Is this the right time to make my first purchase?

Question

Hi! I’m new to this page and to real estate investing. I’m hoping to educate myself as much as possible before I make my first purchase. I have a down payment suitable for an FHA loan, my goal is to get into buy and hold rental property investment. I’d like to find something that is fairly turnkey for renting out immediately but also have the option to make upgrades that will raise the valuation quickly (adu possibilities etc). I’m nervous enough getting into this, is this the right time economy wise? I’m in NorCal, for context. Thanks 🙏

Alex Olson · Answer

@Hannah Joy I would recommend buying now but buy something that is near turn key so there is not a ton of work to do. Buy a duplex or better yet a fourplex. And yes, live in one side and rent out the other. I think it is fine to buy now, but do not over pay. Find a good buyers agent in your area that knows what properties are worth. Make sure you do your own research so you can pull comps. While, you may not find an amazing deal from a price point perspective, you will be ahead of most every other investor because you are doing an owner occupied home, which means you can leverage 96.5% of the purchase price and pay it off over 30 years at a fixed rate in the 3s! Not many of us can do that. Run your numbers, run your numbers again, and have your agent run numbers. Hope this helps!

Dan H. · Answer

If you do a hands off ADU, which means that you do none of the work your self and do not act as the general contractor, the ADU will be valued by an appraiser significantly less than it cost you to build it.  Likely less than 50% as much as it cost you to build it.

The ADU will add value to the property, but not as much as the ADU will cost to build (hands off).  This implies that it is typically better to purchase a property with an existing ADU than to build your own ADU.  It also implies that building an ADU is typically not a value add in terms of something that permits the owner from extracting money beyond investment costs.

An ADU can help with cash flow, but this is true if you purchase an existing ADU or build an ADU from scratch.  It is my belief that most investors who build an ADU as their RE investment have not done enough research and could do better with other RE investment choices.

Good luck

Matthew Forrest · Answer

@Hannah Joy In your circumstances I would make sure you feel adequately educated. What adequately means is different to everyone, but finding an experienced mentor in your area can help you with your decision making. However, once you feel educated I like to go by the proverb that goes something like "the best time to plant a tree was 20 years ago... the second best time is now."

AJ Singh · Answer

@Hannah Joy

Start your RE journey with a due diligence purchase. Learn to manage your tenants. There is a learning curve and everything is not as smooth in the first few months.

with the BRRR option, there will be equity but am not sure it will be instantly refinanceable to do another purchase

@Alex Olson is spot on with advice on not overpaying and buying a small multi family with cosmetic rehab.

Best of Luck!

Dan H. · Answer

> will raise the valuation quickly (adu possibilities etc).

In most markets an ADU is not a value add meaning that it will not appraise for as much as the hands off building costs.  if you go this route, be sure you have comps to justify your forecast valuation.

>My goal is to use equity from this purchase to make another purchase asap, any tips on that?

In most cases, the lender will require a seasoning period.  As it happens, I suspect this is not as large an impact to people who are new to the value add/refinance process because they typically take long enough to do the value add that the seasoning period is either over or close to it.  Realize a refinance may not be possible until a 6 month hold due to seasoning requirements. Just make sure you know the seasoning duration and take it into account.

Good luck

Hannah Joy · Answer

Hi @Hayley Pastori, congrats! It is really nice to hear that this method is working in this area for someone.  I am hoping to find something in the next couple of months, solidifying my preapproval now. I would love to hear more about your process and how that is going for you :)

Hayley Pastori · Answer

Hi Hannah! I’m in Eureka Ca as well. My husband and I have used the BRRR strategy to purchase our first rental using equity from our primary residence. I’m also a realtor here in Humboldt County and would love to help you start searching for the perfect property! Feel free to reach out with any questions!

Hannah Joy · Answer

Thanks @Mike D'Arrigo! As it is my first purchase I am planning to find something close to home, looking in Eureka Ca currently. From everything I see on this website and from the Book on Rental Property Investing, nothing in my area really fits the model deals, but with appreciation and new tourism I hope getting my foot in the door will be worth it and then I can look elsewhere for the future.

Mike D'Arrigo · Answer

@Hannah Joy with interest rates at all time historic lows, I think it is an excellent time to buy. Today's rates add anywhere from 2-3 percentage points to your cash in cash return compared to rates just a yeat ago. That's a huge difference. I highly recommend staying away from high cost markets however and sticking with more affordable markets that will have more price stability. We're seeing some signifcant trends in net migration in some markets due to the fact that a lot of employees can now work from home and are moving from high cost markets to more affordable areas.

Dan H. · Answer

I have heard of being this done for rehabs, but have never heard of it being done for an ADU addition.  I suspect if it can be done for a rehab, it can be done for a project build, but I am speculating solely on the similarity of the rehab versus an ADU addition.

Sorry, I really am not sure.  I do believe that if you did get such an appraiser to help obtain the maximum value for the ADU addition that you would be enlightened enough that you likely would look for a different investment path than the ADU addition.

I know an investor on BP that she invests OOS, but she also invests in L.A. area (she used to be in San Diego when she was only doing OOS).  She has posted that an under utilized zoning usage is far better than adding an ADU.  She typically is referring to complete teardowns, but I suspect it is also true of a duplex being converted to a triplex or quad, or an SFH being converted to a duplex through quad.  The appraisals on these efforts typically do much better with respect to the costs than an ADU addition.  This would be a value add effort.

Adding an ADU is typically not a value add effort.  However, with coastal CA historic appreciation, it likely works out given some time (@Brian Lawson), but different investments could have produced a better return.

Good luck

Is this the right time to make my first purchase?

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