All Forum Posts by: Arthur C.

@Eric Teran

@Russell Brazil

Thanks for the link. Looks like ADU is not permissible in dwelling units zoned in RF-1 so this becomes irrelevant for me. Instead of ADU, would that just be another principal dwelling in the basement then? Not sure what else to call it if it's not an ADU.

AC

@Russell Brazil

Are you sure? From my understanding, ADUs don't necessarily require that they must maintain same entrance as the principal dwelling in and out of house. In other words, ADUs can have their own separate entrance with no access to the living space that belongs to the principal dwelling. How would that work with ADU and principal dwelling having its own separate entrance when owner has to rent the property in its entirety? This makes no sense to me unless I'm missing something here?

AC

@Russell Brazil

Gotta jump into this discussion as your last paragraph got me to become inquisitive further re: topic of ADUs. You mentioned that in order to convert the basement to ADU, the primary unit has to be owner occupied at the time of conversion. Correct? What about if it hasn't been owner occupied yet when ADU conversion begins and owner intends to occupy the primary unit once ADU conversion is completed?

Secondly, I’m assuming if owner decides not to live there anymore a couple of years after the conversion, can owner still legally rent both units separately?

I am pretty sure this topic is something that a lot of investors in DC would be curious to know as they would always seek to produce any potential for greater rental income.

AC

@Russell Brazil

Thought I’d jump in that conversation as I am contemplating about doing a condo conversion of two condo units from a single family home in Trinidad.

Here’s what I found online below. It seems there are a couple of ways to get an exemption from the 5% conversion fee upon sale of each unit. However, I am not as clear to the first bullet, which it indicates that the property has to be previously owned by a sole owner for at least 12 months. Does this mean the owner of a property has to own and live in it for at least 12 months before doing the condo conversion in order to get an exemption in other words? Is that also your understanding?

CONVERSION FEES

The owner must make a Conversion Fee payment of 5% of each unit sales price to the DHCD within 30 business days of the settlement date (§ 42–3402.04 of the Code of District of Columbia).

However, exemptions can be granted if the property meets at least one of these qualifications:

-Was previously owned by a sole owner or registered vacant for at least 12 months

-Sold to a low-income household (80% or less of median household income)

-Sold to a person 62 years of age or older

-Sold to a disabled person (as defined by the ADA)

-Sold to a tenant who lived in the property for at least 12 months prior to the condo conversion

@Joe Villeneuve

Well, you are actually correct. But why does it really matter that it is new money not my cash in a refi?

All we should care is we get the same AMOUNT of funds back or more, if possible, out of a refi to continue expanding buy, improve, and hold properties and let tenants’ rents take care of mortgage payments and reserves. No?

The outcome will be the same should something bad happens to the properties. So, I’m trying to understand why do you care if it’s new money or our cash we put in not the amount what we take out of refi?

@Vince Roddy

Foreclosed. Lost the property to the auction and still living in it.

@Joe Villeneuve

Right because we have to keep 20-25% equity at minimum in them no matter what. There’s no way to avoid and take all equity out of an investment property. I look at funds being taken out of a cash out refi to fulfill what’s been put in that property and the rehab as my seed money back first before anything else.

@Joe Villeneuve

Gotcha. You were saying the same thing what I was actually referring to when talking about BRRRR. My personal interpretation of BRRRR is to buy a property then rehab then do a cash out refi getting all money back what has been put in. Sometimes, things don't work out, you end up having your seed money being stuck to the property and your message stated we need to avoid that "trap".

Honestly, that’s not achievable in DC due to their high valuations and their monthly rents are not enough to take care of mortgage payments as well as other expenses we should put as reserves, unfortunately. If I lived in your state or on other state in Midwest, I’d absolutely go that route as you described.

If anyone else thinks that can be achievable in DC, please feel free to chime in.

Arthur

@Ozzy Sirimsi

Ozzy,

Yes, I agree that I have too much in it right now but eventually later, I think it will turn into a smart decision (if you disagree, but that’s okay). I think you probably are not too familiar with the market I am in. Before we move forward, we need to first emphasize that we have the desire to remain in the area because my fiancée will be in graduate school nearby this coming fall.

Our current plan is still up in air but as of now, I’m likely leaning toward to moving in and possessing main/upper level as our primary residence after doing the excavation project for the basement lowering it so it has at least 7’ to be rentable as a legal separate unit. Once that project is complete, I will do two things:

1. Sell my current condo right across the street, which I had built 2-unit condo building from ground bottom up few years ago and get full capital gains exclusion no more than $500K since we have lived in it for at least two years. That will actually free up some cash for my future investments upon sale than if I choose to keep my condo as our current primary residence. The reason for that because it has higher market value than the one I bought even if we include the costs for excavation and rehab. In other words, I’m giving up my current condo for a 3bdr/2.5baths property that comes along a separate legal unit to rent out after the excavation project and the ability to unload some cash after the transactions. Additionally, it also gives me the opportunity to do a future potential condo conversion project as well. There’s one property zoned RF-1 about two properties away at the corner bought by a developer. I’m keeping my eyes to see what he’s going to do with it but most certainly, it will be a condo conversion of two condo units. As previously mentioned, based on comps of several 2-unit condos building in the next block and the lower unit of my condo building, bottom units were sold for $625-650K and upper units were sold for $695-700K. That’s plenty of margin to “play” with. I think that’s a non-brainer investment to make. This will more likely be my exit strategy in long term.

2. Do a cash out refi of property recently bought at 75-80% LTV getting most of my money back. Upon my calculation, I will probably have $118K rough estimate being stuck on the property (most would prefer to have at least 20% equity in their primary residence to avoid PMI anyway, right?) and pay about the same amount of mortgage what we have been paying for our condo after rental income generated from the basement.

Looking at the market rent via rentometer/Craigslist/Zillow, the main/upper floor consists of 3 bedrooms and 2.5 bathrooms has the average market rent at $3.1K/mo. As for basement, it is easily fetched at $1.2-1.4K.

When we decide to move out, we can easily generate $4K rental income a month for the entire property including basement that will be more than enough to take care of the monthly mortgage itself and several expenses as reserves. Most importantly, this is definitely a positive cash flow. What can go wrong? This will be a cash flow and appreciation will be strong given lots of ongoing developments in the area. No, I certainly don’t have the crystal ball but the feeling must be great when you see lots of developments going on and with Amazon HQ2 coming. This property absolutely hits the quadrant 2 of the buy and hold quadrant box in the The Millionaire Real Estate Investor book. If there is a recession, I’m not going to sell it. I will continue to hold it (still a positive cash flow property) and lots of students from our university alma mater from a walking distance will always need places to live nearby.

By the way, you don't see many properties achieving the BRRRR in DC due to their high valuations in proportion to what monthly rental income can be generated in the areas. In other words, it is relatively impossible to do a cash out refi getting the entire money back what you put in for the property and rehab. I'm fine with that given that it will always be a strong market and they won't plummet badly like cities we clearly saw during the financial crisis in 2008-2009.

You seem to have extensive real estate knowledge and experience. That's good and I always welcome any criticism you may have re: my plan described above. That's how I think I can learn and become a better investor. Out of curiosity, where do you usually do BRRRR projects in Maryland?

Wishing you Happy Holidays and Happy New Year!

Arthur

@Joe Villeneuve

I don’t think I understand exactly what you meant in your first paragraph? Can you please elaborate further? Yes, every refi is new money but you are going to get your amount of money you put in back after the rehab. Why does it matter that it is a new money? Not understanding here...