1 - 4 units in East Bay Area. Should I do it?

Question

Hi everyone!

Long time reader, first-time poster.

I found OFF-market property in San Lorenzo (East Bay area). There is 1200 SF 3 bd/2 ba old house sitting on 9000 SF lot with grandfathered duplex zoning.

Appraisal for the property is $615 000. ARV is around 700k.

I can purchase it with cash for 455 000.

The plan is:

- remodel the current home (50-60k) and rent it out, cash-out with 5/1 ARM

- subdivide the existing lot into 2 SFR lots and prepare all plans - $30k and 6 months

- build a first ADU ADUs on the first lot with existing home (700 SF, 2 BD/1BA) - $175k and 6 months

AND build a brand new 1200 SF 3 BD/2BA home - $300k and 6-8 months, rent them out, cash-out with 5/1 ARM

- build a second ADU ADUs on the second lot (700 SF, 2 BD/1BA) - $175k and 6 months, cash-out with 5/1 ARM

Cash flow:

- in 3 months (after the main home remodeling) - 3k/month

- in 9 months (the first ADU built) - 5.4k/month

- in 12-14 months (the second home built) - 8.4k/month

- in 18-20 months (the second ADU built) - 11.4k/month

Result:

I will invest initial 455 + 60 remodeling + 10 misc (taxes etc)

I will have ±975k in loans (to cover new home and 2 ADUs built out - the cost of construction is 650-700k approximately)

I will have 2 SFR with ADUs in Bay Area with ±11k gross rental revenue.

They could cost up to 2 million with 5% CAP Rate.

Please, share thoughts

Kam T. · Answer

Sounds like it could be a good deal!

The JADU can be fully built within the envelope of the primary structure, so doesn't necessarily have to look much different than a single family home from the exterior viewpoint (ignoring the detached ADU). JADUs can also be built and approved as part of a new construction SFR planning process, per the new state law.

If you haven't already, it's worth mapping out  a rough layout of the new structures on the parcel (some cities' zoning maps have area distance and area/calculator tools built in) after you factor in all of the required dimensions per parcel after subdividing into two. Alternatively, could pay an architect for a few hours to do a feasibility study before you move forward.

Some important factors/constraints to consider when subdividing are the required minimum lot size, setbacks and minimum frontages/minimum lot width for a parcel in the zone you're looking at. Minimum lot width makes subdivision tough (without a variance) for a lot of parcels, even if they're larger than average. E.g. a 9K square foot lot that's 90x100 in a zone with required minimum width/frontage of 60 ft. likely can't be subdivided without a variance. I wouldn't only trust the word of the county person you talked to (they're not always correct unfortunately) but also supplement what they told you by looking at the published zoning code specific to the zone the property sits in (if you haven't already), and internalize the constraints as they relate to this parcel/your plan.

If you are able to subdivide equally (4.5K sq. ft. each new lot), after factoring in the zoning constraints for the new single family homes potential (and potential JADU), how much space is left to allow the new detached ADU (allowing 4 ft rear and side setbacks, per the new CA ADU law), and will a 750 square foot detached ADU fit comfortably given all of that?

Account Closed · Answer

Can't say I understood all of that, but my red flag was an adjustable rate mortgage.  Those killed people back in the 1990's.  I'm surprised to see them resurfacing right now before another recession.  I thought they were banned.  It's like here we go again.  You can't count on numbers when there are ARMs in the mix, in my opinion.

Otherwise, good on you.  I'd advise to go slow, take your time.  During the 2008 crash and the following years, even the Bay Area really suffered.

Mikhail Petrenko · Answer

Sandeep, thank you for your response. Amazing suggestions.

1. I double confirmed the subdivision with the county planning department (by phone and 1 initial meeting).

They told me it will take 6-8 months to subdivide lots. I am still considering to build ±1800sf SFR and 700 SF ADU and get 1 jADU from the new building on the same lot.

2. The main downsize for rent prices is that 4-6 (with possible jADUs) 1-story units on 9000 sf lot would look like a slum apartment building and be valued lower for renters.

3. Construction costs are calculated from my previous experience.

4. One of the concerns is the liquidity of that behemoth - IDK if I could sell it for good valuation in the future))

Brian Garlington · Answer

You're able to buy a 3/2 in San Lorenzo for $455K and with 60K remodeling it will have an ARV of 700K although right now it appraises for $615K?

IF those numbers are legit what are you waiting for?

Somebody is hooking you up IF those numbers are legit.

Mikhail Petrenko · Answer

>Which ADU company are you using?

Just got a few bids

>What are the comps around the area? Are there other ADU's around or near to you?

There a few ADUs and rentals (even neighbors have ADUs). But no comps with sold SFR with ADU.

Rehabbed SFR cost 680-720k in the area.

>What about a JDU on the home already there?

The idea to add 2 jADU and become an owner of 6 units is viable too)

Sandeep S. · Answer

@Mikhail Petrenko

First - congratulations on getting a great deal in contract!  $455k is a great price for 3/2 in San Lorenzo (even in the current environment).   I really like your strategy and execution plan.  Your rent numbers are fairly realistic.  The biggest issue (not a big risk) is that you may not be able to subdivide the lot into two SFRs.  It may mean that you can create 2 units on the same lot (and in that case you may not be able to add 2nd ADU).  Even if you don't get to 4 units, you can get to 3 rental units and the strategy will still work very well.    You may end up spending some more money and time on new construction than the numbers in your budget.  And you may not be able to cash out during re-fi as quickly as you project.    So keep fat margins in all of your estimates.

I also plan to add ADU to couple of properties that I own in the Hayward/San Leandro.  I hope I can learn from your ADU experience!  Good luck!

Brian Garlington · Answer

Agreed Mikhail...........Flipping can be a great strategy....but I have known a lot of flippers that wished they had done a whole lot more Buy and Hold with those flips....Buy and hold is much less labor intensive.

Mikhail Petrenko · Answer

Brian thank you for the response. My main idea is to buy-n-hold + subdivide the lot, build new units etc

Flip is just an OK strategy for me.

Reynard Azada · Answer

Great! So to your topic, I say now or never on doing it! We know timing is everything but this should be a great time and there should be a lot of essential work out there for this job! God bless and ill sure to follow this journey of yours. Best wishes to you brother!

Reynard Azada · Answer

Wow! I used to live in San Leandro! Those are some awesome numbers! Which ADU company are you using?

Have you gotten build sheets yet?

What are the comps around the area? Are there other ADU’s around or near to you?

I’m planning on ADU’s on my soon to be 2 properties. But looking at a year turnaround minimum from start to finish.

Just hoping you have a plan B if first ADU takes longer then the 9 months you got.

What about a JDU on the home already there?

Hoping for this to be a Grand Slam! Following this!

1 -> 4 units in East Bay Area. Should I do it?

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