Buy second property vs construct a second unit in Emeryville, CA?

[Akshat Jain]

Hello BP! 

I am a newbie in the real estate world, I wouldn't even call myself an investor yet. I am looking to get started in real estate and have been reading/ educating myself the last few months. My current situation is that I own a SFH in Emeryville, CA, bought about 2 years ago for around 600k. It was originally a 3/1 and we added another bathroom to make it a 3/2. After we are done remodeling areas that need repair (all scheduled for this year), the house will be worth around 760-800k per my conservative analysis.

Here is my dilemma: I have access to purchase another property upto 800k with conventional financing and an equity line of about 180-200k. I could either use that to purchase a new property or construct a secondary unit on my current lot. For a new property my goal is to purchase a 2-4 unit in the bay area, but most properties do not cash flow to the point I would like. I did look into building a secondary unit, and I would be able to secure the necessary approvals needed to do so. From a cost standpoint, for a 600 SF unit (that's the most allowed in my case) I am budgeting around 200-270k (300+ - 450/SF). I would move into this unit and rent out the entire 3/2 house, for about 3200-3500/mo. I also have some reserves to fund the construction above and beyond what the equity line would get me. Obviously I would refi after construction is complete and main house is rented out.

Seeking the community's opinion, buy another property in this hot market, or build one? 

[Amit M.]

I wouldn't comp and SFH+ADU with tradition 2unit buildings, as they are different animals. The ADU thing is pretty new, so it may be hard to comp. but basically. The SFH is usually better than a unit in aduplex, and the ADU may be lesser value than unit in duplex (size, on ground level, or behind man house, etc. best thing to do, imo, is to talk to numerous agents who may have been involved with ADU clients.

OTOH, the ADU may be a good solution FOR YOU, given you're ok with a smaller space and saving the money.

I'd be very leary of investing OOS. Usually little to no appreciation, and you have little control over the asset and it's management. Plus you don't know the area nearly as well as your own area. Search on this site for cash flow vs appreciation for an earful on the subject! And keep in mind, most people can't invest in the Bay Area because they can't afford to get into it in the first place. You have the luxury of doing so. I'd definitely go local. Time is your friend. The long term appreciation is huge. That's how I made my millions, now I sip lattes, tend to a property here and there and enjoy leisurely walks in the city. Thanks Bay Area real estate!