Many choices but only have one shot. ADU? Out of state?

Question

Hey everyone! First I’m new to this world and also the site so excuse me if I mess up anything. I’ve been reading everything and learning a ton but feel generally lost in the sauce when it comes to pulling the trigger. I currently have a SFH with about 200k in equity located in Oceanside, Ca that’s on a 15 year VA loan. It has negative cash flow but is rising in equity tremendously every year and once it’s converted to a 30 year it will break even. Now I want to use that money to get my investing journey started but am stuck on the details. I’m wanting to pull as much as possible while not being required to have PMI which should be around 120k at the end of the day. Seeing as I won’t be able to purchase much in California I am looking at adding an ADU “pay with cash” which would generate around $1300 cash flow but tie the money up. If I did that and then refinanced I’m hoping to be able to pull out the majority of the 120k investment but have heard ADU’s are so new in this area that it might not appraise and I would be out of luck. Is this a viable option? I’m mainly looking at a cash out refinance but if anyone suggests a HELOC or different financing options I’m open to that also if it makes sense. Or if I’m on the wrong track and should take my money out of state then that is also an option at this point. I appreciate everyone who read this far and look forward to hearing different perspectives.

Connor Nellans · Answer

@Kaden Olson Just to give some insight into the appraising issues with ADUs, I recently wrapped up an ADU project at my home in San Diego and it increased the value of my property by about double the amount I put into the project. From what I have seen and heard, this is not the norm and typically ADUs have not been forcing the type of appreciation you would hope for. More often than not I have heard that people are not getting the appraised value they were hoping for after they build their ADU. This is very location dependent within the county but as of right now it seems to be an issue of not having enough comps. One thing that helped us is that we kept the garage space and built on top of it. I would not recommend converting garage space into an ADU, garages are valuable and by converting a garage into an ADU you lose that value. Best of luck and let me know if you have any questions with the ADU process!

Kaden Olson · Answer

Everyone’s replies are awesome and definitely give me some more insight into the local market. I really appreciate the community here on BP and the fact that individuals are willing to go out of their way to help an internet stranger. To clarify with everyone, I am active duty military and have a great(ish) income, retirement and a little bit in savings so this 120k would not bankrupt me if it got mismanaged. However, it’s probably the only start I’m going to have at the long term real estate game that I’m after, so I want to get it right. The ADU appeals to me because I have the property already, I know the market is good quality and to be honest, I feel completely outgunned everywhere else so this feels safe. I guess I assumed that if the properties square footage increased then it should appraise in the same ballpark. Has anyone done an ADU in the area and had significantly less than they thought come from the appraisal? My situation would be a separate structure/entrance/yard so it wouldn’t hurt the main property like a garage conversation does. If I could only recoup 50-75% of the money at a low appraisal then I would essentially be putting in 50kish for a monthly increase of $13-1600 which sounds great all around. Then that would leave me 80kish to leverage into new assets once I can find a market. Am I on the money with my thought process or do I need to adjust? Also, I’ll definitely be taking a look at those prebuilt single wide structures! Thanks again for everyone getting into the gritty details with me.

Maxwell Ventura · Answer

@Kaden OlsonAppraisals can be all over the place and certainly depends on the ADU build. ATT/DET/Conversion, private entrance?The ADU option will always be there and the rules should continue to get more lax over time. If you're able to leverage debt & acquire another asset I'd most likely lean towards that. You should experience a better return on your money, but less initial CF than what an ADU would provide.

Joseph P Finkelstein · Answer

Hey Kaden,Check out https://www.backporchhomes.com. They are essentially high end single wide homes that can be installed and act as an ADU. The downside is that they are detached units, so there is a bit of a grey area as to if you can attach it to the land and increase the value/convert it to real estate financing. The upside is that you can finance them, and they should throw off about $6k in profit annually.

Justin R. · Answer

I think your instincts on the ADU are right. Your long term goal shouldn't be to just acquire more property - it should be to control more property in HIGH QUALITY LOCATIONS and constrained markets that increase in value. Focus on wealth. Residential in Oceanside generally fits that bill.The ADU process is pretty easy these days (compared to the past) so I wouldn't worry too much about that. Do consider your own lifestyle and what it will mean to have a renter sharing the space you currently use privately.Only other thing I'd suggest you think about: the greatest engine to REI success is probably the fulltime job. $120k isn't enough to make a huge contribution to lifestyle, but a strong job income allows you push forward and take more risk with it. If you haven't established a strong Job income base, I would focus on that first before REI, assuming you want to do real estate long term.good luck!

Kaden Olson · Answer

Grant, I appreciate the advice on using a HELOC to skip some of the closing costs. That’s a great bit of information that I had not even considered and I think that’s the best course of action. As far as the bureaucracy of an ADU, San Diego recently passed streamlined approval processes and waived fees like the environment and school fees for the next 5 years. So from my research and what I have learned with talking to builders, I should have the permit approved and be able to break ground in 60 or so days “they have 60 days or it’s considered automatically approved” once it’s submitted to the city for review. Is this the bureaucracy your talking about? Or are you referring to the appraisals that take place after the build not coming in at a comparable value?

Steven Stokes · Answer

Welcome to BP and definitely continue to use this website to gain information it really does help! ADUs are still pretty new and kind of tricky to get right. I love in San Francisco and we've been talking about creating some ADU property here too. The problem we have been running into is the bureaucracy hasn't caught up to the law and local regulations may still not be fully on board. It seems to be getting easier to discuss now but it's not as straightforward as just build it and rent it. At least not in San Francisco. To be honest, I think it would be easier to look outside of California but that also comes with it's own set of challenges. But good luck and keep at it.