Chula Vista, CA · Member since 2015 · 5 posts · 1 vote
I am a 22 year old student attending SDSU and I'm 2 weeks away from closing escrow on a 4-bedroom house. I thought I'd share my journey and make updates as time progresses. The house is being sold at $380,000, which is very reasonable in San Diego's current market. This is primarily because the house has a shared wall with the neighbor and is in a low-income neighborhood. However, for the area it is on a quiet street and is only 10 minutes away from downtown (Market Street/Mt. Hope).
It is move-in ready so I will only be upgrading the tile floors to to lament, adding a wall in the living room to make a fifth bedroom, and converting the garage into a studio. With myself living in one room, each other room bringing in $600 and the studio renting for approximately $850 I estimate I will bring in $800 monthly. 3,250 (gross income)-2,200 (mortgage)-250 (utilities)=800 (net monthly profit).
I have been marketing the rooms for about 2 weeks, but currently I am having a tough time finding good potential tenants. I do screen applicants pretty strictly and have received a lot of inquiries, however the calls I have received have been less than Ideal (not terrible, just not what I'd prefer). I am wondering if I should be more lenient on the type of tenants intend to rent to (provided they pass a credit check), lower the rent (I'm open to suggestions from people familiar with the area), wait to hear from more potential tenants, or a combination of these options.
I'd also love to hear any additional input or questions about my discussion,
San Diego, CA · Member since 2017 · 61 posts · 20 votes
9y
I'd be careful converting the garage to a studio. If the city finds out they may fine you and make you convert it back. I also see your net income is around $800 but I don't think you're saving for cap ex either.
Just curious, how much did you put down? Is it a single family or multi family? Im looking to get in to multi family is SD as well but have entertained the possibility of doing a single family and renting each room out as an Air-bnb. However, places like Coronado from on this and I'm thinking most other cities are starting to as well.
Anyhow, congrats!
San Diego, CA · Member since 2017 · 61 posts · 20 votes
9y
I'd be careful converting the garage to a studio. If the city finds out they may fine you and make you convert it back. I also see your net income is around $800 but I don't think you're saving for cap ex either.
Just curious, how much did you put down? Is it a single family or multi family? Im looking to get in to multi family is SD as well but have entertained the possibility of doing a single family and renting each room out as an Air-bnb. However, places like Coronado from on this and I'm thinking most other cities are starting to as well.
Anyhow, congrats!
Chula Vista, CA · Member since 2015 · 5 posts · 1 vote
9y
That's very true, but given how much additional income a studio would bring in, and the fact that the garage is relatively out of sight, I believe it's worth the risk. According to the inspector's report the house is in good condition (built in 1970's), so I can safely estimate the net total at $600/month after factoring in cap ex($200 for usual repairs).
I put down 3.5% ($13,300). The building itself is a duplex, but each half is sold on it's own. I think multi family homes are usually a better option overall, good on you if you can afford one in SD(especially Coronado)! If you do decide on a single family, Id suggest looking for a house with living rooms that are easily convertible, that way you can maximize your monthly income weather you rent them out via Air-bnb or as long term, single-room rentals.
My plan is to refinance in a few years to lower my monthly payment and get rid of PMI ($300/month). After that I'm looking to buy a multi family in Las Vegas where a fourplex goes for $250k-$300k. In Las vegas, and in many other markets other than SD, you can make considerably more profit from the difference in the mortgage and rental income.
Thanks for the input, let me know if you need an awesome RE agent/ loan officer!
Something to keep in mind while going through this process is that the tenant quality for a shared home will generally be lower than that of a tenant renting the entire property.
Think of it this way - It's safe to say that the overwhelming majority of renters would prefer to have their own property rather than sharing with other tenants. So, typically, you will find that many of the applicants looking at a shared unit situation are doing so because there is some qualifying factor that is likely prohibitive of them being able to rent their own studio or 1/1(income, credit, etc).
