All Forum Posts by: Eddie Torres

@Jack Lee Like others have said, there isn't necessarily a set amount of time needed to wait before applying for another loan however many lenders require you to have rental income for at least a year before they can count it as "income." Let's say the mortgage on your investment home is $1k/mo and you're renting it for $1500/mo, if it's less than a year, that $1k/mo will count against your DTI and give you overall less buying power potentially. If you have the loan more than a year, that $500/mo will now count as income and help lower your DTI. Some banks might be different, but that's how mine was.

@Jason Holtzinger I bought out of state last year and so far it's one of the best decisions I've ever made. I also live in the Bay Area.

@Michael Bridgett Does your lease say anything about this? I think you're being reasonable by giving her plenty of notice. It's unreasonable for her to expect you to come and unlock and lock the place up every day for 3 weeks just as it's unreasonable for her to take 3 weeks off from work. If the county is requiring the work, then you're doing what needs to be done. I'd make sure to tell her to either remove or lockup anything of value so that's not an issue or have her buy an indoor camera if she's concerned about theft. If she's concerned with the contractor possibly making a copy of the key, just change the locks after the work is complete. Keep the old locks to reinstall if you ever have any additional contractor work done. That's more than accommodating. That's just the price you pay for being a renter. There's a level of privacy that you don't retain like you do with ownership.

@Jonathan Rabot I agree with the above comments. I also wouldn't buy the property if the value of the ADU is reflected in the purchase price. Meaning if it compares in price to a similar house in the area WITHOUT an ADU, I'd consider. But I'm not going to pay for something that is valued in price and is unpermitted. For one, the square footage or value of ADU can't be included in an appraisal since it's not permitted and you'd have to be prepared for potential consequences if the city cracks down. Worse case like mentioned would be you having to completely tear it down. Another thing is if it's unpermitted and you're renting it out and something happens like a fire, are you more liable due to it not being permitted? Idk the answer but it's something to think about.

Quote from @Jerome Morelos:

Quote from @Eddie Torres:

@Jerome Morelos

Yes. I want to add an ADU on top of my existing garage. I'm applying for the 2nd with Transportation Federal Credit Union. They offer LTV up to 95%.

How appraisers add ADUs to property values seems to still be a challenge. It'd be so simple if they just added the value based on square footage but they don't. Best general rule of thumb that I've heard as far as expected ADU value is you multiply what you can rent it for and multiply it by 100. So if you can rent yours out for 1500, your estimated additional value after ADU build is about $150,000. This obviously can vary but this gives you a good idea. That being said, every county has their own property tax rate. You have to find out what your tax rate is for your county and multiply it by your estimated after build value.

Yea the grant used to have that requirement which is why I steered clear. Like you, my rate is at 3.25%. Since the state only issued a grand total of 19 grants since the program started, they probably realized it wasn't realistic. So they just changed the requirements over the last week or so. You can qualify for the grant now even if you build your ADU with cash, a 2nd or HELOC, or a combination of both. They qualifies almost anyone assuming you meet the income requirement and they are pretty high so most should qualify.

 I will check out that lender, thanks.  Yes I just found out about the change with the grant and will definitely take advantage of it.  Did you pay a lot of fees/closing costs on the Home Equity Fixed Loan? I heard the fees are a lot higher compared to HELOCs 

I am currently in the process of this loan closing. Closing costs are estimated at $2347.00. That's with the appraisal included. Title insurance is also required.

@Jerome Morelos

Yes. I want to add an ADU on top of my existing garage. I'm applying for the 2nd with Transportation Federal Credit Union. They offer LTV up to 95%.

How appraisers add ADUs to property values seems to still be a challenge. It'd be so simple if they just added the value based on square footage but they don't. Best general rule of thumb that I've heard as far as expected ADU value is you multiply what you can rent it for and multiply it by 100. So if you can rent yours out for 1500, your estimated additional value after ADU build is about $150,000. This obviously can vary but this gives you a good idea. That being said, every county has their own property tax rate. You have to find out what your tax rate is for your county and multiply it by your estimated after build value.

Yea the grant used to have that requirement which is why I steered clear. Like you, my rate is at 3.25%. Since the state only issued a grand total of 19 grants since the program started, they probably realized it wasn't realistic. So they just changed the requirements over the last week or so. You can qualify for the grant now even if you build your ADU with cash, a 2nd or HELOC, or a combination of both. They qualifies almost anyone assuming you meet the income requirement and they are pretty high so most should qualify.

