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?