1st Deal Analysis Advice Needed: House Hack by Building ADU in CA

[Missy Longshore]

Hi,

I live in the San Francisco Bay Area and would like feedback on my plan to get started in real estate investing. I want to be clear the numbers do NOT meet the 50% rule or the 1% rule, but I live in a high cost of living area and am focused on my financial freedom and security first, and REI is one way to achieve that. So I'm looking for a way to lower my housing costs with this plan.

The plan is to build an Accessory Dwelling Unit (ADU) in my basement, essentially turning my home into a duplex. I would move into the new, smaller unit in the basement (a studio) so I could rent out the 2 br/1 ba for maximum rent. Once the value of the home increases I could do a second cash out refinance and take that money to invest in my second property, likely an out of state or out of area rental.

Here are the numbers:

I currently owe $300k on the 2br/1ba

The current value is $645k (conservative estimate)

I'd cash out refinance a max of $200k to build the ADU and do repairs to get max rent for the 2br/1ba

New estimated value $900k

Current mortgage payment $2k (includes escrow account)

New payment: $2,750/mo

Rent for 2 br/1ba: $2,500

Rent for new studio: $1,750

50% rule analysis:

($2,500 in total income * .5) - $2,750 = ($1500)/mo

Obviously we want this to be a positive number, but is it fair to think of this as I'd be saving $500/mo over what I'm paying now ($2k)?

1% rule analysis:

Monthly rental income/Purchase Price

$1750/$150k=1.16%    This is good, right?

This assumes 50k of 200k would go to upstairs/overall house repairs; I'm calculating it this way because there's no way I could purchase a studio home in the bay area for $150k.

Other questions:

Would this make me over-leveraged? What do I need to consider given that there is likely a recession coming in the next 24 months?

Thank you so much for your thoughts and advice!

Missy