First Time Investor in Need of Advice

[Manny Sosa]

Hello all investors I'm 24 and I'm looking into buying my first investment property for my portfolio. This one is going to be a BRRRR deal for me.

Property Asking $680k 

2 bed 1 Bath 738 sqft 

Lot size 6k sq ft. 

In need of a full rehab so not sure how much that would cost I’m thinking $70k?

Also want to add an ADU to get extra cash flow but not sure how much a fully permitted ADU adds value to the property when refinanced.

Need help with figuring out how to estimate rehab costs and how to figure out what’s the best price to buy at. It’s hard because all I want is cash flow even if it’s $500 and hold for the appreciation. 

Feel free to brainstorm with me down below please and thank you!! 

[Dan H.]

Quote from @Manny Sosa:

Hello all investors I'm 24 and I'm looking into buying my first investment property for my portfolio. This one is going to be a BRRRR deal for me.

Property Asking $680k 

2 bed 1 Bath 738 sqft 

Lot size 6k sq ft. 

In need of a full rehab so not sure how much that would cost I’m thinking $70k?

Also want to add an ADU to get extra cash flow but not sure how much a fully permitted ADU adds value to the property when refinanced.

Need help with figuring out how to estimate rehab costs and how to figure out what’s the best price to buy at. It’s hard because all I want is cash flow even if it’s $500 and hold for the appreciation. 

Feel free to brainstorm with me down below please and thank you!! 

I am pro coast CA market but no one that I am aware of claims it is a good cash flow market in the near term. A high LTV purchase will bleed cash at purchase.

If you spend $680k + $70k = $750k, you likely need rent of about $7500/month to be cash neutral.   Your rent likely is less than 50% of that so you will be negative >$3k/month.  

In general ground up ADU additions in SF zoned areas cost significantly more than they will appraise for. In addition in many jurisdictions the primary unit will become rent controlled.

Here is list of reasons adding an ADU in SF zoned areas of So Cal is a non-optimal investment:

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