Buy Rehab Rent Refi Repeat on ADUs
To build on another blog that I posted about the ADU strategy, in this blog we will talk a little bit about refinancing once the ADU is completed. In the investing world on BP a lot of people talk about the BRRRR (Buy Rehab Rent Refi Repeat coined by Brandon Turner) and that goes for properties that are in bad shape at the start then get fixed up. This is a twist on that concept, and it brings in the added unit on the property to be completed to complete the process of BRRRR on ADU.
What’s an ADU
An ADU is an Accessory Dwelling Unit, most people have heard of a granny flat or mothers-in-law quarters, which is the same structure with a new name for it. These have been approved since 2017 in California and are now even allowed on rental properties in each city across California. You can build ground up, or you can convert a garage to make the unit on a single-family lot, or multifamily lot.
Why Are ADUs an Added Benefit
It’s an option to make a single-family home, or a multifamily property gain another unit for more monthly income and a value-add to the property that people can use for years to come. It gives owners another option or gives investors options when they look at a property that is market value.
It provides the alterative to buy and get it for a possible “deal” when it’s market value and no other investor is looking at the property at the price the seller is asking for the home. What that means is it’s an opportunity that is right at your fingertips without a massive amount of competition for the home barring any average home buyers.
How Can you BRRRR with The ADU Model
Well, this is the beauty of taking on the ADU model verse just buying a house that is undervalued and needs work which everyone is doing these days with the market as great as it is right now. ADUs which are second units add a lot of value to the lot and house that you are buying which means after that this ADU is added then the property will be worth more after this is done.
Just like the BRRRR, you are looking to buy a property then rehab the property, and that means either rehabbing it completely including adding the ADU or just adding the ADU. The house can be already remodeled, and then you add the ADU to value-add, which is good option; however, getting a home that needs a lot of work and adding an ADU is way better.
Once you get that property, now it’s time to fix up the front of the house and add the ADU. The process to get the permits and plans together are going to take two to four months, so make sure to have some reserves for the deal. Once the approval process is complete on the plans for the ADU through the city the next expense will be contraction costs which are $90,000 and above. These construction costs are added onto whatever you paid for the front of the house to be rehabbed, so this project in total is a lot more money than an ordinary BRRRR. The value will be higher after all this work is done.
The Value After all The Work is Complete
Set your eyes on the value after the work has been completed, as you would in a normal BRRRR. The value of the front would be just like the value you would comp out when looking at a normal rehab project. The back unit, or converted garage is the focus to get a higher value out of when the project is complete. When doing this due diligence be sure to look at the area comps for duplexes, and what the rents will be for the units. These two figures will be something that will need to be analyzed to make sure your BRRRR will pull out the money you need for the profit and project.
Two things to think about here, one item is that the work will take about five to six months to be done due to the permits, plans, and contractions, so there is an option to use financing during the purchase and then refinancing after the seasoning period of six months. The second item, when the appraiser comes to evaluate the home, make sure that all the repair costs and construction costs are accounted for on an organized on a sheet of paper so that they can add that to their report for a higher value. Also, you want to be sure to bring comparable properties along with you that reflect the rents on the properties and the valuations for duplexes in the immediate area.
This is a perfect niche to take a look at when getting out of the rat race to get a deal. ADUs allow you to offer market value for a home, do all the work, and then refinance the deal! This is easily something that needs to be looked at as a viable option when getting started and needing to get your money back out of the deal. Make sure all the due diligence is done upfront of the project and know that the project costs will be a lot higher than a standard BRRRR.