I agree with what most have already said.
Also, keep in mind that there are potential tax benefits related to investing in your primary home. Depending on your specific situation, they may or may not apply.
Whereas any income you get from lending your money would be taxed as ordinary income. Ordinary income is usually less ideal from a tax perspective for folks whose primary source of income is W2.
@Michael Calvey I'd be interested in learning more about this program as well.
@Mike Terry Glad to see a few professionals have already responded to your initial question. As you can see, many financial professionals out there have figured out the issue with the asset-centric compensation model you pointed out. Some of my colleagues have already given you some great tips. I agree you should interview a few before finding the right fit. They should have direct experience investing in real estate themselves as well as a history working with real estate investors. Prioritize working with someone who has a fiduciary duty. Make sure you understand how they are compensated (even within the fee-only realm, there are different compensation structures such as hourly, project-based, etc.)
Good luck!
Hey Raj,
Sharing a little bit of my experience here in case it helps you. I bought a 4bed/2bath SFH in Concord in late 2021 for $810K to househack it. Pulled owner-build permits to convert a detached 450sqft garage into an ADU in July 2022. By hiring the subcontractors myself I saved a ton of money. The three quotes I got from builders were $165K, 190K, and $235K, but acting as the GC I spent around $90K all in. Finished construction in Jan 2023. The ADU now rents for $2100/month. I had the property appraised in Jun 2023 so I could remove PMI on the loan and the appraisal came back at $950K. As you can see, because I didn't overspend building the ADU, I was able to get positive equity once construction was finished.
I know this doesn't solve your $6K/month question but I figured I would share my experience here since you mentioned staying in the home was a priority for you and being interested in ADU-house hack.
Happy to share more details if you need them.
Kindly,
Byron
I am sure you realize that between late 2021 and June of 2022 that there was likely property appreciation.
In addition, your ADU addition was not hands off as you saved significant money acting as the GC.
question is whether the $950k - $810k - $90k = $50k is more or less than the appreciation in that 1.5 years. That would equate to 6.1% appreciation over 1.5 years or ~4% annual appreciation. I do not know the appreciation of Concord, but that would have been less than the appreciation in my market. Which would indicate that the ADU may not have even added enough to cover the costs with an actively worked ADU addition. In you spent the hands off cost of between $165k and $235k, you would definitely be starting with negative equity on the ADU addition. My guess is between $75k ($165k addition) to $145k (the $235k addition) negative.
Let's go with the ADU added the $90k value that it cost. It implies you did the GC work for free. I do not like to work for free.
Now if I use 50% expense rule and do not include cost of money. It would take 71 months to recover a negative $75k equity position or 138 months to recover the negative $145k. in practice the numbers are worse because there is cost of money. Either you have a loan with interest or you paid for it unleveraged and gave up other options to have obtained return on that money. Big advantage of RE is the accelerated return resulting from easy leverage so to have RE that does not maximize leverage is accepting reduced return.
Good luck
Investment decisions are not made in a vacuum. And everyone's financial situation is unique which is why you will never see me making statements like "you should" or "you shouldn't" in forums like this. These 50% and 1% "rules" are more like guidelines, and sure more experienced/professional investors like you may use them as hard rules but that doesn't mean everyone should.
To illustrate my point, I'll share a little bit more about why this project made sense for ME and MY financial situation:
I realized I didn't share this before but I received a CALHFA $40K ADU grant to help with the construction costs. I bought this specific property because it was in a great neighborhood that I wanted to live in and I intended to stay there for at least three years. The ADU conversion and house hacking strategy were second priorities for me. I didn't see acting as the GC on the project as working for free. Not only because there was little actual "work" to do but also because I wanted to do it. You see before this I had zero experience with construction. I'm of course no expert now but I certainly am happy to have learned valuable lessons by doing the project.
Now, I did run scenario calculations at different stages of this project but I didn't adhere to the 50% or 1% "rules". Despite that I were to sell this property today I would realize the roughly 30% annualized ROR. Taking into consideration both qualitative(unique to me) and quantitive (some unique to me) factors I'm pretty happy with my decisions.
Kindly,
Byron
as far as i know the grant only can be used for the architectural drawing/permit and not actual development. Am I wrong ?
but you should be okay becoz you are building it for 90k only, that would be the bare minimal. What's your actual cost for plumbing ? do you need to dig ? do you use gas or electric ? For me I upgraded the wire only and no gas. I like the new portable stove, it makes really efficient use of space esp for kitchen.
It can be used for predevelopment costs and non-recurring closing costs. Some of the costs I was reimbursed for were architectural plans, permit and impact fees, utility connections, septic hook-up, etc. In short, I was able to use the whole amount minus the fee charged by the program sponsoring agency (HPP Cares).
