Building a New ADU - House Hacking Strategy

[Andrew Emery]

Hi All,

I'm currently in the process of refining my house hacking strategy, and wanted to run it by you all to get feedback / thoughts on some of the questions I have.

My plan was to use an FHA loan to owner-occupy a 2-4 unit MFH. However, the area I'm interested in has recently relaxed zoning restrictions for and actually incentivized ADUs in many neighborhoods. While I was originally planning on househacking by living in one unit and renting out the others, I've become very intrigued by the idea of building an ADU (probably a tiny home) on the property and renting out the primary MFH.

My questions for the BP community are:

- Does this sound like a reasonable plan (assuming I'm willing to live in the tiny home which I am and that I can find an existing MFH that meets the zoning / parking requirements, location, neighborhood, etc.)?

- How would you recommend financing this? I was budgeting for 75-90k as the down payment on a 600k-700k MFH alone before this idea, but now I'm thinking of putting a minimum DP on an FHA for the MFH and paying cash for the ADU - but I'm not familiar with the feasibility of this from a loan perspective or if there is a more strategic way of going about this.

- With 11 more months on my current apartment lease, do you have any advice on a timeline / sequence for all of this? Should I engage the ADU builder as soon as possible or wait until I actually purchase a MFH before starting those conversations?

- If I went down this path, how would you most effectively get into the next property - refinance the whole property after a year since it would now be appraised with an additional unit and would potentially get me out of an FHA and into a conventional (with hopefully slightly lower interest rates by then?

Thanks everyone - any insight is much appreciated!

Andrew

 

[Byron Valles]

Hi Andrew, 

congrats on getting your house hack plan started! I did exactly what I think you're thinking of doing so I'll try to answer your questions with my own experience. I'm also assuming you meant to build an ADU on an existing single-family home (SFH)

- Does this sound like a reasonable plan?

yes, by living in the ADU you'd likely have more cash flow coming by renting the single-family home. I never lived in my ADU but I wished I had. Living in the ADU and renting the primary would have meant a net $400 monthly cost for an $810K property in the SF East Bay Area. For some reference, the cheapest studio I have found in the East Bay rents for about $1500+

- How would you recommend financing this? 

ADUs are so new that there aren't a ton of financing options for them yet, but it looks like this is quickly getting better. One option I looked into but did not use was Renofi I understand they have a couple of construction loan products that will look at the after-renovation value of the property. I bought my single family with a 5% conventional loan. The ADU cost me roughly $90K. To pay for it I got a $32K ADU grant from the state, took out an unsecured $25K personal loan and the rest came from savings.

- With 11 more months on my current apartment lease, do you have any advice on a timeline/sequence for all of this? Should I engage the ADU builder as soon as possible or wait until I actually purchase a MFH before starting those conversations?

any builder/contractor is going to want you to be the owner of the property before they take you seriously unless you have an existing relationship with them. It doesn't hurt to start having initial conversations but they will not be able to give you any realistic estimate until they can get out there and have a better idea of what you're trying to build and where. 

- If I went down this path, how would you most effectively get into the next property 

Here is how my strategy went: bought the single family for $810K using a 5% conventional with PMI in Dec 2021. ADU construction ended in Jan 2023 and by Feb I already had a tenant in there. I ordered an appraisal to drop my PMI. Property value came back at $950K in March 2023. I've recently moved out of the primary and it's now rented to a separate tenant. The rents from the SFM and the ADU cover about %120 of the property's PITI. So, in terms of an exit lenders will see the income and expense from the property as a wash.

The post was getting kind of long but let me know if I can help answer anything else! 

Byron