First Deal - SFH in a R-2 Zone. Adding primary and ADU

[Jason Gettler]

Hello BP community,

I've posted a couple potential deals over the last few months and I know some of you were eager to hear how they went since they were SFH with ADU adds.  We didn't pull the trigger on them because each house we went after had 20+ offers, 60%+ were cash offers and averaged 30-50k above asking price.  The increased price removed most of the value I was going to bring to the table building at cost, being a contractor and all.
It's a long story but I found an off market deal with a customer of mine who happens to own a single family home on a property zones R-2-N.  The lot is 10,000 SF in North Long Beach and the existing house is 728 SF 1bed/1bath with a detached garage which is in terrible shape.  The existing house is located towards the front of the property. The plan is to demo the existing garage and build a 800 SF garage with an 1,100 SF 3bed/2 bath second primary unit on top towards the rear of the property.  We need to maintain a 20' setback to the rear so that's where it will be placed.  Since we're building a second primary and removing the existing garage we must provide a two car garage for each primary. 
The numbers:
We are purchasing the property for $240,000.00.  My business partners siblings technically own the house but the proceeds are to be divided between the 5 siblings once sold.  My business partner is leaving him and his brothers equity share in the deal so the purchase price is lower for us.  My business partner still owns $160,000.00 of equity in this deal before I see a profit since he's leaving his profit in the deal for now so the numbers work out better for us when getting the loans. Technically we should have purchase the house at $400,000.00.   I hope that makes sense.  He takes care of his brother which is why he's able to leave his brothers share too.

So back to the numbers...
Purchase price $240,000.00
Construction cost for two 2-car garages - $50,000.00
Driveway - $15,000.00
Upgrade to existing systems - $10,000.00
Construction cost for 1,100 SF second primary - $101,00.00
Finishes material cost for 1,100 SF second primary - $30,000.00
Pre-Construction costs (plans, engineering, city fees) - $17,000.00
Total - $463,000.00

Part two:
We plan on converting the garages into a 2bed/2bath 800 SF ADU as part two of the project.  We would have loved to do everything all at once but the city is requiring us to provide the garages for the two primary's first in order to satisfy that code.  Once they are existing we can then convert them into an ADU.  Since the garages will already be build with the ADU in mind it won't take much to convert them.  We plan on already running all the dedicated gas lines, water, sewer and capping them as part of the first project.  We are budgeting another $50,000.00 for the garage conversion and another $5,000 in city fees.   We'll already have the plans and engineering ready as part of the first project.
So the new total is $463,000.00 + $50,000.00 + $5,000.00 = $518,000.00

Although we have worked on a ton of ADU's in residential for other homeowners, we have no experience in adding additional primary residences in a R-2-N zones.  We know unexpected stuff will come up like street improvements, grading, Misc. items the inspector will request during construction that normally wouldn't come up with R-1 type jobs.  I'll keep you guys posted on all of that.  Also, we haven't budgeted yet for landscape, appliances, hardscape other than concrete driveways, etc.  So that will be added as we go.

The goal would be to get an appraisal at 800k+.  Other duplex's in the area have sold for 750-800k and ours will be by far the best in the neighborhood.  Also ours will have a 800 SF ADU with the duplex.  We hope they give us a price per SF on the ADU appraisal but are prepared for the worse.  We believe this property is a great guinea pig for the ADU add as there is so much value being added with the second primary that it leaves a ton of room in case the ADU doesn't get the appraisal we need.  Another reason why it works is because we have to build the two 2-car garages anyways.  So why not add the 800 SF ADU for another 55k'ish?  Our plan is to get an appraisal pre-ADU and post-ADU and share that information with you guys.  My partner will take half his equity share (80k) first and then we plan on using whats left as a down payment for another property.  My partner is leaving his brothers half in and we use that to cover his brothers rent as he lives in the primary house.  Unfortunately his brother has stage 4 cancer which is the reason we are leaving the 1bed/1bath 728 SF primary alone.  Im only mentioning it since I'm sure some of you are wondering why we don't add square footage to it when we're building the second unit.

We're in the middle of refinancing another property now to get the downpayment money for this project. We have about 20 days until we close and I'm told we should close on the new property about 2-3 weeks after (David Greene introduced me to his team and we're working with Christian on the refinance and loan for the new property).  I'll post every so often with an update.  Feel free to ask any questions!  By the way I'm 33 and don't know **** about investing or real estate.  I've listened to the BP podcasts and read a few books but that's it.  I do know construction though and owning properties has always been my number one goal.  I'm roughly 4 years into owning my construction company and finally feel like it's time to take the next step.  Shout out to John S and Justin R from BP.  John is great at running numbers and finding deals and Justin gave me some great advice on multifamily with ADU adds.