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Updated over 1 year ago on . Most recent reply

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Ricio Montes
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Your RE Investing Advice Appreciated

Ricio Montes
Posted

Hi everyone! My name is Ricio, and I'm a new member here. Looking for some RE investing advice. For context, I am 34 years old, and I purchased my first RE rental property in SOCAL, in 2011 (it is my only property). The loan amount for that property is currently at $140k with a 4.5 interest rate, and based on online comps, looks like home value is around $600k.

I have about $280k saved for investing (combination of money market accounts, stocks). What I would like to do if the city permits it, is build a detached ADU, and a garage ADU on the same property. The detached ADU would be 2 bed/1 bath, and garage ADU a studio. I'm wondering if this is a good idea considering city permits/building costs etc (this is all new to me). The lot size is approximately 7000 sq ft and the home currently there is about 1000 sq ft, so having two homes of approx. 1000 sq ft and the garage ADU is how I envision things.

As far as financing, I am considering using a HELOC/LOC for the project, and keeping my money as reserves. If it all goes how I am thinking, I would be cash flowing nicely. My main goal as a RE investor is cash flow, and my goal is to be able to reach 10k in monthly cash flows (over time of course).

Could you please advise if this would be a good idea, or if there are better options such as investing out of California. 

Your advice and help are appreciated. Thank you!

Most Popular Reply

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Dan H.
#1 House Hacking Contributor
  • Investor
  • Poway, CA
7,121
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Dan H.
#1 House Hacking Contributor
  • Investor
  • Poway, CA
Replied

State ADU laws would allow one ADU at the lesser of 1200' or 50% of the existing structure. This means a 500' ADU.

Some jurisdictions allow more that state mandated minimum ADU rules.

However, ADUs in many CA areas is one of the worse RE investments.  Here is why?

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?

Good luck

  • Dan H.
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