Need an advise from RE Investors

[Nema Escartin]

Hello mentors!  First of all, I just want to say thank you to all of you who educated and encouraged me to stay in this path in every post that I read for almost a month now since I joined BP.

I am in the process of refinancing my primary residence and the plan is to add ADU. But not sure of the ROI if I spent the money that I will cash out for ADU or is it better if I purchase a property outside CA ( I am thinking Plano , TX) and rent it out.

Should I do refi or HELOC? I also owned a rental property in LA, still in W2 and planning to moved to new company. Is that going to affect my refi or HELOC application if I have a new job?

Appreciate all the inputs from the gurus. 

Take care!

[Dan H.]

Start by doing research on how your property will appraise with the ADU. This may play a role in deciding your path forward and it may provide insight on best loan option.

If the ADU will add value less than its cost, you will start with a negative position. For example if the ADU adds $50k less value than it costs, you start with a negative $50k return. How many months of cash flow will it take to just be even? I would not think it would be worth it in the scenario I described. However if the ADU appraises for close to its cost, then the cash flow will quickly nullify the negative position and from that point forward the cash flow is producing actual return.

How does this effect your financing decision?   Most HELOCs are variable rate.  I therefore use them only when the loan period is expected to be short.  I use a cash out refi when the duration of loan is unknown or expected to be long. 

If the ADU will appraise at close to, or more than, its cost, then you have the option to refinance after the ADU construction. This is typically a good idea because a Fannie/Freddie owner occupied loan is likely to be the best fixed rate loan available (potentially excluding VA loans).

By the way, I believe new investors should start local.   I have various reasons but they include the knowledge gained self managing, the savings of self managing, the better opportunity for heroics if needed.  I also believe the RE market is efficient.  This implies more expensive markets are more expensive because they appreciate (both property and rent) or are lower risk.  Cheaper markets that have the best initial cash flow typically have less appreciation or more risk.   Investors can succeed in either market, but their odds of success is higher were they have good knowledge, can minimize expenses, and can perform heroics if necessary.

Good luck