Finding an Investor Friendly Contractor In LA is Impossible?

Question

Hi GuysAfter 7 years of doing Airbnb; here is my next move.

HOUSE HACK

Get a rehab loan (Fannie Mae Homestyle at 20% down) to buy, rehab, and live in a beautiful SFH pool home in LA County. Preferably Woodland Hills or Calabassas area as you get higher square footage for your money.

Convert detached garage or build/prefab 1200 SQFT 3bed/2bath ADU & convert part of downstairs of main house into approx 500 sqft JADU.

Make cosmetic upgrades to main house. There should be a separate entrance for all 3 structures. Everyone shares pool/spa and outdoor area. Total of at least 6 parking spots on property or street.

Increase property value by at least 20% of purchase price + rehab.

I will live in the main house and rent our the two ADU's. When I move out, the entire house (all 3 units) must cash flow as traditional rentals.

Now, I would LOVE to have serious conversations with investor friendly contractors in the area that could give estimates on rehabs,  garage conversions, ADU additions, and so forth. Where are they?

Am I on the right track here?

Your friend,

Dave

Will Barnard · Answer

There is a difference between finding "investor friendly contractors" and knowledge of the laws regarding ADU's.

First off, @Dan Heuschele is absolutely correct. Cities, counties, etc can not restrict your ADU build by demanding owner occupancy EXCEPT as it relates to the JADU. The state bills passed specifically add that if you convert a portion of your main residence (no more than 350 SF) with the ability to add on an additional max of 150sf, you may not rent it unless the main unit is owner occupied. So once you sell, you would have to sell to an investor/homeowner willing to occupy the main house and rent the JADU and ADU. That will likely limit your buyer's pool. That said, how easy it would be to convert back the JADU to the main house and THEN you could sell to anyone, investor or homeowner looking for a home and guest house or rental unit (ADU) to subsidize their mortgage.

In my opinion as both a general contractor AND an investor/developer, I see the ADU laws as a huge advantage to investors holding single family (and even multi family) properties to increase cash flows through the ADU laws so long as your plan is LONG term and does not have any need or requirement to get out in the next 5 years. Your best bet is finding the neighborhoods in the SFV (like Woodland Hills that you mentioned) where you have a detached garage in the backyard. If you already own the dirt and the house, the extension and conversion of the garage to an ADU for the rental rates we can achieve here are one fo the best cash flow investments going right now. I have several ADU projects ongoing and all in the SFV (where I was born and raised).

Word of caution: Appraisers will NOT give you full (and likely not even half) the value it takes to build/convert to an ADU as there are just not enough comps to support values in the single family space and they are unwilling (at least for now) to use a true duplex as a comp since the legal usage of an R2 property is different than an R1 property even though you can now effectively turn any R1 property into a multi family property in CA.

So, investor friendly contractor - how do you define that? To me, it is a knowledgeable and experienced contractor who also understands the investor side of things and to do that would require the investor to be not only a contractor but also an investor so he or she can and has seen through both lenses. Additionally, this contractor should ALSO be a "good contractor" which I would define as one who can deliver on what they say both verbally and contractually, and provide you 2 of the 3 factors to contracting. Time, quality, price. If you want it done quick and high quality, expect to pay a price for it. if you want it cheap and fast, expect quality to suffer some. This is true in almost every service business.

Dan H. · Answer

There are 6 CA ADU bills (AB68, AB881, SB13, AB587, AB670, AB671).  I believe it is AB68 that states that a jurisdiction can mandate OO for JADU (it is definitely in one of the 6).  Every jurisdiction that I am aware of mandates OO to rent the JADU.  So I am confident that state allows jurisdictions to require OO for JADU and I have not yet heard of a CA jurisdiction that allows the JADU to be rented without OO, but I cannot know each jurisdiction.  So I put it that I am greater than 95% sure, but not 100% sure for your jurisdiction.  As an example why I cannot be 100% sure.  The state allows ADUs to 1200'.   The jurisdiction where I live exceeds this limit which is allowed.  The jurisdiction cannot be more extreme, but can be less extreme.  You will need to verify for your jurisdiction, but I will be very surprised if the currently allow JADU to be rented without OO.

Search on BP for ADU and their appraisals.  You should find many posts on the low appraisals associated with the ADUs.  If you read the Fannie ADU appraisal guidelines, it is easy to see why this is happening.  I had a protégé about 6 months ago have issues due to the appraisal coming in low on his added ADU.  I am not stating that no ADU will add more value per appraisal than the hands off cost, but I expect it to be a very small percentage of them.  To expect it to add 20% above costs is probably not realistic.  I suspect you will not even get the hands off cost.  By the way, my protégé appraisal was for a sale; refinance appraisals are typically more conservative than appraisals associated with a transaction (the comps used on a transaction are typically trying to justify the agreed on price).  I suspect he would have had a bigger issue if he was trying to do a refinance.

Good luck

Dan H. · Answer

Some potential issues:

• Current rules require Owner Occupied (OO) property to be able to rent the JADU.  So renting 3 units is not currently legal.
• Appraisals for ADUs are coming in less than the hands off cost of adding the ADU.  This means you are unlikely to be able to finance for purchase price + rehab + ADU much less 20% greater.
• There is questions on if Freddie/Fannie will finance a property with both a JADU and ADU.  If they will not provide financing the value will be affected.  The Freddie site indicates one ADU only.   https://selling-guide.fanniema...  From the link "There is only one accessory unit on the property; multiple accessory units are not permitted."  It does define ADU as being "independent" which someone could try to make the case that a JADU is not independent.  My opinion is that it is a risk to rely on Freddie funding being available.

I like the idea of a house hack.  With a long term hold, I like the idea of adding a single ADU.  Adding a JADU with current OO limitation and the potential financing limitation is risky.

Sorry, I have no contractor referals for LA.

Good luck

Will Barnard · Answer

All very valid points of course not all good contractors are created equal. I just took a job from a new client to start in 2 weeks from the day I started the quote and that is with a plate full of jobs already on the books. But I agree most good contractors are very busy right now and may not have the bandwidth or ability to take you on at the moment.

Matthew Paul · Answer

Good contractors are busy , this covid 19 has customers stuck home doing home improvements . Dont expect any contractor thats good to be able to start for at least 45 to 60 days . Due to things being shut down some supplies are in short supply or not available . Expect higher prices , much higher . Some areas the inspectors are running weeks behind on inspections , and on permits , so expect much longer completion times .

David G. · Answer

@Paul Dashevsky I am referring to competitive priced and knowledge General Contractors invest themselves and that work with investors on rehabs and value adds in the LA area.

David G. · Answer

@Dan Heuschele Appreciate it

David G. · Answer

@Dan Heuschele Thanks a lot for the amazing info. Are you saying that once I move out of the house, I will only be able to rent the main house, the ADU,  and not the attached JADU? Are you sure?

Who would be the best professional to talk to about Los Angeles house appraisals after ADU and JADU additions?

Finding an Investor Friendly Contractor In LA is Impossible?

Most Popular Reply