My First Deal: Analysis Advice (SF East Bay Area, ADU, HouseHack)

[Missy Longshore]

Hi,

I live in the San Francisco Bay Area (in El Cerrito, in the East Bay) and would like feedback on my plan to get started in real estate investing. I'm looking for a way to lower my housing costs with this plan.

The plan is to build an Accessory Dwelling Unit (ADU) in my basement, essentially turning my home into a duplex. I would move into the new, smaller unit in the basement (a studio) so I could rent out the 2 br/1 ba for maximum rent. Once the value of the home increases I could do a second cash out refinance and take that money to invest in my second property, likely an out of state or out of area rental.

Here are the numbers:

I currently owe $300k on the 2br/1ba

The current value is $645k (conservative estimate)

I'd cash out refinance a max of $200k to build the ADU and do repairs to get max rent for the 2br/1ba

New estimated value $900k

Cash out refinance rate: 5%

Current mortgage payment $2k (includes escrow account)

New payment: $2,750/mo

Rent for 2 br/1ba: $2,500

Rent for new studio: $1,750

50% rule analysis:

($2,500 in total income * .5) - $2,750 = ($1500)/mo

Obviously we want this to be a positive number, but is it fair to think of this as I'd be saving $500/mo over what I'm paying now ($2k)?

1% rule analysis:

Monthly rental income/Purchase Price

$1750/$150k=1.16% This is good, right?

This assumes 50k of 200k would go to upstairs/overall house repairs; I'm calculating it this way because there's no way I could purchase a studio home in the bay area for $150k.

Other questions:

Would this make me over-leveraged? What do I need to consider given that there is likely a recession coming in the next 24 months?

Thank you so much for your thoughts and advice!

Missy