Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 54%
$32.50 /mo
$390 billed annualy
MONTHLY
$69 /mo
billed monthly
7 day free trial. Cancel anytime
Pick markets, find deals, analyze and manage properties. Try BiggerPockets PRO.
x
All Forum Categories
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

All Forum Posts by: Brian Larson

Brian Larson has started 16 posts and replied 309 times.

Post: Garage to ADU conversion?

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230
Quote from @Dan H.:
Quote from @Bradley Buxton:

@Adam Watanabe

Converting a garage is not the best idea for the exit of a property. Many people still want garages for primary residences. By having a garage converted, you limit the value of the home and the buyer pool to investors. At 120k/2k that is 60 months or 5 years on the return. @Dan H. has some good insights on ADU conversions.
Generally, it would be better to put the $120k towards the down payment of another property so you can gain the equity even if the cashflow is breakeven. 


thanks for the tag.   To the OP, I regularly check ADU addition underwriting.  I encourage accurate and conservative underwriting.  On an ADU addition, the most important aspect of the underwriting is to KNOW the value that will be added by the ADU.  In the absence of sufficiently comps, expect a very poor valuation.  

I suspect the cost to convert an 450' garage to an ADU will approach $150k. The issue is it will likely add ~$75k of value resulting in an initial negative $75k (a value subtract). This initial negative position needs to be recovered before any cash flow is obtained.

I am also a bit skeptical that a 450’ unit can achieve $2k rent in Sacramento.

Using 50% rule (expenses other than mortgage is 50%) on a financed ADU, 8% 30 your loan at 80% LTV.

$2000 - $1000 (50% rule) - $881 (P&i) = $119/month
$75k/$119 = 630 months to recover the initial negative equity. This is 52.5 years.

Let’s use OP’s $120k with $45k initial negative position.
$2000 - $1000 - $704 (P&i) = $296/ month
$45k/$296 = 152 months or 12,7 years to recover the initial equity.

Building a single smal, unit is very expensive development.

Here is a list of why adding a single ADU in single family zoned areas in my CA market is typically a poor RE investment:
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 by the ADU (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 lost opportunity because if you had purchased 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) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

Good luck

 Wow @Dan H. this is a crazy story.  I had no idea that someone could even do this.

Post: Renting out current home and building a small Short term rental to move into!

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

I would use extreme caution buying in this market right now, especially as someone new to investing.  It sounds like you have the ability to stock away money now.  I'd continue to do that.  Maybe get a roommate to lower your monthly expenses further.

BP has many success stories on the podcast and this forum but we haven't seen a downturn in the real estate market for over a decade so I suspect many people (including ones here are overleveraged).  Don't make that mistake.  People look like investing geniuses because they have serendipitously timed the market so even bad investments look good.

However, there are always deals to be had, even in a down-market, but I'd advise not being too hasty and waiting for a deal.

Post: Garage to ADU conversion?

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

@Adam Watanabe

The idea of an ADU might make sense in Sacramento but it would depend on where this property is located. Is it in a trendy downtown place with lots of renters (i.e. Midtown, Land Park, Curtis Park, Tahoe Park, etc.)? If so, then I might consider it.

Also, are you certain about the conversion costs?  How many contractors have you spoken with?  Do you know what plans and permits will cost?  You should probably do more research and maybe find some local people in Sacramento that have ADUs to get advice.

Many of the people above are from out-of-state (OOS) so they don't understand all the rules in California or Sacramento. Sacramento is an ADU-friendly city so I would not be concerned about the city approving your conversion.

Post: Appraising ADU’s in California

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

Appraisers continually mess up these appraisals.  I would exercise caution when dealing with any of them.  My personal and professional experience has been that they do not provide actual replacement costs in their evaluations.  I advise telling them it took a lot more money than it actually took to construct.

Post: Anyone in Sacramento use a Owner-Build Permit for ADU?

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

@Thomas Blocker - Sounds like a cool project.  What part of Sacramento are you planning this work in?

Post: BiggerPockets app change my iPhone and the BiggerPocket app ?

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

I miss the app as well.

Post: Good property managers in Pittsburgh PA area

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

@Max Feinberg can probably give you some suggested companies?  What size of outfit are you looking for?

Post: Quad Plex Search

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

@Jovelyn Punzal - @Dan H. is 100% correct. I built an ADU in San Jose, CA. It was a poor investment in my cash and I would never do it again. HOWEVER, if you can buy a property with an ADU already onsite. That is a huge win. As a realtor, I give this advice to clients all the time because it is easier and cheaper to fix up an existing ADU that building something new.

Post: I have 190 K to purchase a rental home

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

@Erik Estrada makes some good points.  If you are just looking for another city to review, try Pittsburgh, PA.  I have had good luck there.

Post: Code Enforcement for Grass

Brian LarsonPosted
  • Investor
  • San Jose, CA
  • Posts 311
  • Votes 230

Perhaps I should clear up my issue here.

I have no issues with my property manager. They made a mistake and they offered to correct it.

Where I have an issue this with the procedural ability to fine me twice because my wife and I both own the property.  How is that legal?

Also, this fine is $200 each in an area where rents are only $600-$800. It seems incredible that a local government could get away with charging $400 for “slightly” over grown grass.

Has anyone experienced a double fine like this?  These fines were literally the same day. One to me and one to my wife.  Thanks