California Market Difficult for First Time Homebuyer - Worth it?

[Mindy Ma]

I'm looking to buy a property (first timer) for that is a bit over a 1 million with 25-30% down.  I will be living in it with my family.

Due to the high prices in our current market, I may not be able to cover the entire cost of the mortgage each month, and will run short by $1000-$1500/month (which includes property taxes).  Essentially, I cannot cover the property taxes on this purchase.  If I try to do that, I will be house poor, since I have other expenses.

Can I take a deduction for property taxes each year?  Std deduction is $12000 so I would go over that deduction given the price of home.

Should I think about house hacking and building an ADU in the back of the house?
Is this still a worthwhile purchase?  

Love to get your expertise and thoughts.

[Dan H.]

Have you already qualified for the loan?  Is it a conventional loan?   If you qualify for the conventional loan, you are not that house poor as lending criteria will protect the lender and you from you being over extended. 

My view is adding an ADU in most CA markets is one of the worse RE investments. Here are some of my thoughts:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to list opportunity because if you had purchase RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) adding ADUs is a slow process. The time required is time without achieving any return. This amounts to lost opportunity.

If you choose to ignore all these reasons why an ADU is often a poor investment, look into receiving the $40k grant for building the ADU. It can help with item #1 above

Good luck