πŸ’²πŸ’²πŸ’²- Here is my ADU* Variation to BRRRR Its called BRA2xRR!

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Here is my ADU* Variation to BRRRR Its called BRA2xRR! Sounds crazy but it doubles your rent and doubles your profits and simplifies one of the R steps!

BRRRR - [Buy, Rehab, Refi, Rent, Repeat] - Works good, but what if we can make it better, faster and less costly and also doubles your rents and doubles your returns and eliminates a huge tax implication if you did this instead of flipping.

This method works best if you are doing this as owner occupied but most of the time you can use this as a step up from another property or even as an investor if you do not own more than 5-10 properties with aΒ conventional loan.

BRA2xRR [Buy, Rehab, ADU, 2xRent, Repeat} or FLip there are benefits to this too.

This variation doubles your rents and doubles your returns!

Buy Ҁ“ Look for properties that have enough sq footage and or lot size to add an ADU*; each city has specific requirements and owner occupied requirements for renting out units.

Eliminate the step of doing a costly and stressful Refi. You get one loan for purchase and rehab, long term, crazy low rates. Owner occupied as low as 3.5% to 5% down and only 15% down as investors. IF you have more than 5 loans in your name the conventional lenders might cap you out. Some go up to

Rehab – Rehab a property just as you would usually with 2 twists; better financing and doubling your rents.

You can still use a hard money if need be but these conventional loans can be pretty good if you have the time to put in a regular escrow. You might have to use hard money if there is a time factor but if you do not have to buy such a distressed property to make this work. Just find a modest fixer not a major fixer.

Note: If you need a Hard Money Loan I have a lender that will do a HML at 5.75% APR at 80%LTV [DM for more info]

PACE – Home Improvement Loans – 100%, 17 month deferral, paid out through taxes over 20 years. This dramatically preserves your rehab funds and allows you to pay back at a later time when your rents are there to cover the debt service. Go solar, go mini splits A/C, go efficiency windows, go low water landscape – knock yourself out! Create that curb appeal to the max.

Eliminates the extra step of doing a refi out of a hard money loan, this almost doubles your profit.

*ADU

Accessory Dwelling Units (ADUs) are known by many names: granny flats, in-law units, backyard cottages, secondary units and more. No matter what you call them, ADUs are an innovative, affordable, effective option for adding much-needed housing in California.

In California the state made a sweeping zoning bill and implemented a change to allow an ADU be built on most SFR lots in every city in CA. Other states like Oregon and Washington are way ahead of CA. But No Cal and City of LA are leading the charge. If you are in Riverside this method should do great.

ADU's can be in several forms, attached such as a basement, attic or guest bedroom or detached as a separate building or even a garage conversion.

The biggest benefit an ADU can do for your property is 1. Add income in form of rents. 2. Add mult-generational space for family or inlaws by creating close but separate space. 3. One of the most interesting aspects of an ADU from a flippers point of view is to add qualifying income for a buyer looking to buy up into a property. The rents generated from the unit can significantly help a buyer to get into a next level property. Sometimes skipping a low level entry level home or condo.

2x Rent

ADU's maximize the rentable sq footage, the smaller the space the higher the rent per sq foot

State law says that ADU's are not to be rented as short term rentals. Most cities are banning them so be careful and don't make this your main strategy and do not run cash flow numbers based on this. If you can do it then do it as long as you can.

Just compare a SFR with an ADU to a duplex. A SFR is usually in a nicer neighborhood, better aesthetics and less apartments and such. This is going to get you top rents for a nice unit in a nice area.

Exit Strategy

Refi Ҁ“ You can refi the property and best to wait a year to get cash out. But you can keep the loan longer term because the one loan was used for purchase and rehab.You do not have to incur all those secondary refi costs like if you do a HML. You can do a refi to be able to pull some equity out for sure. One thing right now the ADU value is not going to be as much in a refi as in a purchase. But the income approach gives you assurance that you can make the extra payment. Before you go in to the deal make sure you have an exit strategy for refi and find out ahead of time to see what the parameters may be to do a refi. ADU's are so new that lenders and appraisers are just figuring it out. If you are in CA and need some help or resources I know lenders, contractors, architects and consultants that are doing ADU's - Jut DM and will get back to you. Also if you need a good rehab lender or someone at the National Association of Realtors that is working with the State of CA to really push this program I have a good resource that can get the attention of some non co-operative planning department.]

Flip Ҁ“ Sell the property after 1 year and your tax consequence is much better. If you hold for 2 years then you can do a 1031 most likely. [ADU laws are so new check with your accountant to see what part or ratio qualifies as 1031 or what can qualify for Homeowners Exemption. If you flip a property before 1 year you just get killed on the taxes. I know there are alot of ways around it but might as well keep that cash working for you and not the Gov. Hmm.

So basically the strategy is the same, you're just targeting properties where you can add multiple rental units without going through a zoning variance.

