First Timers SCORE in Santa Barbara

[Baird King]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $860,000
Cash invested: $50,000

Converted detached bedroom into permitted ADU. Bringing in $2,200 for the ADU and currently living in the main house until we find our next deal. Anticipating bringing in $3,400 for the main house which will give us a conservative NOI of ~$1,800 for the property.

What made you interested in investing in this type of deal?

Was looking for a single family fixer with potential for conversion into a multi-unit property. Found this gem in our ideal location with an existing detached bedroom ripe for the picking. Unfortunately it was a bit out of my fiance's and my price range for our first deal, so we scrambled to find a partner and went in on it with a friend. Don't want to speak too soon, but pretty sure this will be one of the best decisions of our lives and a springboard for more.

How did you find this deal and how did you negotiate it?

Zillow. We sent the seller a cute picture of us with our dog and told her how much we would cherish her amazing property (fully genuine). I think it was our dog that sold her on us.

How did you finance this deal?

20% down and jumbo loan.

How did you add value to the deal?

Put in just under $50k to renovate the detached space and convert it into a permitted ADU, spruce up the landscaping, completely separate the (now) two units on the property, and spice up the main house a bit. We did most of this ourselves, but probably spend ~$10k on contractor/handyman help.

What was the outcome?

Property just reappraised for $1.05M.

Lessons learned? Challenges?

If you are entering a partnership, make sure you have a VERY clear understanding for how much work each person wants to put in. If you have never worked together before, you NEED to agree on a way to compensate for time if someone wants to put in extra work. Ideas include a project dependent hourly rate, or a set portion of quoted costs from professionals (i.e. "the plumber quoted us $2000, but I'll do it for $900").

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes!!! Nico Pollero (Agent, Sothebys), Tim Taylor (Lender, Homebridge), Joe Billings (Lawyer, Allen & Kimbell) and Vanguard Planning (drawings and permitting for ADU). All highly recommended.

[Dan H.]

I think it is a great purchase.  

I do want to point out that you have $910k purchase price and renovation with a full rent of $5.6k for a 0.615% rent to cost ratio.   This ratio typically does not produce positive cash flow. 

Fortunately, you are already up ~$100k between value add and appreciation (also refi appraisals are conservative, so this is a conservative value increase).  You are in a market with outstanding historical rent and property appreciation.  That 0.6% ratio is likely to improve as rents appreciate. 

Seems like an outstanding investment.  

Good luck