I am about done rehabbing a house I bought a while back. The market here is pretty hot right now.
I started looking at doing another flip after I sell this one, and there are no lots for sale or many fixers either,
so what I have been thinking about is building a second unit in the backyard of this house. It has a huge backyard,
and I can build another 900 sq ft 2 bedroom unit which I think will add $100k to the value of the property for a total of $300k.
But there are no comparables, and my realtor could only give me duplexes which were only about $250k.
My question is should I build this second unit rather than look for another "very hard to find now" flip?
If I go ahead and do it, I will need to borrow hard money to build it as my cash it all tied up in the existing rehab.
Time is money. Deciding late into a flip to construct another building might not make sense. You'll also change the dynamics of your buyer pool.
Look at the market, if an investor or homeowner bought this, will they collect enough in rent to cover the expenses they have ? you would be changing mortgage payments from roughly $955 to $1432, another $477. with taxes and other expenses, could a buyer make enough money renting it to be worth buying the property for the extra 100K
Rent here for 2bdrm house is well over $1000, so it more than covers extra cost, heckif one rents 3bd they could live free. I found that HUD allows rent of second unit to add to qualify income, so i still get hud buyers, not just investors.
Guy 2 lot next door is building new house and he says i should get $350k for property with second unit. If i could get another flip cheap i would do that, but just not to be found now.
I am concerned about having to borrow to build it, as market might soften in six months
But right now everything sells in matter of days..
Then it seems it would be worth it, with the added property tax and Insurance cost ( possibly $175 / month) for a total of $652 cost. Assuming that the new owner has the tenants pay all utilities, then they could make money on it. have you priced out the work yet ? i do not know what the construction costs are there but i assume for a 900sq' place it would run you about 70K - 90K, if 90K, is the 10% return worth all the work and delays to you ?, do not forget you will be prolonging the sale for the 2-3 months it takes to build it and you will have mortgage payments and taxes to figure in holding costs for those months, which take away from that profit. best to get all your numbers and find out if the expenses are worth the return.
I think I can build the second unit for $50-60k, but what it will appraise at is the big issue, as there are no comparables in my area that I or my realtor could find.
My last house the FHA appraisal came in $10k less than the offered price, so even if the rent income justifies fully a $300k or $350k mortgage, if the FHA appraisal doesn't agree, I am screwed, this time for a much bigger amount.
Certainly the difference between $250k, $300k, or $350k is huge, one has no profit, the other $100k profit!
I go back and forth, some days just want to sell and get out of this ghetto, other days I think I'm leaving money on the table,
thus my post to the forum.
Anyone build a second unit on their flip?
Add 900 sf for an increased value of 100 k?
Where is the property?
We are applying for an ADU in San Mateo, ca. 640 sf 1 bed 1 ba.
Just the permit will cost about 10 k, with all the green building, demo recycling, all kinds of bureaucracies.
However, the added value is around $800/sf, or $400k ish.
The actual building cost we estimate around 100k-130k.
@Jack Murray Hard construction without foundation, you MIGHT make it at 60k. 900sf built at $60/sf? uhhh, ok, if you say so.
Property is in Del Paso Heights, north Sacramento. I bought this house for $75k.
I do everything myself and buy used whenever possible to match the standards of this neighborhood.
Ahh. That explains it.
How are you finding your comparables? In So Cal it is a challenge to find decent comparables. Also, lenders and banks ask for after estimated valued with ADU before they consider loans. Have you had any similar issues?