Architect · Emeryville, CA · Member since 2015 · 8 posts · 3 votes
Hello BP!
I am a newbie in the real estate world, I wouldn't even call myself an investor yet. I am looking to get started in real estate and have been reading/ educating myself the last few months. My current situation is that I own a SFH in Emeryville, CA, bought about 2 years ago for around 600k. It was originally a 3/1 and we added another bathroom to make it a 3/2. After we are done remodeling areas that need repair (all scheduled for this year), the house will be worth around 760-800k per my conservative analysis.
Here is my dilemma: I have access to purchase another property upto 800k with conventional financing and an equity line of about 180-200k. I could either use that to purchase a new property or construct a secondary unit on my current lot. For a new property my goal is to purchase a 2-4 unit in the bay area, but most properties do not cash flow to the point I would like. I did look into building a secondary unit, and I would be able to secure the necessary approvals needed to do so. From a cost standpoint, for a 600 SF unit (that's the most allowed in my case) I am budgeting around 200-270k (300+ - 450/SF). I would move into this unit and rent out the entire 3/2 house, for about 3200-3500/mo. I also have some reserves to fund the construction above and beyond what the equity line would get me. Obviously I would refi after construction is complete and main house is rented out.
Seeking the community's opinion, buy another property in this hot market, or build one?
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
9y
I wouldn't comp and SFH+ADU with tradition 2unit buildings, as they are different animals. The ADU thing is pretty new, so it may be hard to comp. but basically. The SFH is usually better than a unit in aduplex, and the ADU may be lesser value than unit in duplex (size, on ground level, or behind man house, etc. best thing to do, imo, is to talk to numerous agents who may have been involved with ADU clients.
OTOH, the ADU may be a good solution FOR YOU, given you're ok with a smaller space and saving the money.
I'd be very leary of investing OOS. Usually little to no appreciation, and you have little control over the asset and it's management. Plus you don't know the area nearly as well as your own area. Search on this site for cash flow vs appreciation for an earful on the subject! And keep in mind, most people can't invest in the Bay Area because they can't afford to get into it in the first place. You have the luxury of doing so. I'd definitely go local. Time is your friend. The long term appreciation is huge. That's how I made my millions, now I sip lattes, tend to a property here and there and enjoy leisurely walks in the city. Thanks Bay Area real estate!
Real Estate Agent · Camarillo, CA · Member since 2017 · 26 posts · 16 votes
9y
Check your code. Lots of cities require that the main residence or the ADU be owner occupied which could be an issue if you plan to keep ownership and move elsewhere down the road...
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
9y
@Akshat Jain I suggest you start with more basic decisions prior to asking this this question. You have not made it clear as to what your exact goal is nor your timeline. In the business terms, you are talking about a product before you have made your business plan.
Are you married (you inferred to a "we") and willing to move into a 2-4 unit building?
Any kids?
As an architect, I am sure you understand the potential timelines of permitting to completion. Building in the Bay Area is always a longer process then just finding another property to purchase.
Have you spent time looking for a contractor to do the work? Most "good" and "fully licensed" contractors have a backlog of projects stretching months, in some cases years. As an architect, maybe you have somebody or you are going to try and GC yourself, but that point is not clear in your post.
Your question is a worthy intellectual exercise. I just feel you will get more substantive feed back if you give more details.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
How do the numbers really work though, if you're spending 300k what's that going to do your payment? Plus the fact that it won't come on line for a while you're still going to be paying "both" payments for quite some time.
To me it seems that you're buying a 300k studio and renting out your house, where you might be better served buying say a 150-200k investment house that'd rent/cashflow better. I only say this because most MFH around here are insanely priced...
Randy, yes Emeryville requires owner occupancy while doing an ADU. We will try for a variance and make a case for building a second unit (making it a duplex as opposed to SFH with ADU). If not, we stick with ADU. Are you aware of an instance where the City has made a stink about owner moving out after building an ADU? In our case, we will stay put for at least another 3, but just wondering. Selling when we move out may not be a bad idea if the price makes sense.