ADUs are can be really disliked by neighbors in SFR neighborhoods. If you plan to build, do it tastefully and make sure your neighborhood association knows what you're doing. I remember attending a neighborhood meeting when someone was building an ADU monstrosity that didn't fit in at all. Complaint after complaint. There should maybe be restrictions by neighborhood, or approvals required, or something. The last thing you want to do by building one is irritate the community. I think it's a mistake to have no zoning restrictions. My opinion.

Originally posted by @Max T. :

So basically the strategy is the same, you're just targeting properties where you can add multiple rental units without going through a zoning variance.

State of CA basically forced all cities to comply with state law. There are the state standards but cities can elect to create their own laws and requirements but the State is basically forcing this through due to an epic housing shortage and affordability issue. We have a huge problem here in CA.Β 

You have to find properties that meet the basic requirements and go from there. Its a labyrinth of rules and regulations and sometimes it does not work out. But for the most part every ADU project that I am familiar with [about 15] its worked out.

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Originally posted by @Brian Larson :

@Rob Massopust - agree on the strategy. How many successful projects have you completed this way? Just curious. The stateΒ law has only been around for 1.5 years. Are all your projects in the LA area?

I am selling a couple of properties to do my first on my own ASAP. I have/know 3 clients and associates that I am involved with that have done them and in the process. I have been melding together all their experience and working with some of the top lenders, NAR, ADU resources etc to really do a deep dive into this.

Thats what got me pushed over the edge my client is trying to do one and its just not penciling out due to the high construction costs. He has forced me to rethink the entire flipping process. He is getting hung up in the reeds, me too I have 2 properties that I was trying to BRRRR but not enough equity on the exit [Condos so they have less margin].

Let me know if you need any help. No Cal is really making a big push and has lots of stuff going on there.

I would like to set up a development company to do only this, I have some good ideas how to tackle and streamline. IΒ am doing in myself but in the interim IΒ am looking to really help borrowers and move up buyers into some creative strategies.Β  PM if you want to chat.

Originally posted by @Tanya F. :

ADUs are can be really disliked by neighbors in SFR neighborhoods. If you plan to build, do it tastefully and make sure your neighborhood association knows what you're doing. I remember attending a neighborhood meeting when someone was building an ADU monstrosity that didn't fit in at all. Complaint after complaint. There should maybe be restrictions by neighborhood, or approvals required, or something. The last thing you want to do by building one is irritate the community. I think it's a mistake to have no zoning restrictions. My opinion.

Yep this was a big contention, but the state superseded all local zoning laws. Cities can adjust and fight it but there are already a few lawsuits. There are requirements to blend the units into existing asthetics and continuity.

There is alot of multifamily in LA so not as big of an issue as other places. There is such a housing shortage and no where to build that its creating such an affordabillty issue. It allows small homeowners to bail out the state for having such difficult building and zoning laws. Its not cheap to do an ADU [ADU conversion is much cheaper] Most cities are charging $15-25k in just fees.

There is zoning restrictions it just allows a higher and better use. The cost of land and building is so high that living in CA is difficult. Average Median House price in Orange County [just south of Los Angeles] is hitting close to $800k.Β  Los Angeles is getting even worse an 900 sq ft house is going for $800k+ - thats almost $900 per sq ft and I have seen it hit over $1000. And these are in areas of North East Los Angeles where we were buying and flipping for $150k - Stupid wish IΒ kept everything IΒ ever flipped. [Kick Self]

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Oh and in many areas there were so many illegal ADU's that they figured a way to make it legal and get a boat load of fees.

Several issues I see here that need to be raised.Β 

  1. 1 - When someone makes these kind of posts proposing some "new" way of making a deal work but hasn't actually done what they are proposing everyone else needs to do they need to put up a disclaimer. Not having actual experience doing what you are proposing doesn't bode well to others.
  2. 2 - Not sure about OR but WA is not ahead of CA on this. It was just this year (maybe last) that Seattle re-did their code regarding ADUs. Even then, from my understanding, it was just to lift the requirement of own-occupied SFR can have an ADU. There is no state wide law regarding them either. So I would say pretty much all towns that aren't a Seattle suburb have not redone any codes regarding ADUs. Its just this year that some of the other larger cities in the state are reworking the codes regarding ADUs and most dont have a launch date before 2020. There's a lot of push back on these and even the larger cities don't want to have the density of Seattle.
  3. 3 - You vaguely mention that codes/requirements for ADUs vary by city but this is the key factor in deciding if this makes a rental feasible or not. Such as minimum sf of a SF lot, setback req., max sf of the ADU, parking requirements, is it aloud a full kitchen or just a kitchenette, ect. This is part of the discussion that should not me glanced over in just a sentence. This is the make or brake section of the entire plan.
  4. 4 - I highly highly doubt you can get anywhere near double your rent. In fact I'll flat out call this a false statement. You will NOT get double rent. ADUs almost always have a size restriction on them. My city, for example, has an 800 sf maximum size of an ADU. There's no way I'm going to be able to charge the same rent price of the main house for the garage sized apt in the back corner of the back yard or the separated small room in the converted attic or basement.
  5. 5 - You can't compare an ADU to a duplex. A duplex has to possibility to be two SFH (albeit attached) on two different lots. You can sell one or both at any time. An ADU is tied to a single SFH and cannot be sold by itself in anyway. Plus ADU will always feel like an apartment, a secondary rental, and never like a SFH. Not that that is bad but it will attract very different renters.

