would love to hear from BP and what their thoughts are. Thank you very much ahead of time!

Have you refinanced a RE in San Diego before?

My concerns: 1) refinance appraisals in San Diego are notoriously low. They regularly come in at 10%+ less than value based on average sold 2) The ADU value is not well understood as it will apply to appraisals and that is because current rules require it to be owner occupied. This clearly makes the value less than a similar duplex. 3) 2400/month seems high given that it was last remodeled in the 70s or 80s. 4) The ADU does not seem like best use of the purchase/zoning.

If it is zoned for up to 11 units why use ADU. A duplex should comp better. I would look to put as many units as I can on the property. You do not need to be zoned for more than 1 unit to put an ADU. So you would be over paying for your current plan. But the 3/2 SFR with standard zoning and a little extra space for the ~$450k and accomplish the same thing for less money.

Good luck

Hello Dan! Thank you for your reply and insight. I should have made it more clear. I guess the real question I have is, should I overpay about $60k to have a mixed use zoning? The zoning is essentially what I am overpaying for. The comps for a similar property would be around $450k. I would be buying at about $515k. I understand it is best to have as many units as I can to put in the property but I cannot finance that. The ADU is the most I can finance given my financial situation at the moment. My ultimate goal for that property is to build a mixed use 10unit commercial/mostly residential property. That is not something I have enough knowledge or financial resources to accomplish now. I see that goal happening 10years from now. But I cannot do that 10years from now if I do not have the property.

Man, the values of these properties, as an investor myself, are depressing.  You'll have a somewhat basic house (and without trying to be like a jerk, it wouldn't be in a super desirable area of SD IMO) and small garage apartment for $600k+.  Do you think if you moved out of the 800SF unit it would rent for $1.5k?  If not, the property would lose money each month if you had it as a rental. 

To put that in perspective, I just bought a 10 unit in a super desirable hip area of Houston (Montrose, named one of the top 10 neighborhoods in the US) for $810k.  It brings in about $10k/month in rent.  I'm doing a refi now.  Value is $1.1m so I'll get an $880k loan which means in it for less than $0 and cash flow.

I realize this is apples to apples, but if you can use your FHA to get low down payment or even help with fixing up, I'd go as big as possible. Normally on smaller deals you're competing with people who are looking to buy to live in thus what it could do in numbers is totally unimportant.

Originally posted by @James Tiu :

Hello Dan! Thank you for your reply and insight. I should have made it more clear. I guess the real question I have is, should I overpay about $60k to have a mixed use zoning? The zoning is essentially what I am overpaying for. The comps for a similar property would be around $450k. I would be buying at about $515k. I understand it is best to have as many units as I can to put in the property but I cannot finance that. The ADU is the most I can finance given my financial situation at the moment. My ultimate goal for that property is to build a mixed use 10unit commercial/mostly residential property. That is not something I have enough knowledge or financial resources to accomplish now. I see that goal happening 10years from now. But I cannot do that 10years from now if I do not have the property.

You need to read up on the ADU rules. In every city I am aware of in San Diego county, the ADU would eliminate being able to add further units. The reverse is also true, an ADU cannot be added to an existing multiplex. National City is not a city in San Diego county that I have looked at the ADU rules so there is a small chance that it is different but I think it is unlikely. I have looked at the ADU rules for Escondido and San Diego city as well as what CA mandates in the CA ADU regulations (which puts a limit on how restrictive any city can be with their ADU rules).

So with your financing and plan to add an ADU, it would not be a smart decision to pay extra for a zoning that you would not be able to fully leverage. Also if you do not have the funds to fully leverage the zoning, you likely would be better off purchasing where your funds can fully leverage the zoning. I would look for a purchase that better aligns with your plans/finances. You can add an ADU to R1 zoned properties within the criteria set forth by CA which is fairly lenient.

@Cody L. appears to have done very well investing in Houston but I point out that RE investors in san Diego have also produced outstanding ROI. Core Logic lists San Diego in the top 3 ROI cities for this century. The price to enter is high but it reflects that San Diego RE has produced such outstanding ROI.

Good luck

Read up on the rent control measure in the upcoming election for National City.  Many people are listing properties at a discount because there is a good chance it will pass.  A friend of mine just sold a 4 plex in National City that was zoned for 8 additional units.  He looked into adding additional units and it absolutely didn’t make since cost wise.