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Jennifer Grbich
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Need Advice to maximize funds for new home build

Jennifer Grbich
Posted Mar 6 2024, 00:50

Hello, I need advice. My friend bought 2 acres of land in Auburn, CA with plans in place to build a house. He's a GC. He also bought a SFH next to it that sits on ~5 acres in duress. Long story short, he wants to build a new home that would serve as his primary on the 5 acre lot. Our current plan is live in the current home until the new one is "livable"... then make the current one an ADU and rent it out. Both dwellings will be on the same lot at different ends, far enough from each other.

Initially, he was going to build on the 2 acre lot but the 5 acre has a better view.  So he's going to sell the 2 acre lot which would net hopefully about $160-170 after fees.

Firstly, do we have to make the current one an ADU? I didn't understand that part of his thinking unless we can't have 2 SFH on a property? Can we keep it as is and still rent it out as a sfh? He mentioned that he would have to take the kitchen out in order for it to be an ADU? Don't people need to eat?

Back to finance question, would it be a better decision to take the funds from the sale of the 2 acre lot and pay off the current mortgage (~$150k) and live in the current home for a year or so (in hopes that interest rates will go down) then refinance that take out $400k from equity (~$750k) to build new house? OR keep the current mortgage and use the funds from profit along with taking out a HELOC against current home to build new one? I'm not sure what other options we have and would love to hear. We obviously want to maximize funds to build new home without getting in over our heads. I think current interest rate of mortgage is around 6% but I can find out to be certain, he bought in 2022.

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Dan H.
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#5 General Real Estate Investing Contributor
  • Investor
  • Poway, CA
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Dan H.
Pro Member
#5 General Real Estate Investing Contributor
  • Investor
  • Poway, CA
Replied Mar 6 2024, 02:22

ADU laws are being introduced at a fast pace and are getting difficult to keep up with.

ADUs can have kitchens.  That is statewide. 

Virtually all SFH lots can have an ADU added as well as a JADU. So 2 separate units (primary unit and ADU) is allowed.

Not all lots are zoned to allow adding a 2 unit that is not an ADU. Check to see if your jurisdiction is SB9 friendly and check the zoning on the current parcels

ADUs can be rented long term regardless of owner occupancy on the property.  Most jurisdiction do not allow them to be rented short term (<30 days).

I believe some jurisdictions will let you convert existing structure to the ADU, but I do not believe this is statewide and is probably a minority of jurisdictions. Note ADUs in most jurisdictions are limited to the smaller of 1200' or 50% of existing unit.

So adding an ADU is allowed but it may have to be the new unit, may be limited to 1200' (or 50% of existing unit), can have a kitchen, and the new unit and/or existing unit can be rented.

As for the financing it is personnel decision but I believe the thing that separates RE from other investment options is the ease to leverage.  S&P 500 historically has returned 10%.  Without leverage, value add, etc RE will typically not do much better and is a lot less passive.  It is the leverage that compounds the return without value adds.  The trick is to use leverage but not to over extend.  In CA virtually everyone who has lost money in CA RE did so because they were forced to sell usually due to being over extended.  

Good luck

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Jennifer Grbich
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Jennifer Grbich
Replied Mar 6 2024, 11:11

Thanks Dan, appreciate the info!  We're blessed to have this problem...  

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