Homeowner · Denver, CO · Member since 2019 · 17 posts · 3 votes
I have a SFH in Denver, CO. It is zoned for an ADU (Accessory Dwelling Unit). I can build an 864 sqft or 3 car garage and an ADU 648 sqft (approximately 75% of garage space) on top floor and generate income. Price tag $275K-$325K.
The catch? I took the equity out of my home to buy a duplex in Oklahoma City, which fell through, and I don't have enough to pay for the ADU. I have about 2/3 of the cost. So what now? I have been deliberating on this and I just don't know if I should:
a) Hold on to the cash/equity and make the payments until...
b) Buy a property in Oklahoma City, strong market but easier/less expensive to get into and try to generate enough return to actualize the ADU project.
c) Take out a loan to cover the cost of the ADU, roll the existing loan into it and build the damn ADU! (By the way I am quitting my job in the very near future and doing some freelance work.)
So you see I have lots of options, with a few caveats, but as a new investor I just feel overwhelmed. Any ideas out there?
Rental Property Investor · Olympia, WA · Member since 2012 · 543 posts · 311 votes
6y
@Justin Tahilramani is correct. Your costs are too high -over $450 per square foot (based on a 650' ADU) with no expenses for land? Get the costs down to $150,000. You'll have enough available, you'll get it done and you'll turn a profit.
Use an already completed and engineered design that is close to what you want and can be purchased for a few hundred $. Set up a cheap website and get all your drawings on the website, then use Craigslist adds posted in out of state major cities with depressed economies. Your add should seek a builder, with tools, who can build your chosen design, within 6 months. Provide a link to your website so the design can be reviewed from anywhere, offer $2000 per week in cash with $1500 paid weekly and the rest paid in lump sum only upon completion. Also offer strong incentives for early completion (incentive like paying six months labor even if your builder completes it in 5 months). You'll have plenty of people interested, but choose wisely, many will be more interested in being paid, than in completing the ADU.
You could sweeten the deal by offering to let the out of state builder stay in a spare a room in your home. Also use less expensive materials if you are still over budget. Choose fixtures, finishes and appliances that can be upgraded later when the finances are stable. Under this arrangement you get an ADU very close to what you want, limit your labor costs to $50,000 and your materials to $100,000. You already have enough to get it built. You do have to manage the project and the builder, and you just do the permitting yourself.
Real Estate Broker · Oklahoma City, OK · Member since 2016 · 39 posts · 58 votes
6y
@Jillian B. If you are going to refinance anytime soon to pull enough cash to build the ADU, then quitting your job will negatively affect your Debt to Income ratio. If you decide against the ADU, from a purely economic point of view, using the cash you already pulled out, then investing in a lower cost market like OKC, you could (by staying in the lower end of the spectrum) have more rentable units and thus a higher overall return. You would need to use bank debt to leverage your out of town investments to make this work though.
Real Estate Broker · Oklahoma City, OK · Member since 2016 · 39 posts · 58 votes
6y
@Davido Davido Using an unknown, locally unlicensed, out of state builder, without any relationships with Subs, mandating a super tight and probably unrealistic budget, with an unrealistic time frame? That’s insane!
In defense of my idea, many jurisdictions such as where I live, Thurston Co. WA, do not require a contractor's license for a homeowner to build their own home, garage or ADU. Here, homeowners who pay for a construction permit, may construct their own foundation, framing, roofing, wiring, plumbing, mechanical, etc. Homeowners are also permitted to hire "help".
In the scenario I suggested Jillian would need to act as the builder, and the person she contracts would be her help. There is nothing that prohibits the helper from being more proficient at every aspect of a project than the owner builder. If it were my project, I would look for a helper who is has some experience in every aspect of home building. If the contractor is weak in one area, a local Subcontractor can readily be brought in on a limited basis to offer supervision/management. But generally there should not need to be any subcontractors, and thus no subcontracting delays.
There are a surprising number of generalist type builder's all across the US who do have broad experience in home building. Our nation is blessed with people who have built either multiple homes from scratch or just their own home. I am one of them. It is true, that a generalist, will not be as fast at any craft as are the specialists, but he also won't have any of the delays typical caused by waiting for a subcontractor to come perform their specialty.
Here in Western WA, a proficient professional contractor, will complete the construction of a house, from foundation pour to final County inspection in 4 months. They do it all the time. Not sure why allowing 6 months for a smaller project, would be unrealistic?
So when the budget is tight, one option toward getting it built is for the owner to step up and do more of the job. Doing more of the job can include taking on the project as an owner builder, handling the permitting, looking outside of the local market for cheaper help that is proficient in building, sourcing all the required materials, and supporting yourself and your generally proficient helper with locally licensed supervision where needed. All that is a lot of work. It is certainly true that many people who have built their own home, do look back on the project and consider it insane.