Arlen, that is a valid point. My goal is to get this completed by end of 2018, and then look into buying another property if the Bay Area market cools down/ I have more resources to buy. If not, then probably look to other markets nearby where I can buy. I am ok moving in to a 2-4 unit for 2-3 years. Looking into prefab as a solution for the construction portion to shorten the timeline. I will trust my professional ability to get through permitting without major delays. Long term goals of having 5 such properties in the next 10 years. You make a valid point of making a more robust business plan first, I have to work on that.
Matt, I would be funding construction through a heloc, with payments being interest only, and only when I draw on it. My estimates put me paying around 8-12k over a period of 1 year (interest only) for that loan, with let's say another 50-60 out of pocket. I will refinance after that, to pay off the heloc and end up paying less than what I do for my mortgage right now, considering the rental income. There may be opportunity to pull some cash out too, depending on how much the property appraises for, but not counting on it. So essentially out of pocket expense would be 60-75k which I should be able to recoup with the refinance. Also, I am not going to find a 150-200k property in the area I want to be in (Berkeley, Oakland Emeryville, Alameda, El Cerrito, Richmond annex). Not ready to go out of state yet, definitely not for just 1 property. What do you think?
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
@Akshat Jain I would look at from a POV of what all the numbers mean and what kind of return I'm expecting from the remodel/upgrade. All these things are to add value of the property, but they also all cost money to do.
Just quick ROUGH math: Buy: 600k Construction/Remodel: 300k (Does this capture the costs from repairs/remodel to the main house?)
Now on lets say we do a refi to get our cash back out and let's assume we're doing 20% down (not sure that applies but this is rough math).
900k
180k for the 20% down
so that leaves up with a loan of 720k Payments would be probably over 5k a month once you include insurance. (30 yr, 4% interest, 2% for taxes, 0 insurance didn't capture)
So now we're onto rent.... Main house: 3500, ADU: 2,000: Total 5,500
So at best you're breaking even, after you spent 180k out of your own pocket, but you can't actually live in your property. So now, let's move you in, you're paying 2k for a ADU which isn't actually a good value. You could probably get one closer to 1500. Lets also point out you're going from living in a 3/2 to a 1/1 which may or may not be as comfortable as what you were previously living in.
On the flip side of this, you could take your 180k that you would of spent and buy a house cash in the midwest. You should fairly easily hit the 1% rule, so let's assume 1800 mo in rent. Let's assume you were able to get a rent ready house at this price point and that the 180 was you're all in cost. You'll lose 75% of first mo rent (1,350) as commission to PM and then 10% per mo. So you've basically paid someone $3,500 to manage a property for you for an entire year.
Now since this is rough math lets assume you'll fund repairs as they come up because you already have health reserves. Let's also assume you'll pay tax/insurance once annually when the bill comes due.
You'd be taking home an extra 1620 a month from the one OOS rental. Now you own a house cash, it's "making" you an extra 18K a year. Yea you have to account for taxes, repairs, maintenance etc, but this is just rough math. This is the safe, boring play, the I hate debt and cash is king play.
Now, you could take the 180k and leverage it, you could do the BRRR method. The simple idea (and conservative) you buy the first house cash, wait a year, cash out refi 80% of it.
1)180k- 20% (36k)
2) 144- 20% (28,800)
3) 115-20%
So lets assume these are are different (yet good quality properties, and they all hit the 1% metric).
That's 439k (net worth addition), 4,390 a month. Yea you'll have expenses but you'll still cash flow.
Now, year 3 you have about 90k left over. You have 3 mortgages, 3 properties that are cash flowing, basically on autopilot. Now you're more comfortable in OOS and want to make a bigger move.
you have 100k to deploy, you could partner with someone on a 1mi apartment complex. Your 100k is 20% down of 500k, 2 of you could make it a million. Now I could be wrong, fact check me, but apartments are commercial loans. They rely on the performance of the asset not the borrowers ability to pay. This would cashflow also and likely much better than the SFR you have.
