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!