CA - My rough build/rent projections look accurate? 2 SF + 2 ADU

[Rami W.]

El Cajon, CA. 1 acre (rs-20) flat buildable lot owned free and clear with utilities. Will split lot (sb9?) and build 2 SF + 2 ADUs. Goal is to build and rent. 

These numbers seem LOW to me. Is this fair or am I off? The ADU's have okay ROI, but the larger unit seems quite low at 2.5% RoC. I'd expect a better return since the lot is owned free and clear so not sure what I am doing wrong here. Any advice? Thanks!

[Dan H.]

Maintenance/cap ex is too low for your small unit count for the long term.   The cap ex on a water heater in San Diego is $12/month ($1.8k/12.5/12).  Cap ex Small kitchen is $40/month not including the appliances.  Roof, flooring, plumbing, landscaping, fencing, hardscape, foundation, windows, appliances, etc.  It adds up fast.

Are you including tenant turn over time in the vacancy or the maintenance numbers?

have you run the numbers using 50% rule?  A quick look shows each unit is negative using the 50% rule ($600/month negative on the primary homes).   The 50% rule is a bit conservative in high rent markets such as San Diego.

In general, properties in San Diego county start with negative cash flow.   this is especially true of small unit new construction.  However, the rents have been increasing at a very high rate.  Your units will be free of rent control for 15 years.  This implies your rent can be kept near market rent.  On $4k rents, the market rent increase this year is over $200/month.  You can see how this can quickly improve the cash flow?   Properties have also been appreciating at insane rate for the last 10 years.  What happens if this (rent increasing and/or property appreciation) stop?   It will at some point, but when?

good luck