Build an ADU on existing property or purchase Turnkey (s)?

Question

I have about $150k to start investing. I have been hunting property "locally" for some time. I live in the north west suburbs of Philadelphia. My interest is buy and hold for long term cash flow. I have offered on 11 properties with no closings. Reason being is most properties require extensive repair, and I hesitate to get overly aggressive on offers for a thin margin net cash flow of $100 or $200 per month. I have turned to Turnkey, actually have an offer in a property now. I am starting "light" to test the process and experience. In parallel I have had this ongoing thought of building an ADU on my primary residence property. I have enough land to build a detached ADU, zoning is okay, and since this is my primary residence I feel comfortable managing the process because my time is used efficiently (no travel or remote management). My mental struggle lies with dropping circa $150k constructing the ADU vs dividing into 4 or 5 down payments for turnkey properties. I conservatively think the ADU would cash flow $2100 per month. It would consist of a 1300 square foot apartment and 3 climate controlled garage bays ( each 28' by 12'). Thanks all! Excited to hear thoughts.

mike

Account Closed · Answer

I'm in Phoenix flipping a 1600 sq ft house with a 960sq ft building in the back that will become an apartment or duplex or ADU or AirBnb and even so the price is nowhere near the numbers you are wanting to do this at. The property has an ARV of $325,000 and the back building will get $1,500 a month rent which is your target amount and the house would get another $1,900 to $2,200 per month or someone could live in it and rent out the apt. Arizona is much less expensive than PA, California or Oregon. To do what you are suggesting for the amount you want to spend I think you are looking at the midwest. That presents a management problem in that it is more difficult to get to the property for you. So, all that being said, for a cash purchase you may be priced out of the market at the numbers you are using. You may want to reconsider buying one that is already set up for the purpose.

Michael Wilson · Answer

Hi Mike, thanks for the reply.  I probably should clarify my situation a bit more.  I already have/own my primary residence (circa 3000sf single family on about 2 acres).  My ADU proposal would be to build on the land my primary is currently located.  I am not looking to build a primary and ADU for $150k, just the ADU.

My hesitation comes with the deployment of capital.  With the ADU, I will deploy all my capital for cash flows.  My equity situation will increase on the primary, but not dollar for dollar.  If I place down payments on 4 or 5 Turnkey properties out of state, the cash flow will most likely be much less, however I would be diversifying, possibly a better equity equity forecast, and the ability to exit without being required to move.