Start investing with ADU's or purchasing a home?

Question

My name is Magdaleno (Neno) Garcia, I am 53 years old, I live in San Diego, CA. I own a 3 bdrm 1 bth SFR on a 6000 sq. ft. lot. I've been listening to bigger pockets for a couple of years now and I'm just now about to finish converting my garage and 1bdrm into a JRADU. This unit will be approximately 320 sq. ft. with 1 bdrm 1 bth and it's own small but full kitchen/living area. I plan on renting it to traveling nurses/professionals as I understand I can charge more rent to them due to the fact that I have to rent it fully furnished but I figure there's less risk. Recent California laws will allow me to build an additonal separate ADU and I plan on building a 2 master bdrm unit so I can rent each room separately and charge more rent. My house payment currently is 1600 plus 100 interest only on a 40K HELOC I took to build the JRADU. The JRADU will rent for anywhere between 1500 to 2000 so it will cover most or all of my house payment. My plans are to aquire more SFR and repeat what I'm doing at my house. My question is would it be better to get an additional loan to build the second ADU, which I figure would be about 100K to build and the payment on that loan would be anywhere between 600 to 1000 depending on interest and length of the loan. The rent I could get from that one would be between 2000 and 3000 depending on how I decide to rent it out, or buy my first rental and start that way. I am in San Diego so buying a SFR here can make sense if I rent by the room to Traveling professionals but not if I rent it to a single family. I'm also open to buying out of my area. I do have David Green's book on long distance investing so I am preparing that way. I just don't want to make the wrong move starting off especially starting off so late in the game. I appreciate any help or advise/suggestions you can give me. Thank you in advanced.

Magdaleno Garcia · Answer

Thanks Twana Rasoul for that clarificatioin. I thought ADU's and JRADU's were treated the same and they are if you have one or the other but if you have both then the property does have to be owner occupied. Good to know, that's going to cause me to rethink my strategy but like you said, those rules may change. As an investor I hope they do. Thank you too Dan Heuschele for catching that on my comment.

Twana Rasoul · Answer

@Dan Heuschele is absolutely right about the JADU owner occupancy...that is likely to change just as the ADU law changed but until then I would build the ADU as well now and maximize your properties potential. This is assuming you weren't able to add additional units to your property. Best of luck!

Magdaleno Garcia · Answer

I went on the City of San Diego Development Dept. website and found that there is wording prohibiting the ADU's to be rented for STR but it specifically says that you can't rent them for less than 30 days. Most traveling professionals are looking to rent for at least 30 days so if I'm reading this correctly there is no problem renting this out that way. I would prefer renting my unit to folks that are looking for 3 months or greater anyway to avoid turning the unit more often. Let me know if I'm reading that correctly please, anyone.

Magdaleno Garcia · Answer

Good morning again Dan HeuscheleSo I was able to find out what STRs are and will be looking into this before I rent this out.

Magdaleno Garcia · Answer

Good morning Dan Heuschele, thanks for the tip. Is the owner occupied rule only for the JRADU? Every thing I've read or every site I've visited says that these new laws in CA regarding ADU's have changed and no longer have to be owner occupied but it may be different with JRADU's. I'll have to look into that further. I definitely don't want to do things that are not aligned with the rules, I wouldn't put my family's future in jeopardy like that. Thanks again for looking out. One questions, I have no idea what STRs are, could you explain what those are? Thank you again. I'm always learning on these forums. I appreciate your input.

Dan H. · Answer

Seems like you are crushing it. My concern is the plan to rent to traveling nurses/professionals. The JADUs/ADUs are not intended to be used as STRs. My next concern is with your plan to repeat what you have done. JADUs require owner occupancy. You cannot move and rent the JADU and primary unit (you need to be owner occupied). You could sell to someone who is planning on living on the property and then repeat. Follow the rules, but if you are not going to follow the rules, do not post it on a public forum. Congrats and good luck.

Kenneth Donaghy · Answer

@Magdaleno Garcia Depending on the location and zoning, you may have more options than just building an ADU. If you have an alley, that can also increase you design options. Feel free to reach out, I will be happy to share some of the project we are doing.

Magdaleno Garcia · Answer

Thank you Maxwell, it's always good to have more contacts. I just responded to your DM.

Maxwell Ventura · Answer

Hello @Magdaleno GarciaI just DM'd you but I suppose I'll put it out to the group too. I have a team that I work with that acts as a 1 stop shop for servicing your ADU concerns. Financing, Designing, Permitting, Building, Leasing, to Property Management.The Owner is also a CPA and they can offer a cost segregation study analysis to help you with your projections. **From your post it sounds like you may already have a team that you're working with but just putting it out there.Best of Luck.

Magdaleno Garcia · Answer

Hey Connor, thanks for responding and thank you for the uplifting comment. It sounds like you're crushing it too. I have owned this for sometime but in my youth I didn't make good financial choices and I didn't know anything about investing in real estate. I'm trying to play catch up and trying to see if I can still retire early or at least earlier than is the norm lol. I get real excited when I see young folks making good sound financial or otherwise choices so keep crushing it. I am leaning more towards the ADU as it is a small amount to invest compared to the return and you're right, my new appraised value should be quite a bit higher and then I can take that and invest in another SFR and repeat. Maybe by the time I'm done with the ADU there will be some deals in our SD market. Thank you for offering more help, I will definitely take you up on that and likewise, if there is any way I can bring some value to you, let me know. In going through this process of converting a part of my home into a JRADU I have learned a lot and I have found out that I have several family members that are in the trades. I have a nephew that does concrete, one that is an electrician, one that is a plumber, another does electrical blinds. I did residential maintenance for many years so let me know if I can help you in any way. Thanks again.