Add Unit or 1031 Exchange?!

[James Lee]

I own a 3-unit property in San Diego on the edge of trendy North Park. It's always rented and has great cash flow and probably around $800,000 in equity. I purchased it as a single family with a VA loan and used the BRRR strategy. We still have the VA loan at about a 2% interest rate. There is space for an additional 1 bed/1 bath unit (possibly a 2 bed). We have access to capital to build the unit, but with the market slowing down, there is a possibility that we could 1031 exchange into an apartment. However we would temporarily lose cash flow. Where should we be focusing our efforts?

[Bill B.]

Do you dislike your current property or think you could do better with a different investment? Those are the two big reasons to sell. 

For clarification:  

1) Are you still living in own of the units? (To qualify for section 121 tax exempt on portion of sale.). 
2) what do you think your net profit would be after selling costs? (To determine how much tax you could avoid with a 1031.)

3) how big is your current loan? (To determine how much money you would have to borrow at today’s higher interest rates.)

I’m guessing you should probably stay put unless you have a chance to take the tax free sec-121 money then MAYBE it makes sense. Since you could exchange in to a cheaper property and not be forced to reinvest that money.  

I love SD. If it wasn’t in California I’d live there tomorrow. Good luck. 

[Dave Foster]

@James Lee, If you love the property.  But want to jump into something larger.  Maybe the answer is to hold the property but don't build the adu.  Put that on hold and keep that money in the war chest for an apartment when it comes available.    That way you don't lose cash flow or a good property or that incredible loan rate.

[Nicholas Coulter]

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

[Dan H.]

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

[Nicholas Coulter]

Quote from @Dan H.:

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

I am in the smaller studio JADU with my wife. We STR the main 4/2. We will move into the 2/2 and rent out the studio likely to a family friend.
We have been using the HH/STR strategy 

[Dan H.]

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

I am in the smaller studio JADU with my wife. We STR the main 4/2. We will move into the 2/2 and rent out the studio likely to a family friend.
We have been using the HH/STR strategy 

 As long as you realize the JADU and primary are likely rent controlled it you ever place a LTR tenant.  In addition because you have 3 units you do not qualify for the owner occupant exemption (that is only for 2 units).  

In addition a jurisdiction can prevent the ADU and JADU from being used for STR. May not happen any time soon, but the law already exists permitting the jurisdiction ability to not allow STRs in ADU or JADU.

Good luck

[Nicholas Coulter]

Quote from @Dan H.:

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

I am in the smaller studio JADU with my wife. We STR the main 4/2. We will move into the 2/2 and rent out the studio likely to a family friend.
We have been using the HH/STR strategy 

 As long as you realize the JADU and primary are likely rent controlled it you ever place a LTR tenant.  In addition because you have 3 units you do not qualify for the owner occupant exemption (that is only for 2 units).  

In addition a jurisdiction can prevent the ADU and JADU from being used for STR. May not happen any time soon, but the law already exists permitting the jurisdiction ability to not allow STRs in ADU or JADU.

Good luck

We have the non occupant license and lucked out getting it. My understanding so far is that no matter what I can't STR my jadu or adu for less than 30 days.
Dan do you have any familiarity with the building permit or building departments in the city of SD? 

[Dan H.]

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

I am in the smaller studio JADU with my wife. We STR the main 4/2. We will move into the 2/2 and rent out the studio likely to a family friend.
We have been using the HH/STR strategy 

 As long as you realize the JADU and primary are likely rent controlled it you ever place a LTR tenant.  In addition because you have 3 units you do not qualify for the owner occupant exemption (that is only for 2 units).  

In addition a jurisdiction can prevent the ADU and JADU from being used for STR. May not happen any time soon, but the law already exists permitting the jurisdiction ability to not allow STRs in ADU or JADU.

Good luck

We have the non occupant license and lucked out getting it. My understanding so far is that no matter what I can't STR my jadu or adu for less than 30 days.
Dan do you have any familiarity with the building permit or building departments in the city of SD? 

Only as someone that has had to pull permits. No insider or special relationship.  

in May I closed a permit that removed load bearing wall, added a bathroom, and removed a fireplace.  The inspector in some ways was a pain and in other ways was lenient.  For example, even though it was little unit, inspector required whole unit tied fire alarm.  He also required sheer wall to go all the way to shingles even though city architect approved plans that only had it go to ceiling (also the removed load bearing wall that was removed only went to ceiling).  He also required a double ground at unit even though there was a double ground at the drop (I believe he was incorrect wanting this but it was not hard to provide).  On the easy, we had work that possibly should have been on the permit.   He inspected it as though it was on permit, but did not mandate it being on the permit (example drywall, new electrical in places other than new bathroom, etc).  

 overall he was reasonable as he could have been easier but he also could have been more a hindrance than he was.

 good luck

[Nicholas Coulter]

Quote from @Dan H.:

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

Quote from @Dan H.:

Quote from @Nicholas Coulter:

@James Lee I am building out a 2/2 1k Sq ft ADU currently near your place in NP. I would say it depends on if the property is a pain and what your long term goals are. My wife and I plan on living in our 2/2 while renting out the other 2 units onsite. Then selling with the equity built up to move into a longer term live in flip strategy. I would say the next moves you want to make are a better predictor of your next steps.

Has anyone indicated that the 2 existing units are rent controlled?   This could play a role in which unit you decide to occupy. 

good luck

I am in the smaller studio JADU with my wife. We STR the main 4/2. We will move into the 2/2 and rent out the studio likely to a family friend.
We have been using the HH/STR strategy 

 As long as you realize the JADU and primary are likely rent controlled it you ever place a LTR tenant.  In addition because you have 3 units you do not qualify for the owner occupant exemption (that is only for 2 units).  

In addition a jurisdiction can prevent the ADU and JADU from being used for STR. May not happen any time soon, but the law already exists permitting the jurisdiction ability to not allow STRs in ADU or JADU.

Good luck

We have the non occupant license and lucked out getting it. My understanding so far is that no matter what I can't STR my jadu or adu for less than 30 days.
Dan do you have any familiarity with the building permit or building departments in the city of SD? 

Only as someone that has had to pull permits. No insider or special relationship.  

in May I closed a permit that removed load bearing wall, added a bathroom, and removed a fireplace.  The inspector in some ways was a pain and in other ways was lenient.  For example, even though it was little unit, inspector required whole unit tied fire alarm.  He also required sheer wall to go all the way to shingles even though city architect approved plans that only had it go to ceiling (also the removed load bearing wall that was removed only went to ceiling).  He also required a double ground at unit even though there was a double ground at the drop (I believe he was incorrect wanting this but it was not hard to provide).  On the easy, we had work that possibly should have been on the permit.   He inspected it as though it was on permit, but did not mandate it being on the permit (example drywall, new electrical in places other than new bathroom, etc).  

 overall he was reasonable as he could have been easier but he also could have been more a hindrance than he was.

 good luck

I’ll hope for the same. That doesn’t sound terrible. I have heard stories of other county inspectors requiring walls to be opened back up etc.