1st Portland Investment - ADU or single family?

Question

Hi folks - we’ve been contemplating our first move as investors and in the PDX market the path doesn’t feel very straight forward. We are weighing the options:

- Build an ADU which we can achieve a 1% return right off the bat

- Continue to save and figure out some financing to purchase a separate single family home. We'd hope to employ the BRRR method as properties around here are pricey.

Questions:

-If we go the ADU route how might we be able to leverage it in the following year or two to purchase another property?

-Does going straight for a single family make more sense?

Thanks for your input!

Dan H. · Answer

I am not familiar with the Portland market but have been doing BRRRR for a long time. I have some familiarity with the San Diego ADU market but have not added an ADU yet (but my protégé did a slow flip of ADU that did not work out great).Assuming you can find a good BRRRR property, my vote is for the BRRRR. Here is why:If you find the right BRRRR property and do the right rehab, you will have very little invested in it after the refinance. We typically are unable to extract all costs unless we get an assist with market appreciation. I believe we have never trapped more than 10% of purchase price + rehab cost and typically have less trapped. To be safe, forecast trapping 10% even if the BRRRR is done mostly right.In San Diego, ADU are being appraised below hands off construction costs. Not sure if this is the case in Portland but I suspect at best case the ADU is being appraised at construction cost which means in terms of value this is not a value add. It is only a value add in terms of income. This likely means that you will have trapped at least 20% of the ADU construction costs if you refinance and likely have more than 20% trapped.I suspect both will appreciate similarly. Both will have peak condition when new/after rehab. Condition wise both will start to degrade but the market appreciation will likely outpace this condition depreciation.The BRRRR unit (assuming good rehab) is likely to rent for more than a small new ADU.So the BRRRR after refi will cost you less (especially as a percentage of total value), will result in more rent, and likely appreciate similar to the RE with the ADU.The key is to do the BRRRR right starting with finding the good candidate RE at the right price. This is the challenge that is not present in the ADU option and one place that many, who do not succeed at the BRRRR, fail.Good luck

Brad Hammond · Answer

That's a good question. Here are some questions to consider... 1. If you build an ADU, how much will that increase the value of your home? Can you afford to borrow against it? Would you sell and realize those gains in the next 5 years to reinvest? 2. It won't be easy to find a BRRRR deal in Portland, you might need to go to Vancouver, Troutdale or Newberg. 3. You can finance (leverage) a BRRRR deal but can you finance the ADU with payments under market rent? I think you should run some numbers on some BRRRR deals and see if that makes sense. If so go that route, if not use the ADU route as plan B. Let me know if you need any assistance looking for deals.

Account Closed · Answer

@Joe Rudolph I just closed a subject-to deal. In higher priced areas. Owner-financing/Subject-To deals make more sense (and are everywhere). Especially with the landlord/Tenant laws in Oregon. ADU’s add value but the time it takes with permitting, worming with contractors is a pain. You can spend that time more wisely just finding more properties etc. Oh... and thats before talking about the delays with the city due to CV.

Account Closed · Answer

@Dan Heuschele if you have not done one, why are you giving him info? Makes no sense. Give him some names of someone who has done one and been successful etc. and leave it at that.

Joel W. · Answer

My question is whether anyone should invest in real estate at all in Portland. Rental laws seem a bit extreme.

Dan H. · Answer

We have done numerous BRRRR very successfully. We have not done an ADU but, as indicated, my Protégé did an ADU flip. I am very familiar with the challenges he encountered (it was mostly at the appraisal not valuing the ADU at close to hands off cost of construction) but was also clear that 1) we have not completed an ADU addition ourselves 2) that the one I was familiar with was in San Diego not Portland. I do believe there are going to be similarities, but there will also be differences. I suspect virtually all my bullets are accurate to Portland.We were also under contract for a high end ADU value add (Cost $1.05M for ARV of $1.45M) in March but there was a challenge to over come on this particular ADU addition that we pulled out. We had completed pro forma, including consultation with ADU experts, prior to making the offer. Unfortunately, the disclosure revealed something that forced us to put out during DD that was not obvious (or we missed - It was actually both as it was possible to catch this earlier than we did but we missed it and therefore was not obvious enough for us to catch it).