WOULD YOU INVEST IN HOUSE with back yard is backed to the major freeway?

Question

Hello to all beautiful mind investors within BP community,

I am thinking of buying a large single home family with lots approved for ADU located in a great city in California for a great deal.   Could you please share with me your thought on this investment particularly I would like to know what are the investor/landlord's Liability risks when Renting out the property for Section 8 vs Short-term rental.  My 1st investment, should I hire a management company or do it myself with one on one expert consultant fee.  Any advice, share of ideas and thought are greatly appreciated.

Best,

Katie

Allan C. · Answer

It sounds like you're trying to make thoughtful investment decisions, but several items you noted are raising flags for me. First off, I wouldn't build an ADU on a rental property. The holding costs of construction will likely diminish your returns, and if this is your first project you'll likely exceed budget and schedule, further compounding your investment woes.

secondly, I would not buy a property in high cost location just to rent to S8 tenants. S8 tenants are not an easy tenant class to deal with, and you're already showing some signs of low resolve. If you're buying in a high cost location, then buy an asset that gives you more appreciation potential and greater exit flexibility down the line.

Third, if you're having a tough time dealing with your neighbor when you can face them in person, you're going to have a tougher time dealing with them when you aren't living on premise. Making it a STR is inviting him to mess with you - I don't see ther path ending well for you. Better for you to just LTR it.

if you think this neighbor won't be around in 5 years, I suggest you stay put and just deal with it.  Otherwise just sell your primary and move on.

Katie Nguyen · Answer

Thank you James, it appear there is a typical concrete wall between the freeway and the backyard.  Your question helps me look into effective noise barrier.  Thank you!

Alan Asriants · Answer

Hey Katie,

The 3 main rules to any real estate: location, location, location. Personally unless it is an apartment complex/multiunit building, I would not consider buying a single family that backs up to a freeway. In todays market it might be easy to sell, but tomorrow it will be an issues. Rule to self: if it is something I can't fix, I am not buying it - i.e. I can't move the freeway, or its near a contamination site, etc.

Also Section 8 vs STR are two very different strategies. I wouldnt reinvent the wheel here. Doing a traditional LTR to start out and try managing it yourself. If you choose STR, hiring a solid management company for the first year is not a bad idea to get to learn the ropes.

Katie Nguyen · Answer

Thank you,

Katie

Katie Nguyen · Answer

Thank you Dan,

Yes, it is about my current single home family.  This house is fully renovated years ago, but we keep it very clean and I think STR is not an issue for it is also near beaches. This is my 1st investment converting my house to rental.  Only because I love to move back in somedays once this hatred neighbor is gone!

The city required permit for STR.  and 3 strike violation means permit will be revoked.  and the city rule is if a neighbor complaints (this current neighbor tenant will make fake complaint, for he had done to us), the PM or landlord must be there physically and resolve the issue within 1 hour of the complaint being reported to the police.

Can I expect the PM to handle this neighbor's nuisance? If possible can I have both of your PM contact info? What do you think about mid-term rental in orange county, if STR don't work out for me.

Many many thanks,

Katie

Dan H. · Answer

I have multiple STRs in San Diego.  2 are in Pt Loma, pt Loma is a high b, maybe low A area.  I suspect median Home price approaches $2m.  Pt Loma is in the usual Lindbergh field flight path.   All areas in Pt Loma can experience flight noise. In the anrea, the pause in conversation due to plane noise is called the OB or Pt Loma pause.  People live with it. Our STR listings make clear that there is airplane noise. There is no way to know how the disclosure affects the rent we get or our occupancy.

What I do know is that even though it is clearly disclosed, we have got multiple reviews that indicated their dislike of the airplane noise.  If the guest wants to stay in pt Loma or OB, they will almost for sure need to deal with airplane noise.

I would be leery of purchasing for STR a property that backs to a major freeway.   Unlike my market, there will be STRs that do not have the same negative item.   You will have to beat them on price to tempt guests to risk staying in a unit that backs to a freeway.

Many years ago after I had already been in RE for many years a friend purchased a property that he indicated was below market to be his OO home.  When I went to it, it was right above a major freeway.  His comps were not.   The discount reflected the discount for being above the freeway.  I did not tell him, but did tell my wife as soon as we left.  He later spent more than the discount off comps in an attempt to reduce the noise.  It helped significantly, but not completely.

Good luck

Dan H. · Answer

I am assuming you are referring to your current home. Unfortunately there are still ignorant people.   A few years ago I let a tenant break their lease with no repercussions due to homophobic neighbors and conflict. In good conscience I could not blame the tenant for the ignorant neighbors.   I lost about 1 month rent on the tenant switch plus the unit tenant turnover (patch hang holes, spot paint, inspect all, etc).  The ignotant neighbors cost me about ~$3k.

Typically section 8 units are very different than STR units.  This is both location and class of the unit.   Is the home in a location that would be desirable of STR guests?   Is the home interior high quality with high quality finishes?   That likely means open concept.  It could mean nice and pleasurable outside area.   If you have a unit that is even close to STR quality, I would not place section 8 tenants (I admit I have zero personal section 8 experience).

Next thing to consider if the unit is STR worthy is do you desire the effort of managing them   We self manage our LTRs but use outside mgmt for our STRs but both managers know I have dedicated maintenance staff.  One of the managers seems to know my maintenance is cheaper and possibly better than her maintenance.   So the  managers use my staff quite a bit (always cc’ing me so that I can tell them they are too loaded to do their maintenance).

One of my STR managers is a licensed PM.  Licensed, insured, have maintenance employees.  In my market STR PMs typically charge between 18% and 25%.  You can find ones below 18%, but they are inevitably deficient in some way.

The other STE manager is a co-host.   Her maintenance person is a reasonably priced contractor.   Her occupancy is slightly better than the PM but I do not understand why as her reviews are noticeably below the licensed PM (but not bad, I think she is 9.4 with our unit on Airbnb and a superhost, the licensed pm is above 9.7 on each of my units).  However she regularly uses my maintenance staff on my unit and occasionally on other units (she recently used them for a few days to furnish a new STR including transporting the furniture - I also believe she under paid them as she paid their usual rate but they provided a trailer and vehicle to get the furniture).    Co-hosts in my market are between 15% to 18%.   If they are below 15% they are new and trying to get started.

Good luck

Katie Nguyen · Answer

Thank you for your time and caring.

Katie

James McGovern · Answer

Does the highway have noise barriers erected?

WOULD YOU INVEST IN HOUSE with back yard is backed to the major freeway?

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