All Forum Posts by: Dan H.

 I read the part on valuation in the first survey you posted. It was a lot of gobbledygook. I say that having completed to post graduate degrees that are math related.

I did not see anything with regard to the value of the ADU versus the cost. What I saw is the claim the valuation of the parcel (land) increases with the ADU plus some other data that was not clear to me what was depicted.

I go to a fair amount of southern CA RE meet ups and used to go to more. I also look at quite a few appraisals with ADU additions some from people who thought their ADU added more value than cost but had not included the market appreciation in their analysis. I also see every post on BP that references ADU (it is in my keywords). I have seldom seen claims that their ADU addition valuation added more value than costs and some of those that claim it did do not hold up to scrutiny. This is in spite of me requesting numerous times that posters post their post ADU appraisal valuations. I have seen many post of disappointing valuations. This matches what I hear at meet ups. There is a local meet up that I used to attend regularly called private lending masters. Up front virtually all the lenders state they do not loan on ADU additions. My lender as well as other lenders that I have seen make comments regarding ADU addition valuation state ADUs do not in general add value equal to a hands off ADU addition cost. This includes some national lenders who have discussed ADU valuations. My view seems to be near universal for single family zoned areas in southern ca (OP has a duplex, so is not single family zoned area). It also seems prevalent of national lenders, so in general country wide.

I have heard Mr ADU (Seth Philips) claim on small MF to use psf for valuation of the ADU addition. In the appraisals I have seen on small MF this definitely does not typically hold true and I have never seen it hold true if property transitions to commercial (5 units).

Having said all this, my wife knows a RE investor that has added ADUs to some of her flips and does well on virtually all of her flips.   I will point out 1) she is not hands off 2) she is quite skilled at flips with lots of experience 3) she only adds ADUs to select properties.

In general flippers are not adding ADUs because even at the flippers reduced ADU addition costs, it does not typically make financial sense.

Best wshes

Lots of questions here. I will start by answering a question from other users. In CA I use 0.1% of value monthly (1.2%/year) and it is fairly accurate on my purchases. OP allocated more than this. I think it is a safe (conservative) initial allocation but needed to be adjusted post ADU.

For insurance, I see no reason to guess.  My insurance agent will provide rough numbers on scenarios.  I usually use their agents estimate in my underwriting.  

As for using cash, it of course improves the cash flow but in appreciating markets it hurts overall return. I work to maintain high leverage but since the rates increased have been slowly getting further from my goal of 70% LTV across the properties. I am a big fan of leverage magnifying the return from appreciation. I do recognize the dangers of over leverage but high leverage does not equate to over leverage. Even if I had 100% leverage, I would not be over leveraged. You need to use a level of leverage that you are comfortable with.

I think it is a disservice of these various calculators displaying a percent of rent as maintenance/cap ex.   Sometimes there is an inverse relationship that I will show

- scenario 1 both in same metro area:  3/2/1 in class A area that rents for $5k.   3/2/1 in class c- area for $3k.  Which will have the higher maintenance/cap ex?  it is unlikely to be the one with the higher rent. tenant class plays a role in maintenance cap ex.

- scenario 2 same metro area: a 2/1/1, 700’ beach cottage on small lot rents for $5k.   A 4/2/2, 2500’ on good size lot in good area 30 miles inland rents for $4k.   Tenants are good in both areas. The location is dictating the differentiation in price.   Which do you think will have the lower maintenance/cap ex?   More bathrooms, bedroom, foot age, lot size, etc plays a big role in maintenance/cap ex 

Where does rent figure in maintenance/cap ex?  Definitely behind tenant class and property size/layout   I used to do very thorough underwriting that calculated sustained maintenance/cap ex using a spreadsheet of replacement cost and lifespan.  For example water heater at $1600 and 10 year lifespan has $13.33 monthly allocation.  Do this on all items and you will be shocked at appropriate sustained costs.   Small attached unit such as a little studio was ~$300 month when I last calculated it maybe 5 years ago.   I would not be surprised if it is over $350/month today.  On a property, I have trees that have maintenance costs of ~$100/month (it is ~$2m unit).  my guess is two attached 3/2 units in class b area would have sustained costs over $900/month in my market.

If you do not have more than 4 units do not use NOI, cap rate to determine value. The value is determined via comps. As for ADU valuation determine the value with at least 3 comps. If you cannot find 3 comps, expect a very poor ADU valuation.