Still, if it is important to get a project built within a limited budget increasing owner participation is one way.
There is always a way. There is always another way. And there is always a better way. Your observation about the insanity of this way, is worthy of consideration.
@Jillian B. - I think you're onto a great line of questioning here! Obviously we can't predict the future with any real accuracy, so who knows what the broad market will think about ADUs 30 years from now, but in my market even though they are uncommon, they spike the value of homes anytime they are well kept. Who doesn't love the value that an alternate income stream can bring to a property?
As for the options you lined out, I think if you are going to quit your W-2 job soon and head into 1099 work, then right now is the easiest time in the next few years for getting a loan to build the ADU. If that is a high-priority project and you feel strongly that it is the play you want to make, then I'd say today is a good day to go for it.
If getting a property in our market is in the cards, you could easily accomplish that. You could even refinance it and pull all or most of the cash back out and build the ADU.
The most important question here, and the one that can guide you the best is this . . . which of the possible decisions best fits your goals and vision for real estate investing? Rental properties in OKC are great, but they are inherently NOT in Denver. So if you envision yourself building up a stable of high performing, moderately appreciating properties in a market like mine and being as "distant" from the operation as possible, then that's a useful thing to realize. If, conversely, you'd value having some of your property right there with you then you can't get much closer than an ADU.
So, while there isn't a right or wrong answer here, there is a better path for you.
I hope this helps!
Thank you Will. Certainly an OKC property w/ ADU would be a small step in the right direction. I can always come back to my Denver property because I expect to keep it long term. In fact it may help me decide if I want the Adu or not. This is great feedback.
What's your long term plan with the property? Will an ADU bring enough value in your neighborhood to cover the costs when it comes time to sell?
The ADU costs are atrocious from what I've seen too. I've got a project right now with an existing one. They shouldn't be that expensive...
Thanks Matt. I think that's a great couple questions. I know right now I want to keep the Denver property long term. I know my goal is to maximize earnings on a single location, and in a strong market like Denver it will likely continue upwards. Of course there are more details to get clear on.
Homeowner · Denver, CO · Member since 2019 · 17 posts · 3 votes
6y
Originally posted by @Account Closed:
@Jillian B. If you are going to refinance anytime soon to pull enough cash to build the ADU, then quitting your job will negatively affect your Debt to Income ratio. If you decide against the ADU, from a purely economic point of view, using the cash you already pulled out, then investing in a lower cost market like OKC, you could (by staying in the lower end of the spectrum) have more rentable units and thus a higher overall return. You would need to use bank debt to leverage your out of town investments to make this work though.
Absolutely true Richard and that is why I have vacillated between both. I have enough to play with in OKC which could support the future plan to build in Denver. That is likely my answer. Denver may be the long term goal and the short term goal is cash flowing properties in a more affordable market. Once again all if these questions will help me clarify my goals.
@Jillian B. what happened with the orginial duplex in OKC?
It's still available. Near the plaza district. Lots of character. It had some issues that I didn't think my budget could support.
I see! Yeah to get a deal by the plaza right now is pretty tough. I'm sure it'll make a handy house hacker happy! I'd expect a cap rate in that area to be at 7% or lower. It's just too late! Someone could get in, fix up and sell to an owner-occupant for a price that wouldn't make sense to an investor though! Well good to hear you know your limits. Good luck at your second shot though if you take another stab at it here.
Denver, CO · Member since 2017 · 33 posts · 21 votes
6y
You are right about the expected costs of building a new ADU. It is basically a 1500 sf new sfr.
If you want to build it yourself, check out Homewrights.com Great company, I am doing a new build with them now and will sell it this spring for a great profit.
If you want a cheap adu, build a 17’ tall 3 car permitted garage For $35000. Then after the permit is closed, finish out the inside however you want and for cheap. I did this for a buddy who lives in Westword and he is loving it. He is finished it and is fully rented for under $80,000. I can show you two versions I have built around Denver. Or buy an RV that is under 22’ and park it back there and rent it on Airbnb. Then you are in it for less than $10,000 and are bringing in $80 a night.
Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
6y
Originally posted by @John Krauklis:
If you want a cheap adu, build a 17’ tall 3 car permitted garage For $35000. Then after the permit is closed, finish out the inside however you want and for cheap.
Or buy an RV that is under 22’ and park it back there and rent it on Airbnb. Then you are in it for less than $10,000 and are bringing in $80 a night.
Bootlegging instead of permitting, or a travel trailer in the backyard. Awesome choices.