All Forum Posts by: German Fernandez

Hey BP, 

I'm in search of licensed plumbers and electricians to give an estimate for projects involving an ADU Garage Conversion in brockton MA. If interested message me

Thanks

German

Hey BP community hope everyone is having a good year, 

I'm hoping to get others perspective on what they would do with a rental property in today's market. The property is performing well at a low interest rate but has 288k of trapped equity. ADDITIONALLY, I have lived in the property for 2/5 years and would be excluded in the gains tax. 

Three-family residential property

current interest rate - 2.625

cash flow - 1900/mo

roe - 22,800 ÷ 288,000 = 7.9%

location - Providence RI

The property for the most part is stable, other than a few minor cosmetic work that can be done, but the roof, windows and one floor of the property is new. Capex repairs I would include a new - boiler and some electrical grounding. Managing the property is fairly easy and I've had good tenants for the time being, besides inheriting 1 bad tenant in the beginning.

My goal is to scale. More specifically, I would eventually like to invest both here and in Colombia on short term rentals.

I can do a cashout refinance for about 130k and the property would still cashflow around 500-600/mo. However, releasing about 270k can really get the ball rolling for me as an investor. 

I could also use some of the proceeds to pay down some high interest debt Ive accumalated over the years, saving a considerable amount, but I also do have a plan to pay down the debt within a year so it is not a necessity.

As far as other opportunities, I have another rental where I can place about 150k in converting a second floor detached garage into an ADU and cash flow 700/mo (possibly more if the unit works as a short-term/mid-term rental) and force the appreciation about 130-150k.

I would be very interested in hearing what others have to say about this. I don't need to sell but I also don't know how I feel about keeping so much equity tied up when I would like to scale.

I would be interested in this information too. I met a real estate agent who was flipping in the suburbs south of boston and he was focusing on acquiring properties considerably under market value. He also had his own real estate company. From what he said -

1. He did bandit signs 2. he had connections with banks that owned properties under foreclosure - he mentioned that he would send them his real estate book in order to gain credibility and instead of auctioning they could send the properties to him. 3. He was also building single family properties.

but even he mentioned it was a slow market but that he could foresee much more foreclusures coming soon. This was about a year ago.

I'm very excited for this. I actually purchased a SF house with a two story detached garage in a nice area of brockton. The garage was built to work on trucks having 14' ceilings and 2 bay doors heating cooling about 700 sqft. I was able to rent the garage to a seasoned electrician running his business through there only coming in and out to stock his truck once per day.

I hope to be able to convert the second floor into an ADU as soon as Feb 2nd rolls around. I'd essentially have 2 units out of the garage. Crossing my fingers that this would be possible. I'm hoping I dont have to make the entire garage into an ADU. Either that or gping with my other option of installing a bathroom on the second floor and including it with the garage as an office space.

Quote from @Dan H.:

Quote from @German Fernandez:

Quote from @Dan H.:

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs 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.
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 n 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.

Good luck

This question is more for my specific property but how do you feel about properties that need less work to convert into a ADU? I have a big garage that has electricity and plumbing already and has a second floor. This property shouldn't cost as much in my understanding. Everything you've mentioned does make sense. Doing this like a brrrr I see as the best bet, for example my property does still have room for improvement adding a bedroom and bath to the primary structure and then the ADU. However, I do agree the risk is the appraiser still may not appraise the ADU enough.

 Note my response is for my market and may not hold for other markets.

I look at large volume flippers for guidance.  What I see is that they in single family zoned areas they often will convert other living space (craft rooms, offices, finished wood shops, etc) to ADUs but do not convert garages.   Garages are often cheaper to convert to ADUs than ground up construction, but not cheap enough to obtain a profit worth the effort.  I have also seen some garage conversion ADUs get valuations below ground up construction.  


Good luck

 Yes thanks for your input.

I can see why flippers would not want to do garage conversions. I guess this strategy is more of a long-term buy and hold strategy. Usually when I hear of someone converting their garage it's the house hacker willing to move into the conversion and lower their living expense. But yes I guess this strategy may not be for the person looking to get the highest return on investment.

Quote from @Dan H.:

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs 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.
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 n 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.

Good luck

This question is more for my specific property but how do you feel about properties that need less work to convert into a ADU? I have a big garage that has electricity and plumbing already and has a second floor. This property shouldn't cost as much in my understanding. Everything you've mentioned does make sense. Doing this like a brrrr I see as the best bet, for example my property does still have room for improvement adding a bedroom and bath to the primary structure and then the ADU. However, I do agree the risk is the appraiser still may not appraise the ADU enough.

Hey Ethan,

I'm actually in the same position as you, except I already have a house that has a detached garage I want to convert into a ADU, just wondering when I should start.

Just wondering if you found any luck with this strategy and what barrier you may have come across? I'm looking at something similar. 

German 

Quote from @Cheng Bin Zhang:

Quote from @German Fernandez:

Hello, 

Thanks for this informative example of a complete ADU process in MA. I'm working to do the same in the state as well but have had some push back with the local municipal departments.

Cheers to you for a job well done 👍. It can be challenging to find ways to house hack in a market like this one for sure. I would love to pick your brain about this more and how the numbers worked out.

Curious on how you were able to get the  OK on a "special permit;" mine is a also detached garage, except the neighbor next door seems to not want this property to be run as anything more than a single family property and have made it known. I'm in the Brockton line next to west bridgewater area. A nice quiet area of brockton. Maybe that's why, they want to keep it that way 😅 not sure 

Happy to. Message me your questions.  

With the plumbing and electrical already in the garage, how much did the project cost you per sqft? Or how much did it save you more or less? Also, what kind of lot was this done in? Was this on a regular interior lot where the garage was behind the house or was the garage on the side of the house; was there an alley behind? If interior lot, did it cost you having a backyard for one or both of the properties?  

Quote from @Michael Coco:

Call local plumber? 

Yea I think ill need to get a plumber over, 
Someone is suggesting that it is a heat tracer. Which is used to keep pipes from freezing but guess that doesn't particularly mean it's a water/sewer line 🤔 .