Advice to help calculate investment opportunity

[Miles Thompson]

Hello,

I have a house that I split into a duplex, each side bringing in about $1500 each.

This has been a great cash-flowing setup as the house was bought for $362k and we've had it for about 6 years.

There are some foundation repairs to be done and I've had a local contractor that I trust quote me to fix this but also quote to build a laneway house to make a 3rd rental on the property. This has been approved by the council etc, and I now have a class C quote of around $300k for the new build, including 10k for the foundation work.

I estimate I will be able to rent this two bedroom standalone for around $1800-$2000 per month.

I need to write a business case to present to the bank to get financing and so I need to figure out ROI etc.

This is in a very desirable town with 0% vacancy.

Any advice on how to get the refinance and what to include in my proposal to the bank?

Thanks in adance.

[Dan H.]

Originally posted by @Miles Thompson:

Hello,

I have a house that I split into a duplex, each side bringing in about $1500 each.

This has been a great cash-flowing setup as the house was bought for $362k and we've had it for about 6 years.

There are some foundation repairs to be done and I've had a local contractor that I trust quote me to fix this but also quote to build a laneway house to make a 3rd rental on the property. This has been approved by the council etc, and I now have a class C quote of around $300k for the new build, including 10k for the foundation work.

I estimate I will be able to rent this two bedroom standalone for around $1800-$2000 per month.

I need to write a business case to present to the bank to get financing and so I need to figure out ROI etc.

This is in a very desirable town with 0% vacancy.

Any advice on how to get the refinance and what to include in my proposal to the bank?

Thanks in adance.

> I have a house that I split into a duplex, each side bringing in about $1500 each.  This has been a great cash-flowing setup as the house was bought for $362k and we've had it for about 6 years.

Your rent to purchase ratio, not including the price to convert to a duplex, is 0.83%. I suspect when I add in the cost to convert to a duplex, your property may not show cash positive on my pro forma using a fairly high LTV (80% LTV?). It certainly is not doing great and probably not even good for 6 years in. I do not believe you need a 1% property (1% rule) to have positive cash flow as there are many variables that determine if a property has positive cash flow, but I do believe it is a very rare market that has cash flow at investor LTV (at least 75% LTV) noticeably below a 0.7% ratio.

Now for this ADU: $290K for $1.8K rent (on my calculations I will always use the more conservative of values) is a ratio of 0.62% (far below my 0.7% ratio that I indicated it would be a rare market to have positive cash flow). This is almost certainly cash flow negative when properly allocating for all expenses. In addition, you indicated in a different reply that the addition of the ADU starts off with a negative position (the value added to the property is less than the cost of the ADU addition). This implies that when the ADU eventually starts to cash flow, it will need to recoup from both the initial negative cash flow and the initial negative position from the addition before you make your first profit.

ADU additions, even when as much hands off as possible, is not fully passive. Dealing with GC, choosing the layout, picking finishes, etc.. Then there is living with the construction project.

Questions: are you expecting Property appreciation far in excess of inflation? Do you expect rent appreciation far in excess of inflation? Do you understand that this ADU addition is the opposite of a value add? Do you believe this is the best use of your money? Are you an accredited investor? How active do you desire your investment?

I believe there are many outstanding investment opportunities. Identifying your desired level of effort and risk tolerance helps identify the appropriate investment for you. For example, I traditionally have achieved infinite return via semi active BRRRR. These are a lot of work (especially the rehab) and are not passive. There are options like S&P500 that is very passive and has a lifetime return just under 10%. If you are an accredited investor there are further options including RE syndications. Basically the right investment is a very individual choice.

My belief is there is likely better investment options for you than this ADU addition. I think if you write a detailed accurate business case you will show this to yourself.

Good luck