Adding one small unit is expensive. A 1/1 garage conversion at $160k is expensive and likely fairly accurate price for hands off addition. More units and bigger units would result in lower costs for what you are getting, but ADUs are small in size and small in number (excluding San Diego's just terminated bonus ADU program). ADUs are expensive development. A developer building units in mass will be able to build them at a fraction of the price that a home owner will be able to add 1 or two ADUs. It is the problem with ADUs and a big reason that adding ADUs is usually a poor RE investment.

Good luck

 It seems like you recognize this by your response so this is to clarify for others that your $500/month cash flow is based on current actual costs and is not subtracting off the projected monthly cap ex on the large items that should rarely fail (assuming decent inspections in the first year of ownership).  Instead you are putting money aside for when these expenses materialize.   This is giving a larger early cash flow than if you attempted to evenly distribute all maintenance/cap ex across every month of the items.  Example if a new roof for the duplex costs $15k in today’s dollars and is expected to last 20 more years, the monthly allocation is $62.50 in today’s dollars.  We all know that the roof will eventually need replacing.   The large cap ex items typically last at least 10 (water heater).  Some like electrical, foundation, hard scape, etc last many decades.

If actual maintenance/cap ex costs are used, the early years look great but every year that has a large cap ex expense looks bad.   It provides an inconsistent cash flow number.  However, it takes less effort than deriving estimates for each property (I used to have derived estimates for each property).  Today, I simply use total expense/vacancy excluding P&I of 40% of the rent (I am in a high rent market, in many markets I would use 50%, in cheap or lower class areas (below class c) I would use greater than 50%).   It is fairly accurate across all my properties, but I have some that clearly do better and some that clearly do worse.  Note I do not expect newly acquired properties to have significant maintenance/cap ex when initially placed into service under my ownership, but I attempt to evenly distribute those known future expenses evenly across every month.

best wishes

 This could be the outskirts of San Diego which is my market.  

Your rents seem accurate. Insurance varies significantly attached versus detached but I will assume accurate numbers. You did not update your property tax for the adjustment after adding the ADU. That will be close to $2k/year at your cost. You also did not increase your mortgage with the ADU build. Are you paying cash and going unleveraged on the ADU edition. Unleveraged significantly impacts the return from appreciation. Your maintenance/cap ex is far too low if going sustained costs (full lifetime of all components). Your allocation Is below what I use for an attached 2/1 triplex.

ADU additions are often one of the worse RE investments. The big issue I see with the ADU addition is it is likely going to add less value than your costs. It is a primary reason so few experienced flippers are adding ADUs and their ADU addition costs would be significantly lower than your costs. ADUs are often adding less than 50% of the hands off costs. In your case this means a negative $80k equity position. With the current high interest rates on ADU addition loans, at high LTV I am unconvinced that the ADU will be positive cash flow. $2000/$160000 =0.0125, 1.25% monthly rent ratio. My underwriting shows you need better than 1% on traditional conventionally finance to hit cash neutral. With the higher rates of ADU financing, that is certainly not going to have much cash flow if financed at high LTV. This implies negative $80k equity position will likely take decades to recover using only the ADU cash flow.

Here is a list of why adding a single ADU in my CA market is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

good luck

There are 2 common no fault evictions in AB1482.  No fault evictions cost 1 month’s of rent either by forgiving the rent the last month (do not use this option) or paying the tenant a month of rent at move out.

1) move you or close family into the unit

2) rehab extensive enough that tenant cannot reasonably live in the unit through the rehab

The issue is the current owner cannot give the notice using criteria #1 because they are not moving into the unit.   If tenant is given notice using this criteria, they can rightfully get damages, etc.

After you acquire the property, give the notice of the M2M unit and move into the unit 60 days later as required by AB1482.

For the other unit, either raise rents as allowed by AB1482 or rehab the unit to get the tenant out.  Raising rent consistent with AB1482 will take a while to get to market rent.   When rents are increasing significantly, your max rent increase may not even keep up with the market increase.   Rehabbing units is costly, but can produce sweat equity.

good luck

 Low entry point typically equates to poor flipping opportunity.   A good flip is where you can add significant value for the amount and effort of the value add.

So if I was going to flip in Ohio, it would be in the higher priced areas.  Columbus might have some decent opportunities.  Look for a wreck in a nicer area.

I watch various flipping shows.   I like many of them.   The lady in Detroit area who restores to classic often does not disclose their return.  The ginger lady and her mom that recently retired produce modest returns.  The hometown couple does rehabs for their clients.  Compare this to flipping el Mousas, flipping 101, renovation aloha, the couple that flipped in Vegas, etc.   It is not rocket science to see where the flips can create great returns versus where the flips generate modest returns.