With that said, I am sure that you can find enough qualified tenants to fill your property. While the overall qualifications of the prospective tenants you'll see will likely be lower, remember that the liability they are qualifying for is also lesser. So, as long as they are able to meet that 2-3x income requirement, nothing too damning on credit, and they have a stable rental history - I wouldn't hold my breath for an applicant making 6 figures with an 800 credit score.
Being cautious is never a bad thing in the leasing process, but you want to be sure you're also being realistic.
Also, as @Nicholas Baughman pointed out, it appears as though you've forgotten to factor in a few expenses. First, I would recommend budgeting ~ 4-5% of gross rents for Capital Expenditures ($130-165/month), ~4.5-5.5% vacancy($145-180/month) and at least 3-4% for repairs ($100-130/month).
Other than those - I am not sure if your homeowners insurance was factored in to the mortgage expense (not PMI), but you'll want to factor that in as well if you haven't already. If that $250/month number for utilities is ONLY your portion of the utilities, then it may be a bit high. If that is inclusive of ALL utilities, I would imagine that's pretty darn low.
Chula Vista, CA · Member since 2015 · 5 posts · 1 vote
9y
I've been posting the ad on craigslist daily and have been receiving 10 calls per day. Most of which are not quality tenants. However, thanks to the shear volume of calls, I already have the interest of two "very qualified" tenants. One is attending SDSU for grad school, the other is going to veterinary school. Of course they have other places to look at, but I believe my low price ($600 compared to an avg. of $650-750) keeps me competitive.
$250 for utilities was just an arbitrary number I used as an estimate. What do you think might be a more accurate estimate for a 4 bedroom house with a gas line? $300? $400 maybe?
My congrats, too - on your first purchase / first business! You've started on quite the adventure - with tenants - business - regulators - utilities - you name it! If I can, let me make a few suggestions:
First, please check with the city's planning department on the master development plan and the specific zoning for your address - to see if the business use you envision for this property is allowed - and what restrictions may attach to the use if it is approved.
Next, check with the planning department about the conversion of the garage to a studio (I assume you are talking about a studio apartment - not just an artist's studio). Can it / must it have an exterior door - separate from the access you might retain (or not) through the house? What would be the plumbing, electrical, and other requirements for a studio apartment such as you envision? Can the plans filing and work be done by you the owner modifying the property for your own enjoyment - or, at this scope of modification, must it be done by a licensed general contractor? Would the answer to the last question change if the property is a formal business and its modification is being done for business use reasons - rather than a personal use reasons? ... etc.(?)
Then, explore the permitting and inspection processes for such a conversion, if allowed by the master plan and zoning for your property. These steps will tell you both time and dollar cost for the legal conversion you envision.
If it is a go (either as a declared personal use or a declared business use at this point), get yourself and the property insured for all perils including construction perils for the period of modification. If it is a business use modification, additionally set up your business entity (or entities) so you achieve both personal and business asset protection and business operating capability and put the ownership of the property in the appropriate asset protection business entity and appropriately ensure your business operating and asset protection entities for all perils including the construction for the period of construction - before construction starts.
Once you have accommodated all of this information and tasks, either:
1. plan, file, and do all of the work yourself, have it inspected and get the occupancy certificate ... and then begin your 'business' (renting it out) - if this is your plan and it is allowed under the declared property use, or
2. plan, file, and have all of the work done for you by the various trade contractors/handymen you hire and once done, have it inspected and get the occupancy certificate, if this is your plan and it is allowed under the declared property use, or 3. have all of the plans, their filing, and the work done and supervised by a general contractor, have it inspected and get the occupancy certificate - as required for your situation under the local business, building, and construction codes.
Finally, get your business license and begin/continue the marketing and renting activities to fill your property with tenants who meet your standards (as described by others above).
Bottom line - this is a business - which is regulated for good public policy reasons. Be legal. And within these constraints (which all really have to follow) make money!