“Live In” Flip Advice!!

[David B.]

Hi all,

I have to move back to Los Angeles in the near future and I’m interested in purchasing something I can add value to and exit within a few years.

While I’ve flipped a fair amount of houses, Iv never done one one while living in it. I also haven’t done one in Los Angeles. My goal would be to move in, add value, and exit in 2-3 years. I have a couple questions —

1. What criteria makes for a good live in flip? I know conventional lending could become an issue depending on the condition of the property. Anything else to consider?

2. ADU's are a very popular in expensive areas, and I understand they add equity value as well. Curious as to thoughts on building ADU'S for equity in LA / SoCal market.

3. Anyone actively flipping in LA/ SoCal? What’s the landscape looking like nowadays? Any area particularly hot? I’m very familiar with the city but have been gone three years, so curious what’s happening on the ground.

I’m gonna have to stretch if I want to buy in Los Angeles again, but I still think it’s a better idea than not. My income doesn’t show itself as being very high, but I have a relatively large amount of cash to put down. Let’s assume I could buy between 800k - 1.5 million.

Any ideas or guidance James Dainard or anyone else could offer in this regard?

Ps — I think I prefer SFH value add vs Multifamily house hack. Rent control laws in LA are a little scary to me. I could still house hack a SFH after rehab, as I'm currently single.

Thanks everyone.

[Dan H.]

Quote from @David B.:

Hi all,

I have to move back to Los Angeles in the near future and I’m interested in purchasing something I can add value to and exit within a few years.

While I’ve flipped a fair amount of houses, Iv never done one one while living in it. I also haven’t done one in Los Angeles. My goal would be to move in, add value, and exit in 2-3 years. I have a couple questions —

1. What criteria makes for a good live in flip? I know conventional lending could become an issue depending on the condition of the property. Anything else to consider?

2. ADU's are a very popular in expensive areas, and I understand they add equity value as well. Curious as to thoughts on building ADU'S for equity in LA / SoCal market.

3. Anyone actively flipping in LA/ SoCal? What’s the landscape looking like nowadays? Any area particularly hot? I’m very familiar with the city but have been gone three years, so curious what’s happening on the ground.

I’m gonna have to stretch if I want to buy in Los Angeles again, but I still think it’s a better idea than not. My income doesn’t show itself as being very high, but I have a relatively large amount of cash to put down. Let’s assume I could buy between 800k - 1.5 million.

Any ideas or guidance James Dainard or anyone else could offer in this regard?

Ps — I think I prefer SFH value add vs Multifamily house hack. Rent control laws in LA are a little scary to me. I could still house hack a SFH after rehab, as I'm currently single.

Thanks everyone.

> ADU’s are a very popular in expensive areas, and I understand they add equity value as well. Curious as to thoughts on building ADU’S for equity in LA / SoCal market.

Search BP forums for appraisals associated with California ADU additions in single family zones. What you will find is they typically appraise for far less than the hands off cost to add the ADU. This creates an initial negative equity position that consumes the initial cash flow, sometimes for many years. The primary issue is that building small unit in a single count is some of the most expensive development.

In addition, in most jurisdictions the primary unit will become rent controlled (assuming more than 15 years old).  

Here is a list of issues with adding an ADU:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return.
11) adding an ADU to SFH can make the SFH fall under rent control.

good luck