Building an ADU / detached home on one lot, help!

[Zachary Jamison]

I’ve found myself in somewhat of a predicament with no clear answer on how to move forward. 

Background:

Purchased a home in the San Diego area using a VA loan in 2016. Purchase price was 470k, the outstanding balance on the loan is 440k with a 3.5% interest rate. I lived there for the first year and change to satisfy the VA owner occupancy requirements but have since moved and rent a condo in a more desirable neighborhood. The home is currently leased for a year at an amount that pays my mortgage exactly (2650)

Situation:

I bought the house with the intention of subdividing the lot and building a second home on the property. a lot of the investigative work and planning with the city has been done by the previous owner but is outdated. All those documents belong to me now (tentative parcel map etc). It seems to me like it would make more sense to build a large detached ADU on the property and and rent out both units. I'd be maximizing my space and creating a good amount of cash flow without all the crazy requirements to physically divide a lot. It is zoned accordingly and all the preliminary conversations with the city, the ADU project looks like it would be a go barring any extreme unforeseen issues. Construction estimates have been 350-400k. The new home would be a 1200sqft 3bed/2bath and I expect to be able to rent it for about 3,000-3,100. The problem is I'm not sure how to finance it. Right now I expect the property to appraise around 550k as is. Since I am not in an OO situation, the broker said I wouldn't be able to actually pull any cash out and refinance. If I want to just straight up refinance into a conventional loan, that too would cost me 15k.

I know I’m missing a ton of information. I’m just looking for some creative ways to finance this project and start making some cash flow before moving on to other investments. Thanks in advance. 

[Justin R.]

@Zachary Jamison If you want to pursue this, feel free to reach out and DM me. I've done (and am doing) multiple projects like this inside the City limits - adding ADUs to existing parcel, subdividing parcel and building new SFR, subdividing and building SFR+ADU.

To start, 1200sf shouldn't cost you $300/sf unless you're paying full service general contractors to run it start-to-finish.  Second, guessing from your description (though I'd need to confirm with an address) what the previous owner did with the TPM almost surely isn't highest and best use now - ordinances have been changing since about 2015 in ways much more favorable to you.  And, third, you don't necessarily need to bring existing structures "up to code" with a subdivision.

Going the subdivision route is real honest-to-goodness work and not for the casual investor to undertake. But, the an ADU may add $200k in value to a property ... but could sell for $500k after subdivided. It's financially worth the head, back, knee, and earaches.