I did a rehab a year ago in a very costly market.   My wife proposed adding a half bathroom out of existing space in a very small unit.  We used comps to determine the half bathroom would add ~$50k of value.  Crazy!  Easy decision.  How much do you think adding a half bathroom out of existing space would add in a low cost market?  Would it be worth the effort.

Do not buy in a cheap area and expect a flip to provide outstanding return for the effort.   The properties are so cheap that value adds are constrained in the value that can be added.

good luck

In 2010 3% rent to cost ratios were possible and 2% was easy to find (why the rule was initially the 2% rule) when 1% would have cash flowed.

Today in some markets you can find 1% ratio but at today's rates these are still negative cash flowed at high LTV with proper underwriting.

In 2010 virtually all residential purchases cash flowed.  In 2025 it is a rare residential property that cash flows with proper underwriting.

anyone that thinks today’s market is similar to 2010 is delusional.

Best wishes

Depending on the value of the duplex,10% ownership seems high for managing a rehab.  Normal GC varies from 20% to 25% of the rehab in my market but that is for a professional with their various contacts.   Even large successful syndicators charge far less than 10% of total asset value as acquisition fee. They also charge an asset management fee which is your management fee.

The 10% of asset value likely comes down how great the purchase was. For a common MLS purchase, it is far too high. Was this listed on the mls? I Think for a killer off market purchase10%may be justified anything from the ml and t is way too high (look at syndication offers acquisition fees for a reference).

I assume you will be paying market rent.

As for PM fees, in my high cost market all inclusive (meaning including tenant turn over, re-lease, inspections, etc) PM (meaning licensed, insured and associated with a brokers license - in my market these are required to be a PM and handle money (but as owner you can handle the money)) fees are typically 6% to 8%.  LTR co-manager (meaning at least one of not licensed, not insured, or not associated with a broker license) typically isn’t more than 5%. 

Then recognize that you are the occupant of one unit out of two units.   This would greatly reduce the PM effort as you are dealing with one tenant.   I would use 60% effort of managing 2 tenants.  60% of 5% is 3%.  That would be fair co-manager in my market in the situation described.

Find out what is charged for an unlicensed manager in your market (our fees are low because our rents are high and tenants are easy to deal with).   Then take the reduction for occupying one unit (use somewhere near 60% of the total usual co-management fee).  That is the appropriate charge.

Good luck

Note the OP is not complaining about the valuation given to the property as it is $50k over his contract value.

Have you ever got a DSCR loan? Your statements are true for conventional loans. DSCR loans are based largely on income even in single family. Granted you will not be able to get a DSCR loan above comp value. So the loan limit is in effect the lower of the two calculations.

On a DSCR loan the more you are above 1.0, the better terms you will get and the easier it is to obtain the loan.

In the OPs case, the income produced at the appraised rent point could make a DSCR not optimal. However, if you cannot qualify for a conventional loan, the DSCR is the common funding for investment properties.

The low rent valuation is a concern to the OP because he intends to use a DSCR loan.

I like DSCR loans because my dti is crazy high (over 500 to 1), my income is modest (the reason my dti is crazy high), I already have 10 conventional loans, and the required paperwork is on the order of 1/3 of what is required for a conventional loan. This is at the cost of slightly worse terms, but in my case I cannot get a conventional loan.

Good luck

 > I do think it is common sense that the rent should be higher, if ALL active listing within 1 miles are over $1400 per unit

You think that but 1) you want to ignore the current rent operator (the previous owner) was charging this amount.  It sets the best comp there is.  It is little difference than if the property next door sold last week for $50k less than other comps.   It is a top comp (near, recent, etc) regardless of the motivation of the seller. 2) units that are up for rent have been tenant flipped and are typically in good shape.  Any carpet usually replaced, walls painted, repairs made to everything.  Your units have 10+ years of occupancy.  I expect the tenant flips will be expensive and take significant time.  I expect in the units’ current condition you would get far below market rent. I had a unit turnover late last year that needed a unit flip not a tenant turnover.  We had a family that offered to rent it for $700/month less than rehab market rent in its current condition which would eliminate vacancy and the costs of the unit rehab.  We turned it down because we do rehabs often and benefit from the value add. The rehab cost $40k and placing the tenant took a total of 2.5 months (about half on rehab and half acquiring replacement tenant and having them move in).  market rent prior to the unit rehab was probably fairly close to $700 less than the rent comps. That is what someone was willing to pay to rent that unit.

Condition has a role in determine fair market rent and I suspect is why your rent appraisal came in low.  I guarantee the appraiser knows that an extra BR typically gets more than $5/month in rent.  Does your appraisal have a current condition entry?   What does it list the current condition?  Note fair is actually bad, bad is horrendous.  

Good luck