China Built Backyard Homes (SoCal)

[Andrew Erickson]

Here is a strategy I've been working on. I have a business where I design products and have them mass produced in China. I ordered over $200k in wholesale orders last year, so I am very familiar with the whole China production and import business. I was looking into some business models where I can marry my China import skills with real estate. I came up with buying kit homes produced in China and putting them in people's backyards.

These homes are semi pre built and fold together to fit into a shipping container. They come with plumbing and electrical already built into the home. They can be made with any finishing you'd like and can be designed to meet local standards. There are several sizes, but I would go after a model that is 380 sqft. It includes a full kitchen, full bath, and a small bedroom.

There are new regulations in California that allow tiny homes to be placed in backyards very easily. These homes are called auxillary dwelling units (ADU). You can read more about those rules here. If the unit is under 500 sqft, meeting fire code, and a few other small requirements, it should be very easy to build these homes.

I can produce these homes for $11k each. It costs about $4k to ship them. I figured I would add another $5k in costs to transport the home to the end customer and assemble it onsite. That is a total cost of $20k/home. A home this size in San Diego, CA rents for at least $1,200. I verified people would be willing to live in a space like this by making a Craigslist ad. I got over 100 responses in under 24hrs (see the screenshot) so the demand is real! A unit that rents for that much should be worth about $150k, right? I figured I could charge $40k-$60k to do the whole thing for the end customer. That's a $100k value proposition to the customer. And I would make $20k-$40k on each sale.

I have already talked to several people who are willing to buy my first sample home. I just need to do all the work to get them this home. Right now I need help finding a contractor that could help me oversee this project and a permitting people to help navigate the whole process.

BP forum, please poke holes in my business plan! Or give me some advice on where to go next.

[Jackson Wu]

If you have an issue with a tenant and you are not zoned to have a legal rental,  you will not be able to evict them with the assistance of law enforcement.  This means the only way to get rid of a bad tenant is paying them to leave.  With these types of rentals its best to opt for short term or rent to a friend or family. 

Also, the math is a little funky. Its not really a 100k bump for the customer. You might get $1200 a month in rent(14,400 a year), but you cannot apply a standard GRM or CAP rate at the point of sale. The banks won't underwrite the income or the square footage.

 I'm guessing these will be installed into single family homes. If you were to ask an appraiser, they would value these at a flat rate that mother-in-law/pool house/guest houses would be valued. They would not value it by the amount of income or the added square footage. Last time I checked, the appraised value for one of these in the state of California was $25,000 and thats when the thing is permitted. 

Your value based on a 16x GRM at $1200 a month in California is $230,040.

Your Value based on 380sq ft at $500 a sq ft would be $190,000.

Your value based on a California licensed appraiser would be around $25,000.

So the thru value for a buyer is somewhere between the bank's number and the value of the rental income for the owner.  

Other than that, it looks like you have a nice little niche product. I think for a new investor that is house hacking, or someone who owns a 3/4 unit with the land to install one of these, you have a really interesting product.