Hi BP! I'm looking for my first property (most likely househack) in greater LA area. My criteria is positive cash flow after I move out of the property and enough equity to finance my next deal. This has gotten me looking into ADUs. 

Below is one I'm practicing analysis on. I've got 203k loans in mind for financing. Are my numbers realistic?

Link: Calculation spreadsheet

Some thoughts:

• The interest rate to purchase will likely be less than the 203K.  Did you try to factor each into the one 3% number?  I would rather see is shown as two different loans with 2 interest rates, amounts, etc.
• 203K prevents you from doing work yourself.
• $90K hands all ADU (203K will mean hands off) likely can only be achieved on garage conversion.
• I always place Property Management in my pro forma even if we are self managing.  This is because it takes time and effort to manage and you deserve compensation if self managing or will need to pay someone else if using a professional PM.

Unrelated to your calculations, be sure you understand how the ADU will appraise. In some areas ADUs are appraising significantly below the hands off cost of building the ADU (and in all areas it is appraising below the hands off cost of an ADU). Note an ADU addition that starts with a negative $50K plus position due to it having a value of more than $60K less than hands off construction cost will take many months (probably years in the case of your example) to recover the initial negative position.

This negative position and the extremely high LTV you depict (96% LTV) implies that extracting money out is likely not going to be possible until the property has appreciated at least 20%. Most Owner Occupied (OO) cash out refis are at 80% LTV or lower. I am not saying you cannot find one at a higher LTV, but you likely would not desire the terms.

Good luck

I purchased a SFH in 2018 with 10% down and completed construction of an ADU in 2019 with cash. As Dan mentioned above, when I went to refinance in 2020 (to lower my interest rate) the area had already appreciated with the market, but the ADU did not even appraise for my hands-on building costs. For me the overall returns have been great because I house hack and live for free, plus there has been strong market appreciation. I'm glad I was not relying on a cash out refinance since I doubt I'll see good market value for it for at least a decade.

Anecdotally I saw a post about a company offering a lending products that looks at properties based on DSCR. I have no experience with the product and have not looked into it, but I took note of it since it might be a way to pull more cash out of properties with ADUs.

@Matthew Forrest - I am almost done with my personal ADU project. I plan to do a cash-out refinance at the end to consolidate the date but I seriously doubt the new appraisal will be anywhere near my expense to build. In the end, like you, I hope that appreciation and increased rents over time save this investment. Only time will tell.

@Kevin Tsai - I would use caution when incorporating ADUs into your investment plan.  They work but they are not considered a traditional "value add" for appraisals.

@Matthew Forrest

Hey Matthew,

Did you build your ADU here in the South Bay?

Also could you give some details about the type of ADU you did. Garage conversion, stand alone. What were your all in costs.

You can PM me if you would like.

Thanks!

@Dan Heuschele great points I didn't even realize. I agree - the appraisal value is a big factor for considering ADUs. I thought with CA's new ADU-friendly laws that they might appraise better. I've got more thinking to do, thanks!

@Matthew Forrest that's interesting about the DSCR-based loan. I'll have to do some digging.

@Brian Larson what else would you consider "value add"? Are these like upgrading kitchen/bathroom, adding more rooms?

@Kevin Tsai - correct. Those items traditionally translate into a higher appraisal value.

If you're doing a garage conversion that number is pretty high. You should be able to do it w/ $75k and that's if you're unlucky and having to do new sewer line and other bigger upgrades.

I'd avoid doing 203k or any FHA product if you can. BP's advice is not always one size fits all. FHA financing offers often goes straight to the recycle bin in big metro markets like LA. Your offer will be much stronger if you do 5% down with PMI and it's not even that much like, $150 or 160/mo.

Interest rate is a bit high but it's ok being conservative. I was recently quoted around 2.675% owner occupied.

Home insurance if that's monthly that's too high... depends on your coverage obviously but prob not even $500/yr.

Other than that, it's pretty close. If you rent out the main unit it covers your mortgage that's already a huge win in some people's eyes.