Need input on complex transaction: SFR + ADU + Construction

[James B.]

Hello BP Community, this is my first post...apologies that it's a long one, but we could really use your input! First off, while I'm experienced in Financial markets, I am new to Real Estate Investing. We came upon this unique opportunity that could be a primary residence with income potential and we are weighing out whether it makes sense, and would value the input of those more experienced/distanced from the situation. I will try to keep it brief and to the point, although there's a lot of moving parts: Home is a 2BR SFR with a 1BR ADU in back. It is 2130sq ft (House is Approx 1320 sqft, ADU is 810 sqft). The ADU was actually the existing home which was taken down to the studs and beautifully renovated, and the 2BR house is all new construction built on the lot in front of the ADU. ADU has separate address and is metered separately. There is a 1 Car Garage attached to side of ADU that could also be converted to a BR, but we are not planning that. For it to fit our needs we need to: add a 2nd BR to the ADU (120 sq ft) and another 500 sq ft Jr. ADU (1 BR) to be constructed on top of the garage w/separate entrance. The home is being sold by the architect/builder who just completed it and they are willing to make the additions, and are willing to do so at a wholesale price ($85K) but do not want to do so until the home is sold, as it was originally custom built for a buyer who ultimately backed out of the deal. We are in the process of structuring a deal to buy the home at a price to include the construction, which is to be done at close of escrow, with a provision to hold back a portion of the funds to cover the cost of building. As the builder has just completed the construction of the new home/ ADU, they still have an open permit with the city and will add the proposed plans/drawings to this permit for review. We are to pay for the review fees/structural drawings and the architect/builder will furnish the blueprints on their dime. The numbers: $1.26M to purchase the home, with $85K of the purchase price to be set aside in escrow to cover the construction of additions. (So, effectively, $1.175M for the house as-is + $85K for additions). Working with an atty to draft the contract. After the additions, total sq ft will be 2753. The mortgage will be $5900 PITI, market rate rent for 2BR ADU is $2200-2500, studio/1BR ADU is ~$1500, and 2BR house $3200. We plan to live in the house and rent out the ADUs. Our plan is for my father-in-law to live in the ADU with my stepson for the next few years at below market rent and then stepson goes off to college and we rent it at market rate. We have several prospects who would potentially rent the additional Jr ADU. Also, by my numbers (included above) it should cash flow about $800-1000/mo. even if we decide to move on in several years and keep it as a rental. The way I look at it is, for the meantime we have a home at less than the net monthly cost of our current rent and long term, it can be a positive cash flow rental. We (I) have some obvious concerns about the risk of buying a home with a pending construction project all in one and especially with our lack of experience. We have a very good rapport with the builder and they seem very amenable, but I'm concerned about the what-if's. Would truly value the input/perspective of some experienced investors. Has anyone here done something similar?