This is all from your 180k that you'd of spent from just adding a ADU to your property and having to live in a 1/1. You have 4 total mortgages (you're allowed 10), you've likely changed you're lifestyle very little. You've added significant value to your net worth with very little out of pocket expense. THEN YOU GO CRAZY WHEN THE BAY AREA MARKET COOLS OFF...... or if that doesn't happen keep your OOS properties and let them do their thing.
Oakland, CA · Member since 2016 · 51 posts · 26 votes
9y
I have been toying with the idea to adding an ADU to my house in Oakland, here is how I see it -
PROS
The land is free, your cost of acquisition is the construction cost
The property tax should be a bit lower than buying full price in open market
You add value to your house, the HELCO can be rolled back to your primary mortgage later
Better control over tenants and managing, as you live there
CONS
Some loss of privacy
Dealing with regulations on who can live where, as it is an ADU
Hiring a GC in this market
Given that you have experience in the field and are planning to do some pre-fab type construction, to be it a no brainer! Curious to see what others say and what you do, I am still on the fence myself on what to do
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
9y
You guys should really do research on the value an ADU (vs an SFH without one) adds in your particular neighborhood. be interested in seeing that info. Also, you may be able to build for closer to $300 PSF than $450, which seems a bit rich. Most important primary concern is to assess how much equity gain the ADU brings you, because it won't throw out a lot of cash flow (a few hundred?), assuming it rents for about $2000, and cost $200-250k to build. But, if it's worth say $700-800 PSF on the value side ($420-480k), you've just created $200-300k of value for yourself....which is nice imo.
So unless you find a super off market deal on a 2-4 in the area, you're probably better off exploring the ADU.
Architect · Emeryville, CA · Member since 2015 · 8 posts · 3 votes
9y
Matt, I do not disagree with your analysis. In fact I'm glad to see a different perspective. I tried to run comps for a house with an ADU before replying but could not find a good comp fast enough.
I am curious to know whether sinking 300k in the house will add 300k in value. I see duplexes in the area that are around 8-900k. If that is the value of the home after adding the ADU then I wonder if it's worth the investment. But here's the flip side: currently we live in a house that is way too big, and we pay way too much for it (>3k). We could be in a situation where our monthly effective payment would be ~1500, not 3200. So that in itself is more than 1500 less than our current expense. If I buy an OOS property, I'd rather spend 36k (20% down) than 180k, to minimize personal risk. I have not looked much into OOS, but feel that it may be more work than we can put in.
BTW, have you invested OOS? Sounds like you have with success.
Amit,
I'm going to take a hard look at how much the value add is. 480k sounds great, but not sure if it's realistic for my area.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
9y
I wouldn't comp and SFH+ADU with tradition 2unit buildings, as they are different animals. The ADU thing is pretty new, so it may be hard to comp. but basically. The SFH is usually better than a unit in aduplex, and the ADU may be lesser value than unit in duplex (size, on ground level, or behind man house, etc. best thing to do, imo, is to talk to numerous agents who may have been involved with ADU clients.
OTOH, the ADU may be a good solution FOR YOU, given you're ok with a smaller space and saving the money.
I'd be very leary of investing OOS. Usually little to no appreciation, and you have little control over the asset and it's management. Plus you don't know the area nearly as well as your own area. Search on this site for cash flow vs appreciation for an earful on the subject! And keep in mind, most people can't invest in the Bay Area because they can't afford to get into it in the first place. You have the luxury of doing so. I'd definitely go local. Time is your friend. The long term appreciation is huge. That's how I made my millions, now I sip lattes, tend to a property here and there and enjoy leisurely walks in the city. Thanks Bay Area real estate!
