New addition or Another property?

Question

Hello, this is my first time posting and am in need of some ideas from such a great community.

I currently have about 100k equity in my current house and was thinking of building either...

A) A new add on suit of 420sqft with its own bathroom and a 3 quarter wall to separate the bedroom and a living room to rent it out.

B) a separate unit all together in the back of 400sqft with a small kitchen as the attached addition won't share a kitchen

C) just buying a new property all together and trying brrrr method.

The market where im at in the 5 cities of Portsmouth, Norfolk, Chesapeake, va beach area on the east coast is a highly saturated with buyers and was considering just adding to my house and renting it out.

if have spoken with city about permits and these are the only two options I have with that as my max size I can build. I found a contractor to build the entire thing start to finish for roughly $140 a sqft. And could potentially rent the addition for $1k to $1200 A month all bills paid. So with a 70k loan at 9.2% would put my monthly payments around 700 a month. So it will cash flow nicely.

my concern is when I move. The attached build would rent the house at a higher price but if I build detached I could collect two rents. I know I'll have instant equity in the house but would have to wait about 5 years to pay the down the loan, allow house to appreciate then do it over as a bigger project on another house.

Here's some extra numbers for anyone that read this far and is willing to give thier time and advice for a beginner trying to start.

Current mortgage at 2.8% with $805 monthly payments. I owe 100k left with 10 years left on my mortgage loan. My current value is 210k as of now

My Heloc would allow me to pull over 100k but not sure why I would as 70k pull at 9.2% is around $700 a month.

Total of both would be 805 plus 700 equals $1505 mortgage of both loans.

I rent one room already for $850. So my mortgage is covered. But the addition would cause a bigger cash flow.

I look forward to the replies as I'm very undecided on my next steps. Thank you all for your time

-Mike Truman

Michael Truman · Answer

Hey David. thanks for the reply but there is also a fixed equity line of credit which is what I was referring too but would not want to cash refinance as interest rates are high right now. But I'm sorry I missed the meeting. I would like to know when The next one is available as I couldn't make it today. I've been looking for these types of meet ups and appreciate you bringing us together.

David Smith · Answer

Absolutely no problem! I am looking at holding the next one on 10/25 @ 5PM in Chesapeake. Keep your eye on the local meetups forums I will make a post there soon.

Alecia Loveless · Answer

@Michael Truman I have a garage on a property I can expand into for about a 400sq ft unit and would cost about $80,000. With the rent I can receive from it would likely take about 7 years to begin actually making real time profit from this. In the meantime there would be some tax advantages and so on. I have gone back and forth on this for a while and have come to the conclusion that I can put a 25% down payment on a new 3 unit property for around $80,000 and start building equity and having immediate cash flow by buying a new building as opposed to attempting to add the additional unit to my existing property. It sounds like you are in a slightly different situation where your unit would be cash flowing once it was built and rented as you can command higher rents than I can. I’m not sure how much adding the ADU affects the overall value of your house once it’s built. In my case my property only appreciates by about 50% of the as built value which is why I’m leaning towards buying a different property. If your property will appreciate by at least as much as the $70,000 building cost or relatively close to it then this is something to consider as long as there are other comps in your neighborhood. You should not be the highest valued home in your neighborhood or you’ll have a hard time selling when the time comes.

Michael Truman · Answer

I have a permit and designer person I've hired to take care of the nuances from the city. I'm ok to build with a small kitchen. But it won't make finicial sense when I add in the extra plumbing with the trench as well as a separate meter. Leaning towards the attached 420sqft addition which would cash flow $300-$500 after that fixed line of credit is paid. Looking at comps I see a ARV of about 50k-60k added to this house. So total ARV would be 270k to 280k So after about 2 years of payment it would bring my addition to even and start to see green. Just not sure if I should hold out and just buy another property with this equity instead. Being a first time investor it's scary to take the leap. I appreciate your replies!

Michael Truman · Answer

Sean Hudgins · Answer

Mike,I think all your options are good. My question would be what is your goals from the investment? You are currently living for free which is huge. I would try to hold onto that if at all possible unless you could use your equity to buy a new house hack that also covered living expense. I like the idea of the detached unit personally because you essentially create your own multi family property... however depending on which city you're in that may not be an option. For example Chesapeake does not allow ADUs with kitchens and specifically states it cannot be rented (not the exact wording). I also have one of those under 3% mortgages and I personally would not want to lose that if possible, but it sounds like with a HELOC for the addition you would cashflow the HELOC so seems like a good deal to me.

David Smith · Answer

Hey Mike! Your current mortgage is killer, looks like renting that property out would be a solid plan. I believe getting a HELOC would work well too as long as there was a plan to get rid of it quickly in a cash-out refi. I am hosting an informal meet up for investors on 9/25 at Clean Eatz on Volvo in Chesapeake, VA at 11AM if you would like to swing by and chat about you plan with other new investors!