All Forum Posts by: Leo R.

@Koree Scott the prices of labor might be a lot higher where you live, but 100k-150k seems high to me to convert a garage...I'm not a contractor, but I've hired plenty of contractors, so I'm reasonably familiar with a lot of their costs...I'd suggest running the details of your conversion by some of the contracting pros on here and asking them if that price seems on-point.

I agree, 2050 sq feet would probably be cramped with 5 bedrooms...

Instead of adding bedrooms, would it be possible to add a bathroom or two--and if so, how would that affect the functionality of the property? I know that in some rental situations (like rent by the room), having more bathrooms can often greatly improve the livability of the house...

@Dustin Street (and anyone else who knows the KC market)  

--For the properties that hit the 1% rule, what grade are the properties, and what grade is the neighborhood?

Thanks!

@Mahdi Mike zip code alone would not be a very precise way of estimating vacancy--because there can be highly desirable neighborhoods (low vacancy) and completely undesirable neighborhoods (high vacancy) within the same zip code. In fact, sometimes just crossing a street can be the difference between low and high vacancy.

In my experience, nothing beats boots-on-the-ground familiarity with a city and its properties. Experienced real estate investors know their markets like the back of their hand--they know which areas are trendy, which are not, where the employment is located, where the amenities are, which areas have the best schools, which areas have the highest crime rates, the average income in various neighborhoods, the aesthetics of each neighborhood, what types of tenants are likely (or unlikely) to want to live in a particular neighborhood, etc., etc. ...all of these things can impact vacancy.

Additionally, there are countless factors related to the property itself that will impact vacancy. For instance--what grade is the property, how many br/ ba does the property have, what is the rent price (and what's the market rent), how well is the property marketed, what type of floorplan does the property have, do the characteristics of the property match the demands of the local tenant pool, etc., etc.  Two properties can be in the exact same location and have completely different levels of vacancies depending on these types of factors.

Good luck out there!

@Liam Spears EXCELLENT idea to start on this journey now while you're young (the longer you wait, the more difficult it becomes).

I suggest pursuing four basic steps:

1) Go all-in on learning about house hacking, property analysis, and residential REI asap (this will cost you almost nothing; read articles, books, listen to podcasts, etc.). I suggest house hacking over other strategies (like flips or BRRRR'ing) because house hacking is comparatively straight-forward, relatively lower risk, and it will teach you all of the fundamentals of REI that you'll need to know later on (e.g.; how to find a good agent, how to analyze properties, how to engage in thorough due diligence, how to manage a property, etc.--if you want to be a successful RE investor, this is all ESSENTIAL stuff to learn first-hand!).

2) Once you understand the financials of house hacking, and you know roughly how much $ you need to acquire a cashflow-positive, house hack-appropriate property, talk to mortgage brokers to find out exactly what you need to do to qualify for the amount of money you'd need.  Then, do what they say. (again, this will cost you nothing; good mortgage brokers will be happy to tell you what you need to do to qualify for $X.  Over the years, my primary mortgage broker has given me a free education that's paid off WAY more than many college degrees).

3) Once you're eligible to qualify for the amount you need, buy a property and house hack. To maximize your returns, occupy the least valuable spot in the house (this is a lot easier to do as a young adult than when you get older). 

4) Every 12 months, buy another property and house hack again (renting out the prior property). Rinse and repeat until you hit the limit on owner occupant mortgages (usually 10). As you gain experience, you may decide to try out more advanced strategies (like a live-in BRRRR), but get the experience of house hacking FIRST before moving into more advanced strategies. House hacks will teach you a LOT of lessons that will help you avoid making big mistakes with the more advanced strategies (assuming you ever decide to try out the more advanced strategies--which isn't always necessary...plenty of people have built considerable wealth via nothing but repetitive house hacking).

If you study up and execute correctly, you can build a solid portfolio of  (at least) 10 cashflowing, appreciating properties in about 10 years by the end of the process, and the process will turn you into a lean, mean, real estate-investing machine!

Good luck out there!

@Koree Scott do you have any quotes on roughly what it would cost to do either of the conversions you mentioned?

Once you have cost estimates, calculate the ROI on each (both in terms of the impact on cashflow, and the impact on property value), and then you'll have a better sense of the desirability of each option.

Also, you're correct to think about how these types of conversions could affect the "flow" and functionality of the property...it's difficult to know this from the photo you provided, but definitely put some thought into how people will use the property after the conversion, and how the conversion will affect the livability of the property.

You'll want to consider things like:

-How would it affect the "flow of traffic" through the property? For instance, if the new bedroom would be right next to a kitchen or other area where people congregate, then that might make the bedroom less desirable to a tenant. Or, if the new ADU could only be accessed by walking right by the window of every bedroom in the house, that might make things weird..but, if the new bedroom/ADU would be off on its own with plenty of privacy, separate from most traffic, then that could work out great...

