1st Portland Investment - ADU or single family?

[Joe Rudolph]

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.]

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