ADU Analysis in California

[Kevin Tsai]

Hi BP! I'm looking for my first property (most likely househack) in greater LA area. My criteria is positive cash flow after I move out of the property and enough equity to finance my next deal. This has gotten me looking into ADUs. 

Below is one I'm practicing analysis on. I've got 203k loans in mind for financing. Are my numbers realistic?

Link: Calculation spreadsheet

[Dan H.]

Some thoughts:

• The interest rate to purchase will likely be less than the 203K.  Did you try to factor each into the one 3% number?  I would rather see is shown as two different loans with 2 interest rates, amounts, etc.
• 203K prevents you from doing work yourself.
• $90K hands all ADU (203K will mean hands off) likely can only be achieved on garage conversion.
• I always place Property Management in my pro forma even if we are self managing.  This is because it takes time and effort to manage and you deserve compensation if self managing or will need to pay someone else if using a professional PM.

Unrelated to your calculations, be sure you understand how the ADU will appraise. In some areas ADUs are appraising significantly below the hands off cost of building the ADU (and in all areas it is appraising below the hands off cost of an ADU). Note an ADU addition that starts with a negative $50K plus position due to it having a value of more than $60K less than hands off construction cost will take many months (probably years in the case of your example) to recover the initial negative position.

This negative position and the extremely high LTV you depict (96% LTV) implies that extracting money out is likely not going to be possible until the property has appreciated at least 20%. Most Owner Occupied (OO) cash out refis are at 80% LTV or lower. I am not saying you cannot find one at a higher LTV, but you likely would not desire the terms.

Good luck