All Forum Posts by: Jon Schwartz

 Anton,

These are some exciting problems to work out!

Let me give you some general advice, then help with some back-of-the-napkin math.

Adding two units and creating a 5-unit property is risky not because the buyer pool is smaller (there are ample buyers for every property in CA!), but because it's unclear where lending will be in 5-6 years. Currently, stepping up from residential to commercial via ADU additions is a huge grey area (correct me if I'm wrong here, anybody!). Most commercial lender don't see this is a commercial property, and most residential lenders don't see this as a residential property. The issue will hopefully be cleared up before you want to sell, but you're taking on the risk that it won't be.

For these reason, I'd pursue the ADU, maybe pursue the addition, and ditch the JADU idea. You're correct that the owner must live on the property in order to rent out the JADU. That's clouds up the property's value on top of the residential/commercial confusion -- so just ditch the JADU idea, I say.

I would solicit more construction quotes, too. $500K for a renter-grade garage conversion is quite high. You could build a ground-up new structure for $500k! And adding 100 square feet and a bathroom for $400K?! You realize you'd be paying $4000 per square foot, right? That's highway robbery! Unless you're building your high-end dream home, you should not be paying this much, even in CA!

In terms of the math, let's look at return from rental income and return for equity:

For each item, calculate a year's return, and there's your approximate ROI

For the ADU conversion: ($4000/month x 12 months)/$500,000 cost = $48,000/$500,000 = 9.6%

That's before expenses, which will cut that number down by several points. If the ADU actually costs you $500K, it's barely worth it in terms of cashflow. If it costs $250K, however, $48K/$250K = 19.2%. Now we're talking about a solid return on investment!

For the home renovation, do the same math, but with the difference in rental income. Looks like this:

$5000-$3600 = $1400 in additional rent

($1400/month x 12 months)/$400,000 = 4.2%

If that renovation is going to cost you $400K, no way is it worth it! If that's a typo and the reno is actually $40K, which is closer to what it should be, the numbers are killer: ($1400 x 12)/$40,000 = 42%! That's a no-brainer! The ROI is HUGE.

In terms of comps, you should really be looking at the additional income you'll be generating and how that will impact the value. Residential multifamily is partially appraised by comps, partially appraised by the amount of income it generates. The more units, the more your potential buyers will just be looking at the income.

So the math is like this:

You bought a property that generates $8000/month for $1,500,000. Your purchase price was 15.6x the annual gross income, so this property sold at a 15.6 gross rent multiplier (GRM).

If you do the renovation and add the ADU, the property will generate $13,400/month ($2200 + $2200 + $5000 + $4000). Assuming the neighborhood doesn't change substantially and still warrants a 15.6 GRM on its buildings, you should be able to sell the property for $2.5M ($13,4000/month x 12 months x 15.6 GRM).

So if you bought at $1.5M, spend $900K on the renovation and ADU build, then sell for $2.5M, you haven't really earned that much for your efforts.

So, yeah, these improvements don't seem worthwhile at the prices you've been quoted, but again, your quotes seem wildly high. You should be able to add a bathroom and 100 sq ft for under $100K and convert a garage for under $300K. At those numbers, the improvements make all the sense in the world.

Good luck!

Best,

Jon

Spencer, 

For sure your best move here is buying a ramshackle SFR and renovating. Building from scratch is expensive and slow; you'll be in permitting for months and months before breaking ground.

I'd look for single-family homes with an existing structure that can be retrofitted and permitted as an ADU.

$250K makes for a tight budget to buy and renovate if we're talking about creating an ADU. You'll want to keep you down payment low, and currently, the conventional borrowing limit for LA County is $970,800. If you stick to the conventional minimum of 5%, you're looking at a max purchase price of $1,021,895. With closing costs, you'd be putting $71,500 into the purchase, leaving you with $178,500 for the renovation.

Buying a duplex would allow you to borrow up to your limit, but you'd have to put 15% down, so you'd have much less left over for the renovation -- though you'd need less if you're not creating an ADU!

Best,

Jon

Here's the deal as I understand it:

The FHA isn't going to keep tabs to make sure you live in your property. To keep your tail clean, you probably should move in within 60 days. But if you move out and rent the unit a month later, the FHA isn't going to catch you.

However, you won't be able to get another owner-occupant loan for a year. If you try to get another loan, even a conventional one, and the lender sees you have a six-month-old FHA loan, they won't write you a new owner-occupant loan.

So where you physically sleep isn't something the FHA will check up on. However, you won't be getting any new FHA or conventional owner-occupant loans until a year in.

Best,.

Jon 

I don't think the FHA is going to be checking up on you...

$230K for a ground-up one-bedroom ADU is definitely reasonable.

$9.5K to exterior paint a 2-story SFR is reasonable. How many square feet is the home? What is the siding?

$28K for a roof is a lot. How large and what kind of roof?

Best,

Jon

You should keep it as an individual. The loan is in your name; for simplicity's sake, keep the property in your name. Otherwise, your lender might call the loan.

For protection, take out an umbrella policy with your insurer for the full amount of your net worth. It'll do you better in an unfortunate scenario than just parking your property in an LLC.

I live in a duplex and didn't open an LLC. Actually, my duplex is owned by my living trust, but that's for probate purposes (in CA, if you own property and have children, it behooves you to put the property in a living trust so that it's doesn't have to go through probate court if you die.)

Best!

Jon

Allen,

As a fellow Angelino, I suggest selling one or both of your condos and investing the proceeds in either A) a multifamily in an affordable, gentrifying neighborhood in LA (like Inglewood, San Pedro, West Adams, El Sereno, etc) or B) in an appreciation out-of-state market.

I'm sure you have a lot of equity in those condos, and with your equity position up 100%, you may as well move on to new pastures with the funds in 2022.

Best,

Jon 

Nathan,

House hacking a duplex near Sun Valley is going to be expensive. Most Sun Valley duplexes listed currently are $1M+.

It comes down to finances. I'd talk to an LA lender about what kind of mortgage you'll be able to qualify for as a seminary student.

For down payment funds, do you have any equity in your Lancaster property that you can pull out with a refinance or HELOC?

One nice thing about LA is that, because it's so expensive, there's a huge infrastructure here for out-of-state investing. There's no shortage of locals here with strong connections to out-of-state markets. I myself can refer you to excellent teams in Columbus, OH and St. Louis. If your funds limit you to less expensive markets, you can definitely keep busy even while living in LA.

Best,

Jon

This is what you're looking for:

https://ttc.lacounty.gov/wp-co...

LA County doesn't have an STR ordinance on the books yet, though one is expected to be approved summer 2022:

https://ttc.lacounty.gov/wp-co...

If you're in unincorporated LA County, you can do pretty much whatever you want.

If you live in an incorporate city in LA County that's not LA (like West Hollywood, Culver City, Pasadena, Glendale, Long Beach, etc...), you'll want to search for any municipal ordinances. For example, the city of Lawndale has a complete ban on short-term rentals (if I'm remembering correctly).

Best,

Jon