Los Angeles Post ADU Build BRRRR Strategy: How to Get Cash Out

[Caleb Lee]

Hello BRRRR aficionados!

After purchasing an SFR in Los Angeles in 2020 and renting out the main home to tenants, I'm close to finishing up building a new detached ADU in the rear as well, complete with a private entry and backyard for another set of tenants. The ADU (with a separate address) adds about 700sqft (2BR/2BA) to the existing 1100sqft (3BR/2BA) main home, with the additional sqft and bed/bath count showing up on the property's title report.

The question now: How do I maximize how much $$$ I can pull out of this property so that I can do this again? I've been told that a cash-out refi is probably the easiest way to go, but here's my open questions for the community:

1. Maximizing Equity to Pull Out: How do I maximize the appraisal value of property, given that it's now much more square footage, bed/bath count, and rental income potential?
2. Refi Options: Is a cash-out refi, HELOC, or other method to pull out the newly built up equity the way to go?
3. Loan Limits: How do I get around the CA jumbo loan provision, which prevents how much I can pull out at the current rate? I had looked into cash-out refi-ing before, but ran into the ~548k maximum loan as a blocker (which in hindsight is puzzling, because it looks like the LA county jumbo loan threshold is ~822k)
4. BONUS: What would you do in my shoes?
   

Thank you for your help and advice!

[Dan H.]

Originally posted by @Caleb Lee:

Hello BRRRR aficionados!

After purchasing an SFR in Los Angeles in 2020 and renting out the main home to tenants, I'm close to finishing up building a new detached ADU in the rear as well, complete with a private entry and backyard for another set of tenants. The ADU (with a separate address) adds about 700sqft (2BR/2BA) to the existing 1100sqft (3BR/2BA) main home, with the additional sqft and bed/bath count showing up on the property's title report.

The question now: How do I maximize how much $$$ I can pull out of this property so that I can do this again? I've been told that a cash-out refi is probably the easiest way to go, but here's my open questions for the community:

1. Maximizing Equity to Pull Out: How do I maximize the appraisal value of property, given that it's now much more square footage, bed/bath count, and rental income potential?
2. Refi Options: Is a cash-out refi, HELOC, or other method to pull out the newly built up equity the way to go?
3. Loan Limits: How do I get around the CA jumbo loan provision, which prevents how much I can pull out at the current rate? I had looked into cash-out refi-ing before, but ran into the ~548k maximum loan as a blocker (which in hindsight is puzzling, because it looks like the LA county jumbo loan threshold is ~822k)
4. BONUS: What would you do in my shoes?
   

Thank you for your help and advice!

 >How do I maximize the appraisal value of property, given that it's now much more square footage, bed/bath count, and rental income potential?

Income potential does not have role in the value of non-commercial residential roperties (less than 5 units). Appraisers often are valuing ADUs less than hands off costs of adding the ADU. The best thing you can do to maximize the appraised value is to find comps that have an ADU that depict the highest value. Comps should have an ADU, be in vicinity, be recent sales, and similar in total bedroom/bathrooms. In the absence on comps, you are likely to receive a disappointing appraisal.

>Is a cash-out refi, HELOC, or other method to pull out the newly built up equity the way to go?

HELOC for non-owner occupied are much more difficult to find since Covid than pre-Covid. This is not a big deal because I would recommend the refi over the HELOC in your case. Most HELOC are variable rate with low costs which make them ideal for shorter duration loans. I choose refi over HELOC for longer duration loans or unknown duration loans.

>How do I get around the CA jumbo loan provision, which prevents how much I can pull out at the current rate? I had looked into cash-out refi-ing before, but ran into the ~548k maximum loan as a blocker (which in hindsight is puzzling, because it looks like the LA county jumbo loan threshold is ~822k)

If your property appraises high enough to be a jumbo here are 3 options: get the jumbo loan with the associated terms (but the rate the jumbo rates are pretty low right now, recently quoted 3.5% to 3.75% depending on buy down at 75% on $1m loan), lower the LTV to fall below jumbo rates, look for lender that will keep loan in house).

good luck