ADU House Hack in Orange County, CA

[Peter Mai]

Hello Fellow BP Members,

I am new to real estate investing, but have always wanted to get my skin in the game for quite some time now. After finding out about BP and its podcast, I have been thinking endlessly of which house hacking strategy would work best for me and my current situation. I landed on the SFR w/ ADU house hack strategy as most realistic and ideal for me and my family. Also ADUs will begin to be much more favorable in CA with new laws (SB13) taking into effect 1/1/20.

I'm having difficulty in getting the numbers to work, and wanted to get some input on what changes you think I need to make, or what estimates I might have wrong.  Below is breakdown of the scenario:

Facts:

I'd like to finance the home w/ a FHA loan. I could finance the ADU construction w/ my own cash, not ideal, but I'd like outside financing for that piece as well. Anyone have any tips/ideas regarding this?

SFR @ purchase price of $575k - 4bd 2ba 1650 sq ft (7100 sq ft lot)

Constructing an ADU in the backyard - 2bd 1ba 900 sq ft - estimated to be $125k all in (would bringing in some type of mobile unit instead be a cheaper option - suggested by a friend but haven't looked into this yet)

After living at the property for 1 year, I'd like to move out and rent both units

Monthly Income:

SFR - $3000 / ADU - $1800 = Total $4800/mo

Monthly Expenses: (this is assuming I am financing the all in $700k @ 3.5% down under a FHA for now)

Mortgage - $3,225 / Vacancy - 5% or $240 / R&M - 10% or $480 / Property Tax - $415 / PMI: $300 / Insurance: $100 / CapEx: $48 = Total $4808/mo

Given the facts above, the property would have negative cash flows of -$8 after the estimated 1 year it will take to construct the ADU, fully rent out both units, and serve my 1 year FHA live in requirement. I'd also manage the property myself to cut down the monthly costs. The SFR itself is a turnkey property. It could use a few cosmetic touches but is already better than most homes as is and should not have any problems renting. It is also in school districts at all 3 levels that rates 9/10.

Am I being too unrealistic with my strategy? Which part would you change to make this work? And do you have any financing suggestions regarding the ADU?

I appreciate any and all feedback.  Thanks so much!