Build ADU vs buy rental

[Michael Krouse]

Hello everyone,

"Long time listener, first time caller". I have a first-home-purchase-turned-rental in CA I need some advice with. I've rented the home since 1/2014 and it's been cash flow positive for the last year after regular annual rent increases . I've recently been approved for a either HELOC/HEL and wanted to take advantage of the equity built up through the current market. The narrow property is semi-ideal to build an ADU with posterior access to a cul-de-sac. Preliminary research and prior construction industry experience suggests I can build the ADU for 120-180k, with the upper end being the most I have been approved for. I can afford the carrying costs of the loans over the projected 1yr build and with comps, I would be able to rent the unit for 1500-2000/mo. My other proposed option with which to apply my equity is to pay equity "cash" for a finished rental. Unfortunately, I know my available equity won't be very useful in CA, but I recently moved from and am relatively familiar with the Phoenix, AZ area. I believe that I can use my equity to buy a rental, ideally in the high-rent Scottsdale/Arcadia/East PHX etc area, that is ready to rent and be immediately in positive cash flow, save for the time securing a tenant and any necessary repairs/upgrades. I'd really like opinions from anyone with experience with either of these options and even suggestions for others. I'm a real estate novice with a masters in biochemistry, but I appreciate the opportunity that my nearly 200k in equity could allow me to leverage. So, for those willing to share their opinions and bestow their prowess, I would be especially grateful. Please, and, thank you.

Cheers,

MK