Hi BP fam.  I'm a 32 year old licensed GC in southern Cali.  I'm looking to invest in my first property and would like to hear your guys' thoughts.  In my mind this is a no brainer but what the hell do I know.  I have made several offers but none have been accepted yet.  Regardless, my eventually first deal will look something like this:

Purchase price - $750,000.00
Down Payment - 5% or 3.5% whichever makes more sense (will take advantage of owner occupied loan)
After closing, insurance, taxes, etc. if I go with the 5% down the loan agent and I figured I will be out of pocket $37,500 down payment, $10,000 closing, and need to show $17,000 in reserves. Total needed is $64,000.00 but $17,000.00 is reserves. They are estimating the rate at 2.875% and the payment at $4,201.00 (forget how much of that is PMI but I think around 300)

Now here comes the fun stuff...

I'm looking for properties that have a detached garage at the rear and plan to add 400 SF to the garage and convert the garage, making it a 750-800 SF ADU. The ADU will have 2 bedrooms and 2 bathrooms, a living, kitchen, laundry closet and have it's own entrance. Now normally this would cost a home owner in southern CA around 150-200k depending on the contractor. Being that I'm a contractor I plan on adding this 750-800 SF ADU for about $75,000-80,000 after plans, engineering, permits and construction (it will be turn key). I've spoken to a few lenders who offer construction loans on these types of projects and they are telling me I should be able to get a construction loan based on future appraisal (70% loan to value). Even if the give me a low future appraisal, 100k?, if they can finance me 70k to get the majority of the project done I can personally finance the rest. The monthly payment on the loan is anywhere between 600-1,200 depending on my credit and DTI at the time and how much I borrow. The rate can vary from 4.99%-12%. The ADU should be ready to rent 7 months into me getting the keys. I will be living in the front house for the first year and plan on renting it out after. I should mention that If the main house needs remodeling I will also do that at cost. So there is a possibility to increase value on the main house as well but not really factoring that in as it will be icing on the cake.

This is where it gets tricky for me since I'm new to this.  My plan is to eventually rent out the front house - according to different rent estimating websites I should be able to get 2,800-3,200 rent for the main house (remember the mortgage is 4,201.00).  Then I should be able to rent the brand new 2 bed 2 bath backhouse for 2,200-2,400, maybe more.  We have done similar builds for homeowners over the past year and they confirmed what they charge for rents so I'm going off their numbers plus similar rents in the area.

Once I can refi I plan on doing that and I think the property which now has a second house on it should appraise for much more than I spent.  Normally this wouldn't be the case if I paid full retail price $150,000-$200,000k but since I'm building it for myself at around 75,000-80,000, shouldn't I be able to refi now that I added at least 140,000 worth of value to the property (this number was given to be from an owner we built a similar ADU for, he got an appraisal for 140k after we finished and that was in a bad area).  Am I wrong here on how this all works?  I'm hoping after the refi my monthly payment would drop to 3,200?  Is this naive to think?  If it does drop to 3,200 and I receive 3,000 in rent for the main house, 2,200 for the backhouse, then this property would cash flow $2,000 per month.  In this scenario would I be able to pull out enough cash to do this all over again?  I plan on doing another owner occupied loan and doing everything exactly the same but with more experience.  My credit union said I can do a owner occupied 3-4 times before they pull the rug and make me do investment loans.  I figure by the 4th one I will have 20% to put down moving forward.

I know this is just a unique opportunity for me since I'm a builder and this won't work out for everyone.  Another thing I should add is this - The numbers seem to good to be true so when I tell my family or people who I think would invest with me they don't believe me or want me to prove myself first.  I'm okay with that but I want to mention that the reason this will work for me is that the state of CA just started allowing ADU's (first in 2018 but then they opened the flood gates in the bill they just passed in 2020).  There are basically no restrictions for ADU's under 800 SF.  Most builders in my area are barely catching on but once they do I believe they will try to do exactly what I'm trying to do.  Oh also, I should add that this works because Los Angeles and Orange county are overpopulated and there isn't enough affordable housing.  People pay 800-1,200 just to rent a room in some areas!  I actually will look at renting by the room down the line.

Anyways, sorry for the run on sentences and bad grammar. I'm typing all of this from my cell phone.  I'm really excited about this and if this works I don't see myself working after I turn 36.  I can swoop up 2 of these the first year, 4 the second year and then so on and so forth.  We're strictly talking about cash flow here too.  Once we factor appreciation and depreciation for tax purposes it seems like the deal gets sweeter and sweeter.