Architect · Emeryville, CA · Member since 2015 · 8 posts · 3 votes
9y
Thanks everyone for the insights. There have been 2 different opinions, either go OOS or build an ADU, but I feel that buying IN the immediate area is pretty much ruled out.
Personally, I do not have much knowledge about OOS investing, no target areas etc. So this will take some research before jumping in. For now I will stick to what I know so far and go ahead with the ADU plan. This will take a while but I will keep updating this thread with progress to have a log in case it helps anyone in the future.
Architect · San Diego, CA · Member since 2013 · 244 posts · 101 votes
9y
As an architect, I like the ADU idea. You get to leverage your skills, time and network towards your investment. By designing it yourself you save money, you can get discounts at a lot of interior finish stores, you can call in some favors from your contractor buddies, etc, etc. As an owner occupant you could manage the construction yourself if your into that kind of thing. Also I hear that Airbnb thing is a good way to make extra money from an ADU (depending on the local laws).
Oakland, CA · Member since 2011 · 55 posts · 28 votes
9y
In this market I'd probably go ADU all the way if I didn't value my privacy so much. I've worked with a contractor who rebuilt a 250 sq ft garage as an ADU for $85K. The homeowners are currently renting it out to a friend for $1500/month. Finding decent returns in the Bay Area is difficult, and finding them without spending at least $600K is nearly impossible.
Oakland, CA · Member since 2011 · 55 posts · 28 votes
9y
In this market I'd probably go ADU all the way if I didn't value my privacy so much. I've worked with a contractor who rebuilt a 250 sq ft garage as an ADU for $85K. The homeowners are currently renting it out to a friend for $1500/month. Finding decent returns in the Bay Area is difficult, and finding them without spending at least $600K is nearly impossible.
Rental Property Investor · San Francisco, CA · Member since 2017 · 26 posts · 6 votes
8y
@Akshat Jain I started learning about OOS investing from a BP member who mentioned https://www.roofstock.com/. I only own in Oakland but I check out this site to see how their analyses and buyer interface have been evolving.
@Amit M. I am on your side about the "keep it local" thing -- that feels safer to me; as a local I know all the weird ins-and-outs of a place. But I wonder, as someone who has been successful in local REI, what do you think of something like Roofstock? (I'm not sure if they are the only company offering pre-vetted properties OOS that you can buy sight unseen.)
Developer · San Francisco, CA · Member since 2009 · 37 posts · 22 votes
8y
$450/SF is for the big apartments in regards to construction costs. I think you’ll find your construction costs to be lower than that should you do the ADU route - likely closer to $300-350/SF depending on finish levels. Kudos to you though, keep $450 as a budget number and be pleasantly surprised when you have a budget surplus.
BTW, don’t tell your contractor that you have a $450/SF budget. He’ll find a way to meet it.
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
8y
I suggest you not to engage in an added on. Getting a brand new home is an easier route may be in Livermore or Lathrop away from SFBA. In the mean time put energy working on your architect career making money. Added on is when you are out of work with 1 year living savings in the bank. As for you projection the $300-450/sf is not something any experienced investor wants to put that much even in PA, CA.
Home prices in East Bay already passed historical high last spring with more people leaving than arriving on the rentals.
Investor · El Cerrito, CA · Member since 2016 · 4 posts · 3 votes
8y
Hi Akshat,
Just wondering if you did the AUD in Emeryville finally. I have a small SFG in Emeryville and it is potentially be able to covert the downstairs to AUD unit.
Sounds good. If you have a copy of the plans, I could even look over those prior to issuance of permit but either way works. Looking forward to hearing from you.
San Francisco Bay Area California, USA · Member since 2018 · 14 posts · 3 votes
7y
Hi @Akshat Jain just curious if you moved forward with this project as I'm close to Berkeley and am pursuing building an ADU. If you decided not to move forward I'd be curious if there were any key reasons as to why you didn't move forward (e.g., more lucrative to focus on your paying architecture clients, etc.). Thanks!