-What's the total sq footage of the house, and can it "support" an added bedroom? For instance, if you had a 3 br house with only 1500 total sq ft, then adding another bedroom might make the house pretty cramped (4 housemates in a 1500 sq ft house sounds tight)...but, if it's a 3000 sq ft house, there might be plenty of space for an added br...

-How easy are these conversions? If it's as simple as adding a non-load bearing wall, then that would obviously be cheaper, quicker and easier than a project that requires structural re-engineering of new load bearing supports, addition of a new sewer line, adding extensive electrical HVAC & plumbing, etc. Similarly, would the ADU require its own HVAC system, or would it be combined with the existing system in the house?

...in a nutshell, consider things like: 1) the cost & complexity of the operation, 2) how it will affect the "flow" and functionality of the house, and 3) the ROI (based both on its effect on cashflow & property value).

I've done these types of conversions before, and sometimes they pencil out great and add a ton of functionality to the house...but, there are also properties where it just never pencils out and/or would ruin the functionality of the house...

Good luck out there!

@Avery Heilbron congrats on building up the portfolio!

Your conundrum is pretty common these days, I think (I've been facing similar issues).

It is hard to find a HELOC for an investment property, but it IS possible (at least it is in my area)...but, I did have to call around to a LOT of banks and credit unions before finding one that would do a HELOC on a rental property.

Personally, I'm hesitant to sacrifice cashflow and low locked-in rates (esp. since the old sub-4% rates may be the best rates we'll see in our lifetimes)...but, it's a balancing act; if a person can get enough cash to acquire another property and only sacrifice a relatively small percentage of their overall cashflow in the process, then it may be worth it...

If the numbers pencil, they pencil...personally, I'm not seeing much pencil out right now, but prices may come down as the market adjusts to the higher rates...

Good luck out there!

@Seth Taylor I've used rentprep.com for years; I find their system pretty simple and easy to use.

Also, C class or lower is EXTREMELY risky, and usually not advisable (and this is 100x more true for inexperienced investors).

Read the forums, and you'll find plenty of horror stories from inexperienced investors losing their shirts on C and lower properties.

@Prabh Virk age of the property does not determine grade of property. There are many A grade 100+ year old houses, and D grade 10 year old houses. Although a newer house can have some advantages, they can also have some serious disadvantages--age alone does not determine whether a property is "good" or "bad". I've seen plenty of 100+ year old houses that would be great investments, and plenty of 10 year old houses that would be horrible investments; age alone doesn't mean much.

Appraisers have a structured way of assessing the grade of the property--and, you can probably find info online about how appraisers grade properties. But, many investors use a more informal approach...things that impact the grade of the property include:

Location, location, location (the three most important rules in REI). Generally, I'd rather have a C house in an A area than an A house in a C area. Things that impact the grade of the location include: proximity to amenities, crime rates, average household income, proximity to employment (and the type of employment), aesthetics of the neighborhood, proximity to restaurants, shops & bars (and the quality of those restaurants, shops & bars), proximity to schools / colleges / universities (and the quality of those institutions), the grades of the surrounding properties, etc., etc. An experienced real estate investor will know the neighborhoods of their market like the back of their hand, and knows the grades of all the neighborhoods... Also, in many cities, the less desirable neighborhoods have relatively newer houses, whereas the most desirable neighborhoods are in the oldest part of the city (where most homes are 100+ years old)--in which case, it's almost impossible to get a property in an A grade location without it being a very old house.

The quality, condition, and style of the building, its interior finishings, and its internal systems (e.g.; plumbing, etc.). Is the building a manufactured double-wide, or a custom design with top-tier architecture and materials?

The size of the building and the size of the lot. Also, the quality of landscaping on the lot.

The topography/geography of the lot and surrounding area --for instance, is it on a majestic bluff overlooking the ocean with million-dollar views, or is it a flat lot overlooking a flat empty field?

The overall "feel" of the property...this is somewhat subjective, but some houses are incredibly well-designed and have great aesthetics, floorplans, and functionality...other properties are poorly-designed, lack aesthetics, have awkward floorplans and poor functionality. One of my properties is quite small (only 1100 sq ft), but it feels and functions like a MUCH larger house--I've been in 1800-2000 sq ft houses that feel much more cramped.

The best way to familiarize yourself with property grade is to view a LOT of properties in a LOT of neighborhoods (just looking at photos isn't enough, because photos do a poor job of conveying the quality of the location--which is arguably THE most important factor).

Good luck out there!

Yeah, I agree it's possible to make reasonably accurate appreciation projections (though, even experts get it wrong)...either way, the bigger the speculation, the bigger the person's net worth needs to be to absorb the hit if the speculation is inaccurate.

Warren Buffet can afford some speculative plays...most of us are not Warren Buffet.