Quote from @David Maldonado:

Hey everyone,

has anyone tried to buy a large tuff shed or steel home kit and turn it into an ADU? There are tough sheds as big as 2 stories and 1000 sq ft. I also saw that home depot has a bungalow style 1000 sq ft steel home kit and it specifically mentions ADUs. According to the description is that they will design the unit in accordance with your local code. This can be a game changer for me because I am an owner builder and I only sub out the work for the structure. Once the structure is up, I diy the rest. I'm calling the city on Monday to ask but I'm just curious if anyone in California has tried it.

Keep me posted as well. I imagine there is still ton more cost involved like site prep, utilities, plumbing, electrical etc. But again, let us know how it goes. I'm in the market to build an ADU myself.

Quote from @Cindy Tansin:

Any recommendations?  Any experience with the kits that are built onsite?

Are you talking about companies like Boxable? You still will need a permit for everything so hopefully you've done research on what is allowed in your particular city.

Quote from @Jerome Morelos:

I'm debating on whether to use a HELOC or a Home Equity Fixed Rate Loan to finance a garage conversion ADU. I am in the process of getting bids for the 350 sq ft garage conversion ADU, but I'm expecting 70-85k. Could rent it for $1,500. What are your thoughts on my 3 options below:

1) Use a HELOC to finance a garage conversion ADU. Use the cash flow from that + my W-2 income to save up for another value-add, owner-occupy property. As soon as there's enough equity, refinance and pay off the HELOC on the first. Issue of course is the ARM on the HELOC, but I get the flexibility and interest-only payment option.

2) Use a Home Equity Fixed Rate Loan to finance a garage conversion ADU. and repeat the process in option 1. The interest rate will be higher than the HELOC, but with the peace of mind of a fixed rate. I've gotten quotes of 7.35%, term 20 years. I also won't have the flexibility of the HELOC and will be required to pay P+I on the lump sump borrowed from the gecko.

3) Hold off on the garage conversion ADU and use a HELOC to acquire my 2nd value-add property instead. The opportunity cost would be the cash flow from the ADU. This is all in SoCal, so that cash flow would be nice.

I am pretty much in the same boat as you and this is what I am currently in the process of.

I chose to go with a 2nd fixed mortgage. My credit union is offering one with a rate of 5.75% over 20 years. I am choosing this based on the climate of the current market. I can probably cash flow the ADU at around $1k a month but of course I have to wait around a year for it to be built but I'm ok with eating the payments during that time.

The drawback with a HELOC is the rate is variable and that's not good with rising interest rates. A HELOC can also be "called" at anytime which rarely happens but can happen. A credit line can also be frozen at anytime and that has happened often historically especially around the time of the last crash. So, unless you are withdrawing a large sum in the beginning that will basically cover the ADU, you are at risk of having a frozen HELOC especially if the real estate market tanks and it's already starting to cool. It would be a terrible situation to be in the middle of building an ADU just to have your HELOC frozen and no funds to continue building. When borrowing money these days, fixed rate debt seems to be the safest.

Having the 2nd amortized over 20 years makes me treat this investment kind of like a regular rental investment purchase. Sure I can pay it off early but if not, as long as it cash flows, I can just keep this loan for the full 20 years and focus on saving my own funds on another investment purchase. If the ADU is on your owner occupied property, you can also now take advantage of tax depreciation based on the percentage being rented out so there's that benefit as well.

Another thing to note is that when the ADU is completed, your property value will be re-assessed and your property taxes will go up slightly so keep that in my mind when calculating your cash flow numbers. Also, in the 1st option, there's no telling what your equity will look like in 5 years. Values seems to be going down slightly and may continue to do so. You will have increased equity eventually, but it might be a longer timeline than you anticipate.

Lastly, if the ADU is going to be in CA, check out HPP Cares. Through them the state of CA is offering grants of up to $40k for adu building. The $40k can only be used for "soft costs" such as site prep, permit fees, etc. It cannot be used on actual construction costs. Hope this helps.

@Andrew Perkins I'd personally hold the rentals especially with inflation being so high. Not to mention you'd lose the tax depreciation benefits if you sold.