We only needed to dig for the septic hook-up. In Contra Costa ADUs have to be all electric, so no gas. Adding an electrical sub-panel to the ADU was another cost I was able to use the grant for.
Hey Raj,
Sharing a little bit of my experience here in case it helps you. I bought a 4bed/2bath SFH in Concord in late 2021 for $810K to househack it. Pulled owner-build permits to convert a detached 450sqft garage into an ADU in July 2022. By hiring the subcontractors myself I saved a ton of money. The three quotes I got from builders were $165K, 190K, and $235K, but acting as the GC I spent around $90K all in. Finished construction in Jan 2023. The ADU now rents for $2100/month. I had the property appraised in Jun 2023 so I could remove PMI on the loan and the appraisal came back at $950K. As you can see, because I didn't overspend building the ADU, I was able to get positive equity once construction was finished.
I know this doesn't solve your $6K/month question but I figured I would share my experience here since you mentioned staying in the home was a priority for you and being interested in ADU-house hack.
Happy to share more details if you need them.
Kindly,
Byron
I am sure you realize that between late 2021 and June of 2022 that there was likely property appreciation.
In addition, your ADU addition was not hands off as you saved significant money acting as the GC.
question is whether the $950k - $810k - $90k = $50k is more or less than the appreciation in that 1.5 years. That would equate to 6.1% appreciation over 1.5 years or ~4% annual appreciation. I do not know the appreciation of Concord, but that would have been less than the appreciation in my market. Which would indicate that the ADU may not have even added enough to cover the costs with an actively worked ADU addition. In you spent the hands off cost of between $165k and $235k, you would definitely be starting with negative equity on the ADU addition. My guess is between $75k ($165k addition) to $145k (the $235k addition) negative.
Let's go with the ADU added the $90k value that it cost. It implies you did the GC work for free. I do not like to work for free.
Now if I use 50% expense rule and do not include cost of money. It would take 71 months to recover a negative $75k equity position or 138 months to recover the negative $145k. in practice the numbers are worse because there is cost of money. Either you have a loan with interest or you paid for it unleveraged and gave up other options to have obtained return on that money. Big advantage of RE is the accelerated return resulting from easy leverage so to have RE that does not maximize leverage is accepting reduced return.
Good luck
Investment decisions are not made in a vacuum. And everyone's financial situation is unique which is why you will never see me making statements like "you should" or "you shouldn't" in forums like this. These 50% and 1% "rules" are more like guidelines, and sure more experienced/professional investors like you may use them as hard rules but that doesn't mean everyone should.
To illustrate my point, I'll share a little bit more about why this project made sense for ME and MY financial situation:
I realized I didn't share this before but I received a CALHFA $40K ADU grant to help with the construction costs. I bought this specific property because it was in a great neighborhood that I wanted to live in and I intended to stay there for at least three years. The ADU conversion and house hacking strategy were second priorities for me. I didn't see acting as the GC on the project as working for free. Not only because there was little actual "work" to do but also because I wanted to do it. You see before this I had zero experience with construction. I'm of course no expert now but I certainly am happy to have learned valuable lessons by doing the project.
Now, I did run scenario calculations at different stages of this project but I didn't adhere to the 50% or 1% "rules". Despite that I were to sell this property today I would realize the roughly 30% annualized ROR. Taking into consideration both qualitative(unique to me) and quantitive (some unique to me) factors I'm pretty happy with my decisions.
Kindly,
Byron
Hi Tony, thank you for the advice! Garage ADU is indeed in our radar. Our current plan is to find something we can be rent out immediately (existing ADU or a master bedroom with separate entrance), and later convert a garage into an ADU for extra rental income.
Hi Siyi,
Where in the Bay Area are you looking to house hack? I did something very similar to what @Jerome Morelos mentioned in the borderline of Concord and Walnut Creek. bought a SFH with a detached garage that I converted into a 450sft ADU while living in the home. When getting ready to move out to rent both sides I considered MTR and got some requests for it (it's 5 miles from John Muir Hospital) but ultimately decided LTRs since I was starting a different business venture at the same time.
Build time for the ADU was approx 7 months because my subcontractors mostly worked weekends only. I pulled owner-build permits and acted as the GC which helped me save a ton on construction costs.
Good luck!
@Byron Valles - thank you so much for sharing. Huge difference in price with being GC yourself. In your appraisal report, is the ADU appraised separately? If so, would you mind sharing the breakdown? As others have commented in this post, ADU doesn't appraise as well per sq ft as the main home. Thank you.