This plan of using ADUs to your advantage is a very good one. There is just so much more to it than plopping a small unit in the backyard or sectioning off the basement. People need to be aware of that vastly increased due diligence required with this. Especially since its new city inspectors and such will have very inconsistent views on the laws and requirements and how to enforce them.

Updated 3 months ago

EDIT: Sorry for the horrible formatting. Typing that on the phone was a bad idea.

@Rob Massopust check with the cities before building. I have thought about doing this and the cities I investigated only allow 1 of the units to be rented at the same time. I could not add one to my rental and rent both out.

Originally posted by @Bryan S. :

@Rob Massopust check with the cities before building. I have thought about doing this and the cities I investigated only allow 1 of the units to be rented at the same time. I could not add one to my rental and rent both out.

Β Correct. You are supposed to be owner occupied and rent the other unit. But in LA that is changing.

Where are you located and I can look stuff up for you.

Originally posted by @Nik Moushon :

Several issues I see here that need to be raised.Β 

  1. 1 - When someone makes these kind of posts proposing some "new" way of making a deal work but hasn't actually done what they are proposing everyone else needs to do they need to put up a disclaimer. Not having actual experience doing what you are proposing doesn't bode well to others.
  2. You are a little negative on this post, its a postulation, Disclaimer: Might not work everywhere, for everyone and results may differ.
  3. Its a learning process, we all have to start somewhere. My clients combined have done about 30 or so and IΒ am involved with them to some degree. Yes some speculation but this post is not a dictum just a post.

  4. 2 - Not sure about OR but WA is not ahead of CA on this. It was just this year (maybe last) that Seattle re-did their code regarding ADUs. Even then, from my understanding, it was just to lift the requirement of own-occupied SFR can have an ADU. There is no state wide law regarding them either. So I would say pretty much all towns that aren't a Seattle suburb have not redone any codes regarding ADUs. Its just this year that some of the other larger cities in the state are reworking the codes regarding ADUs and most dont have a launch date before 2020. There's a lot of push back on these and even the larger cities don't want to have the density of Seattle.


  5. https://accessorydwellings.org/2019/01/14/adu-permit-trends-in-portland-in-2017-and-2018/

  6. 3 - You vaguely mention that codes/requirements for ADUs vary by city but this is the key factor in deciding if this makes a rental feasible or not. Such as minimum sf of a SF lot, setback req., max sf of the ADU, parking requirements, is it aloud a full kitchen or just a kitchenette, ect. This is part of the discussion that should not me glanced over in just a sentence. This is the make or brake section of the entire plan.
  7. Yes, you do have to do alot of before hand research. Again this is just a proposal.Β 

  8. 4 - I highly highly doubt you can get anywhere near double your rent. In fact I'll flat out call this a false statement. You will NOT get double rent. ADUs almost always have a size restriction on them. My city, for example, has an 800 sf maximum size of an ADU. There's no way I'm going to be able to charge the same rent price of the main house for the garage sized apt in the back corner of the back yard or the separated small room in the converted attic or basement.

  9. Depends, If you do an ADU conversion or a large enough separate unit. You got me some hyperbole. I know one doing short term rentals and triples the rents. Shhh dont tell. OK

  10. 5 - You can't compare an ADU to a duplex. A duplex has to possibility to be two SFH (albeit attached) on two different lots. You can sell one or both at any time. An ADU is tied to a single SFH and cannot be sold by itself in anyway. Plus ADU will always feel like an apartment, a secondary rental, and never like a SFH. Not that that is bad but it will attract very different renters.
  11. No you cant, again this is not an end all post, its a postulation. ADU's are better because usually in better location and has better neighborhood and what not. Duplexes often times are in multi family and crowded and lower standards as of a house. Every location is different.

This plan of using ADUs to your advantage is a very good one. There is just so much more to it than plopping a small unit in the backyard or sectioning off the basement. People need to be aware of that vastly increased due diligence required with this. Especially since its new city inspectors and such will have very inconsistent views on the laws and requirements and how to enforce them.

No you can not sell a duplex as two properties, as far as I know, IΒ do not know the laws in each state. Most the time its one APN.

Same as ADU.

IF you really want to rant or if you have specific questions just let me know, maybe I can help.

Β 

@Rob Massopust - You can sell a duplex as two properties. It happens all the time. The one thing is that you have to have two lots. You are creating a zero-lot line property, think townhouses but with just two houses instead of a row or 4 or more. Not all duplex are like this as it take extra work and planning but it can be done. You just have to check and see if its aloud and where.

@Tanya F. To your point, it's important to choose ADU appropriate neighborhood for this kind of development.

However a big percentage of ADU is just converting existing structure like Garage or converting a room into a junior ADU. How neigghbors react would be similar to how neighbor reacts to Airbnb...In expensive metro areas like Bay Area, I think people generally understand why the neighbors need extra cash...

Chen

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