Purchasing second property

[James Tiu]

Hello everyone! I have been following bigger pockets and reading a lot of posts for at least 3-4years. This is my first post. A little background about me. I bought a duplex at City heights in San Diego November 2016 for $450k with an FHA loan. I refinanced the loan to a conventional in May this year. I pay $2.8k a month. I rent one unit for $1500/month and I live in the other. If I got the market rate I could probably get around $1800/month.

That leads me now to my next purchase I am trying to make. I wanted to ask everyone in the community to give me their thoughts, insights, and experience with my next purchase. The subject property I am trying to acquire is in national city. It is a SFR with 1650square feet and 3bedrooms and 2 bathrooms. Last time it was updated was probably in the 70's or 80's. It was being offered between $525-550k. Realistically, the comps for that type of property is probably somewhere in the ballpark of $450k. The reason I would even be interested in this overpriced property is because it has a mixed use zoning. The zoning could allow for up to 11units. I have offered and counter offered and we are at a stalemate. I am at $520k purchase and $10k back in escrow. Sellers are at $520k and $5k back in escrow. $5k is not going to break the bank for me. If I purchase this property I plan to use an FHA 203k loan and add a 800sq foot ADU where the garage is. It will likely cost between $80-100k. My final cost for the property will be between $600-620k assuming a $520k purchase price. My mortgage will be around $4.4k/month for a $620k mortgage. I will rent the main house for the market rate of $2.4k/month and live in the ADU. So I will effectively be paying $2k/month for a 800sq foot 2bedroom/1 bathroom in National City. Looking at recently sold duplexes that have a very similar main house and a smaller granny/ additional unit the comps are around $675-750k. If the property were to be appraised around $750k and my mortgage was at $620k I would be able to refinance into a conventional loan and remove the FHA mortgage insurance. My monthly mortgage would then be at $4k. And my portion of paying at $1.5k for a 800square foot 2bedroom/1 bathroom is a lot more pallateable at that rate.

My main question to the BP community is this, is this a good deal? My main goals going into this next deal is that I get instant equity and that the rental income would cover the mortgage once I refinanced and rented the other ADU out. It seems if the property would be appraised for $750k after building the ADU then this property would be a great buy. If it apprasises under $700k, I believe it will still be a good buy but not a great buy. I will have instant equity but I will not be able to achieve the goal of covering the mortgage with the rental income right away. I understand that I should also be budgeting other expenses such as vacancy, repairs, and property management. Unfortunately, in San Diego's market I do not believe those properties exist unless you have 20% down which in this case I wouldn't have 20% down. My FHA and the mortgage insurance handicaps me a little in achieving rental income covers mortgage. The trade-off is low down payment. Anyways, I would love to hear from BP and what their thoughts are. Thank you very much ahead of time!

[Dan H.]

Have you refinanced a RE in San Diego before?

My concerns: 1) refinance appraisals in San Diego are notoriously low. They regularly come in at 10%+ less than value based on average sold 2) The ADU value is not well understood as it will apply to appraisals and that is because current rules require it to be owner occupied. This clearly makes the value less than a similar duplex. 3) 2400/month seems high given that it was last remodeled in the 70s or 80s. 4) The ADU does not seem like best use of the purchase/zoning.

If it is zoned for up to 11 units why use ADU. A duplex should comp better. I would look to put as many units as I can on the property. You do not need to be zoned for more than 1 unit to put an ADU. So you would be over paying for your current plan. But the 3/2 SFR with standard zoning and a little extra space for the ~$450k and accomplish the same thing for less money.

Good luck