Buying first home / investment property

[Carlos Manuel]

Hello and good morning bigger pockets fam, I am seeking guidance and thoughts into starting out in real estate. I am currently in San Diego and wondering how I can afford a duplex or single family home which I can value add an Adu. I am thinking about house hacking renting out rooms once I get into the property. Also, I payed my mom’s mortgage on her primary which I can rent here in San Diego which would help with the mortgage but I rather not use that in the calculations to avoid over leveraging myself. I know it’s harder to find a duplex that makes sense but that’s what I’m leaning towards. I want to invest in my own city I make 130k a year roughly which is increasing every year by about 3 percent. Thoughts?

[Dan H.]

Thoughts

- ADU additions are not usually value adds. They typically add less value than the cost of adding an ADU. Make sure you know the value that will be added by an ADU before adding it. It is cheaper with better financing to purchase a property with an existing ADU than add one. You may be able to find properties that only have $50k value added from the ADU. Also make sure you understand everything about adding an ADU including value of the ADYPU, financing, impact from rent control, duration between initial expense and initial income, true cash flow (know the 50% rule, at 50% rent ratio initial property tax will be near 20% of income)

- educate.  Attend RE meet ups.  
- it is far cheaper to rent than own in the near term.   Is your outlook long term?  The rates and market have made San Diego a tough buy and hold market.  It has been my path to financial independence, but I mostly am not looking in San Diego currently and I get many off market offerings daily (so even below retail the hold is cash negative).  There have been at least 3 studies that show this is true for virtually every large city in the US (you can internet search this).

- buy and hold is currently tough in San Diego.  Currently flippers are much more active locally than buy and hold.  
- 130k does not go far in San Diego. At 95% LTV (I would choose 95% LTV over the fha) the down and reserves is easier than the monthly. Basically you can afford -3500/month which equates to ~$500k if no rental income. A portion of rental income can be applied to your income if separate units (not for bedrooms in your unit) which could bump the value a little, but this will pose a challenge.

For me

- I have not purchased local since Dec 2021. I purchased $4m that month.   Note that a few months after that date rates started to rise and quickly got to over double what I got on these purchases which would significantly increase the P&i.  I have no purchased local due to the extreme cash negative reflected in my underwriting (that many would consider conservative).

- I have an offer going out this month not local.  I expect I will be purchasing this property as the offer will be strong with options to make it work.  Someone who has made the money I have from local RE is purchasing not local.  That says something about the current buy and hold market.
- we are starting a local rehab on Dec 1 (last unit in a quad).  My son will be leading this effort (it will be the second effort he has led. He will be doing a live-in rehab.  He has a vacation scheduled, but otherwise maybe 5 to 6 week effort (plus live-in may add some complexities)) .  I expect it to be moderate size rehab which to me means no significant plumbing or electrical and no walls being added or removed.  I have offered to show some newer RE investors the pre rehab on Dec 1 and will extend the offer to you.  We can discuss the finances on this purchase (I will be up close to $1m on this after this rehab from 3 sources: 1) purchased below retail 2) value add 3) natural appreciation).  Contact me Friday or Saturday if interested.  It is in Pt Loma.  

good luck