All Forum Posts by: Rick Albert

The challenge with the FHA guidelines is the self sufficiency test. Basically 75% of the total rents need to cover all the bills. The numbers don't really work. This only applies to 3-4 unit properties.

I think you are on the right track, as this is an equity play. There are a few different avenues that my clients have been exploring, including getting unpermitted units actually permitted. I had a house hack client do that a while back where the 2-bed unit wasn't permitted. It cost about $100K, but it would have cost around $200K if she were to do it from scratch.

 I just attended a webinar and the attorney made it very clear that it would. Keep in mind in Los Angeles if something isn't permitted a tenant may make an argument about the unit not being habitable. Then that is a different story.

If anyone is giving you advice to not permit it and you intend to rent it out, then you need to fire them. Your agent, your architect, whoever. 

If you rent that out without a true Certificate of Occupancy, a tenant can sue you for ALL of their rent money back. 

Also double check on the ADU size restriction. They loosen the guidelines last year and made it much easier to get ADUs permitted.

The other major risk by not permitting is if you decide to get it permitted later on, it is likely going to be more expensive. Building codes change and labor and materials go up. When I bought my place, at first you could tie the sewer line to the main house. That cost would have been around $3K. By the time I closed, building codes changed and it required an independent line. That cost $7K. Keep in mind this is 2018-2019 prices. 

You are also opening yourself to major liability. How do you know if the electrical was done correctly? Plumbing? The benefit of a permit and inspections is to have an independent party verify work. 

So there are a couple of things to think about here:

1. Be careful with these posts, this is when all the real estate agents come out saying their market is best, when it might not be. It is a sales tatic.

2. You can arguably make it work in any market. I have properties in a few different markets. For example because New York is a generally more expenisve market, you have larger loan buy downs, bigger dollar appreciation, etc. An argument can be made that you will generate a higher net worth there than say middle of nowhere Alabama.

3. What you want is what everyone wants. No market can promise you this. I recently bought in Saint Louis thinking it was a great market and it has killed us for example. 

4. Check out howmoneywalks.com and see where people are moving to. 

5. Honestly think about the lifestyle you want. If you are willing to move keep in mind you have a life to live. Don't move and be miserable.

You can make it work pretty much everywhere, you just have to get a little more creative.

I know the dream is to only live there for a year, but with putting so little down, most properties right now aren't cash flowing enough. Think about it, if the numbers work at 3.5% down, why wouldn't an investor putting 20% down just buy it?

I would be focusing on adding value into the homes you are looking at. I'm not talking about cosmetic fixes, I'm talking adding bedrooms within an existing floor plan, creating a second unit (like an ADU), etc. That's where you will gain in cash flow.

So you are openly stating that you want to commit loan fraud. The fact that you are working with a loan officer who is coaching you on committing fraud, you may want to change your circle of influence. 

I apologize if it comes off as rude, but I really just want to drive the point home. 

In terms of getting priced out here, what kind of house hacking strategies have you looked into? City National Bank has a $50K grant program for homes in certain neighborhoods. That can be used to buy the interest rate down to make the home more affordable. It is for those who do not own any properties. 

 Please do because in Los Angeles our rate went UP because of the multifamily. 

 If you piss off someone, they will enforce it. There is a neighborhood in Los Angeles where there are very old covenants that state you can only build a single story home. There are newly built 2 story homes on that street. My developer was going to be a two story home but a neighbor complained because it would affect his view and cited the wording. An attorney said it would be expensive to be right so the developer built a single story home with the highest ceilings possible. 

I have another client who was renting by the room. There is a city wide ruling that it isn't allowed. The tenants threw a party and neighbors called it in and now he is dealing with the City on how to address this.

What we think should and shouldn't be enforceable isn't relevant. The rules are there and it only takes one person to say something. 

If I were starting over in your market, I would 100% focus on house hacking in San Diego. You match money four different ways:

1. Cash flow

2. Appreciation

3. Loan Buy Down

4. Tax Benefits

San Diego is an expensive market. Therefore you are going to have bigger gains in appreciation(3% rent/value appreciation on a $1M asset is dollar wise bigger than a $100K property) and you are going to have bigger loan buy down. This generates wealth FASTER. Then from there I would leverage and use that money to buy out of state. That's what I did and I wouldn't change the strategy.

As far as properties, look at opportunities to add more units/bedrooms. Years ago I saw homes in areas like Lemon Grove with large floorplans and limited rooms. You would easily add another 2-3 bedrooms.

Look just outside San Diego. As San Diego gets priced out, tenants and home buyers have to go somewhere. 

$85K seems extremely low for a garage conversion. Typically it is at a minimum $100K but likely closer to $150K and that's with no addition. An independent sewer line alone can be as much as $10K. My hunch is that's $85K for the garage itself before plans, permits, engineering, sewer line, electrical panel, etc. 

The thing with ADUs is it is for cash flow. I have an ADU on my property and it was the best thing I did. But I did it pre inflation so the total cost was around $75K at the time.

The question is really about opportunity costs. Can you use that $85K towards another property that would generate the same or more cash flow. Even if it is slightly less cash flow, you now have a second appreciating asset. Plus the challenge with mid term is you are generally on the hook for things like internet, utilities, etc. That can hurt your cash flow and could equate to the same as a traditional long term hold without the headache and management.

I'm not saying don't do it, I'm saying you have to look at all options.