Using FHA to buy a home and build ADU // need advice

[Michelle Kay]

Hello everybody,

My name is Michelle and this is my first time posting on Bigger Pockets forums. I'm hoping to tap into the wealth of information provided by you fine folks.

A little bit of background on me: My husband and I currently rent a 1 bed 1 bath ADU in the San Fernando Valley, we pay $1700/mo including all utilities. I am a project manager for a general contractor. I deal with building inspectors, subcontractors, suppliers, and laborers on a daily basis. My husband is a carpenter, welder and all-around handyman with golden hands who manages our fence/gate business. We live and breathe the home improvement industry! We have access to cost price, amazing professionals, and insider knowledge which will ultimately save us tons of money in any renovation, big or small.

Our goal for 2018 is two-fold: to become homeowners AND landlords. We will achieve this buy finding a home with a large lot, build a detached ADU (accessory dwelling unit) and rent it out ASAP.

Our financing strategy is to use FHA and put down 3.5% (we've saved 6% to include closing costs just in case) and then get a private construction loan to finance the building costs of the ADU, which will cost us around $40,000, since we will be doing most of the work ourselves (including framing). Estimated monthly mortage/insurance/tax + loan payment would hover around $3500, not including utilities.

Since we have lived in 3 ADU's in the past as tenants, we've accurately estimated that our proposed 1 bed 1 bath with fenced-off yard and pergola, ADU could rent for $1700/mo easily, with the tenant paying their own utilities.

Our budget is no more than $475K, including money earmarked to repair main house (because honestly, we won't be getting anything pretty in San Fernando Valley at this price range) and construction loan for the ADU.

Currently we have about half of the down payment and closing cost amount saved up. 

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Here is a list of my main concerns/questions that I'm hoping you folks can help me with:

1.) Does it make sense to jump into such a project in such a costly area as a first-time endeavor? 

2.) Would it make more sense to start small and buy a much cheaper property to flip? But then I couldn't get FHA because of the 1 year occupancy requirement, and then I'd have to wait till I saved 20% for a conventional mortgage and that takes more time, and time = money!!! Especially in this hot market.

3.) Can you buy a foreclosed property through FHA? Does it make sense financially/time wise?

4.) What can I do RIGHT NOW to save time and make it easier for us when the time comes to start building the ADU?

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Thanks for reading my post, any and all feedback is highly appreciated.

Michelle

[Nabil Suleiman]

Hi Michelle,

Welcome to BP. I love the game plan. Here are my short notes/ thoughts before I answer your questions. 

1. FHA has certain requirments when buying a home and the condition that it is in, so just be aware of that when thinking of looking at fixers.

2. 203k loans can be something you explore if fixers are the route you want to go.

3. construction loans (to my knowledge) are not accessible to people who do not own the land outright. meaning you cant have a loan on the house and then get a construction loan... BUT if you do buy a fixer, then you can force appreciation into the house and then take out a HELOC. to afford your ADU's.

now to your questions:

1. I jumped into costly areas on my first endeavors. It can make you or break you, so make sure you are doing your numbers right and have good exit strategies.

2. 5% conventional loans exist. look at those as possible options to avoid FHA (notes above on issues with fixers and FHA's)

3. No

4. a) You can find people on here that have done ADU's already, or have begun the process. If you can find someone in a similar area to the one you want to invest in, that would be the best. Take them out for coffee, and pick their brains.

b) go to your local investor meeting and start talking to people about your goals. The more people that know them the sooner you will find the right people to connect with.

c) evaluate properties you are interested in as if you are going to buy them this week. Find out the numbers and how you would make sense out of the purchase

e) have you been pre-qualified yet? this is a super important part about educating yourself on what you could potentially afford. 

I am sure there is more but this is what immediately comes to mind. 

Good Luck!