Hey Raj,
Sharing a little bit of my experience here in case it helps you. I bought a 4bed/2bath SFH in Concord in late 2021 for $810K to househack it. Pulled owner-build permits to convert a detached 450sqft garage into an ADU in July 2022. By hiring the subcontractors myself I saved a ton of money. The three quotes I got from builders were $165K, 190K, and $235K, but acting as the GC I spent around $90K all in. Finished construction in Jan 2023. The ADU now rents for $2100/month. I had the property appraised in Jun 2023 so I could remove PMI on the loan and the appraisal came back at $950K. As you can see, because I didn't overspend building the ADU, I was able to get positive equity once construction was finished.
I know this doesn't solve your $6K/month question but I figured I would share my experience here since you mentioned staying in the home was a priority for you and being interested in ADU-house hack.
Happy to share more details if you need them.
Kindly,
Byron
@Travis Biziorek - would like to hear your advice, since you are in the process of building an ADU in California.
I'll try and provide some thoughts here quickly.
First, you are not going to get $6k/mo in cash flow "instantly" with either method.
The ADU route will take you a long time. For perspective, it took us over 10 months to get through the PLANNING phase of our ADU build. It will be another 3 months now before the structure is up. Then we have to do the finishes ourselves.
You're talking about 2 ADU's and, honestly, I think your budget might be light (although I don't know the specifics on square footage, etc.
In terms of going OOS... I have 12-doors in Detroit and the numbers still work there if you know what you're doing (happy to help anyone interested in that market, always).
But again, this isn't an "instant" route to $6k/mo cash flow. If you're smart and know what you're doing in Detroit you can do 10-12% CoC returns. And I'd argue the city offers insane upside right now.
I built my Detroit rental portfolio before building my ADU but everyone is different and I try to stay away from giving advice. Everyone's situation is just so nuanced and we're always biased to what worked/works for us when giving advice.
I'd much prefer to tell my story and if it makes sense to do the same for you... great.
One consideration is if you were to go OOS you still have the option to build the ADUs (or just one) at your primary.
Parking!
I've done two house-hacks and parking has been an issue in both despite both properties being on a corner lot.
In one case I converted the detached garage of a SFH into a legal ADU essentially converting it into a duplex. Well, that meant two families were sharing a two-car driveway. Luckily I was able to convert a portion of the front lawn into an additional parking for not a lot of money, but I had initially failed to account for this inconvenience - lesson learned.
@Jordan Budke You are better off in San Diego and your capital invested would be less in san diego than some other random market and your overall returns will likely be higher in the long term here...Very cheap markets are cheap for a reason.
If you step up to another condo since you already have one, assuming in the 400k-500k range condo your down payment would be 3-5% which is in the 12k-20k range. You can purchase another condo and rent out your current condo and continue to move up and rinse and repeat when you can.
I started off in San Diego with low money down and the first property my wife and I purchased was under 400k as that was what we could afford in 2014 and by 2017 we were purchasing our 3rd property and it was still under 400k, not in particularly great areas...so first 3 properties were are single family homes or Condos (in East County)...then we house hacked a duplex in 2019 and fully renovated those units, and we are currently submitting plans to put 2 ADUs in the back. In 2020 we did a cash out refinance on the first 2 properties we purchased and pulled out over $250k between those units ....we used the $250k to purchase a triplex in La Mesa Village in the first half of 2021 (we are currently adding an ADU to make it 4 units). At the end of 2021 we sold the condo we purchased in 2017 (put less than $40k down initially) to do a tax deferred 1031 exchange and purchased a ugly/tiny 4plex in Golden Hill but I was selling 1 unit to buy 4 in a better area so I was happy.....in 2022 we purchased a 4plex with low money down, also in east county using a small bank that did this type of loan at the time....
So between 2021 to 2022 we purchased most of our units (11 units) with little money out of pocket since 2 of them were from cash out refi funds and 1 was from a 1031 exchange. If we didn't purchase those initial properties we would have never been able to do the above and the properties that we purchased were retail and not in great areas but it was better that we purchased than not doing anything and letting time pass by. They were all "base hit" deals at best but it worked for us, and of course if we purchased value add and in slightly better areas we could have done even better but we did not have the funds initially to take on properties that needed work.
I had a few mid west properties for a bit and sold those off...from that experience I can say for me, I would rather have 16 units in San Diego than 200 units in the mid west.
I loved reading this. CA in general and areas like LA, SD, and SF specifically get a lot of bad rep but the fact is that there is so much appreciation in these markets. I'm doing something very similar to what you've done but in the Bay Area. Bought a duplex in 2020 using a VA loan that now cashflows a couple hundred bucks per month. Then a single family in 2021 using a 5% down conventional, added an ADU, and recently moved out of there to rent both sides. The next deal will be a similar strategy. Between these two deals alone there is roughly $450K in net equity. I'm relatively young and the cashflow the properties provide is not much, but I see it as a safety net only. The real wealth-building play here is the $1.6M worth of properties appreciating over the long term.