All Forum Posts by: Dan H.

Quote from @Alberto Cioni:

I read it. 

In West Los Angeles, where I am building my ADU, the rent for a 2 bed and 2 bath goes from $ 3500 to $ 4000 per month.

In some new complex 2 bed and 2 bath goes for $ 5000.

Since the cost to build is reasonable around max 250 K I think is a good deal.

Where do you buy a 2 bed / 2 bath in LA for $ 250K?  Impossible

Note due to the worse financing options alone $250k on an ADU would equate to a lot more than $250k on a property.

If you purchase the property, unless there is property depreciation, $1 spent equates to a $1 of value. Adding an ADU often adds less than $0.50 for each dollar spent. So that $250k may add $125k of value.

if you purchase a place, income can start immediately. On an ADU the process can take a year from start to income.

the comparison really should not be to an existing home because you are doing development and the associated work and effort.  If you compare ADU addition with any larger development effort , either in size of unit or number of units, the return is greater because building single small unit is the most expensive residential development.   If you add unit to your home, your home likely became rent controlled.  You do new development and the units are exempt from rent control.  

there is a reason so few flippers do ground up or garage conversion ADU additions.   If you find a separate habitable space, the ADU cost is significantly less.   Or like RFC specializes, but MF with many garages and convert all to studios (not single unit development).  RFC has quite a few of these going on right now.   

if you want to see what is worth doing and what is not, look at what the successful investors or syndicators are doing.   If they are not adding single unit ADUs, the it means at a minimum they are sourcing better opportunities.  

good luck

Quote from @Joe S.:

Quote from @Dan H.:

Goals between now and end of 2025   

- finish the last rehab on my last purchase.  This starts tomorrow.  My 22 year old son will be leading his second rehab and will be performing his first live-in rehab.  This purchase will be up ~1m over purchase price after this rehab is done (3 sources: 1) purchase below value (or value add from addressing the rent issues - depends on your perspective) 2) value add from 4 class b+ unit rehabs 3) natural appreciation).   ETC: February

- buy a high end home at a destination location.   I suspect an offer is going out this week on a >3000’ cabin that Garth brooks used to record in. Needless to say it has nice finishes.  We plan to turn the small recording room into a small office.   If purchase this RE, ETC Mar 2024.   

- convert new RE purchase to STR. ETC: if above cabin, May.
- determine how I can assist child in purchasing his own home in San Diego. I can buy investment RE but due to crazy bad DTI (far worse than 100 to 1, possibly approaching 500 to 1), I cannot get reasonable financing on an OO and not sure my co-sign will help on conventional financing. We likely need to look for local lender that is keeping loan in house. ETC Dec 2025.

- Son to have RE license and path to life he desires.  This week he met a syndicator that has a lot of success (by a lot I mean lives in easy 8 digit home, local and in Detroit), but did not really know what to discuss or what to try to learn from him.   It did give him a peek into what a kick a$$ syndicator can achieve.
- determine allocation of my last accelerated depreciation allowance and execute it.   I have like $500k that needs something to allocate against.   I do have stuff to allocate it, but picking which stuff to do will take some time.  ETC Dec 31, 2024 (yes, 1 month).

I want at least 10 trips in 2025.  I have many goals for my son, but my goals are not necessarily his goals.  

Hope everyone has a great and successful 2025.  

I have a son 2 years younger than your son… How did you go about moving your son along towards financial independence? 

 First I will say it can be trying at times.  

My son was very motivated and succeeding in virtually everything until he was 16 years old.  Then he became a demon child and made up for lost time in making his parent’s life hell.   So I am not stating this was a panacea or easy.

We started him as a toddler helping.  We let him go to design centers, etc and give his opinion since being a toddler.  Around 8 years old I hired him as a gardener and let me tell you his early efforts looked like the work of a drunk gardener.  I started him on handy man tasks.  By the time he was 16, he had a half dozen part time employees and ads in paper to do various handyman stuff including hanging Christmas decorations, assembling ikea furniture, gardening, painting, building fences, etC.

Then came the demon child.  He walked away from his business letting his best friend take it over.  His virtual straight As became a lot less perfect.  We tried counseling.  Counselor called it the most extreme case of rebelling he had ever seen after initially questioning the issue due to our sons accolades/accomplishments. Our son still managed to get into his second choice of university (I am confident he would have got into his first choice without the demon years because even with the demon years both his gpa and sat where above the average for those accepted to Stanford).  He graduated HS the Covid year which added to the difficulties. 

Even though classes would all be remote, All of us were for sending him off to school and were thrilled when he won a lottery for the reduced capacity dorm.  Then they further reduced the capacity of the dorm and we were thrilled when he got selected again.  Then they decided to close the dorms to open university all together.   Housing options were few.  He found a place on del playa.  The closest comparison would be bourbon street for college age kids, but bourbon street may need to up its game.  Tough environment to focus on studies. 

Our relationship was getting back on track but I had some resentment from the demon years.

2nd year similar to first.  3rd year was looking promising then University California TA strike.  3 years in and no way he could graduate in bio but could graduate in his hobby of German.  So German it was.

What can he do with German?   I wanted him to move into the unit he starts rehab today and rehab it when he moved back home but he is non committal because he has not decided between peace corps, teaching English in Europe, continuing his education in Europe, or RE.  

Well he eventually decided RE but did not really understand many areas of RE. So he signs up for RE agent course. He leads his first rehab effort (which was also trying as he gets away with stuff that I would not tolerate from a regular protege).  The rehab turned out good even if doing it was rough between us at times. 

Today he starts on his second rehab.   3/3 of potential b+ unit in an A- area (pt Loma).   Today is demo day.   Kitchen and most flooring hopefully will be out by tonight.

It has not been easy.  There have definitely been some bumps.  He knows what is possible via RE.  He has some idea of our success via RE.  This week he did some work at a very successful local syndicator’s house but did not do great (understatement) at trying to get valuable insight.  I think the biggest take away was the level of success possible (this guy’s home is worth ~$20m).   

I know other local RE investors well enough to potential ask that they take on my child’s continuing RE education and I think it would be in both of our best interests.  My hope is by end of next year he has a local small MF value add house hack (probably will cost ~$1m so it will be a challenge).

Clearly I did not sugar coat the path (except I suspect demo child does not fully convey the true extreme of his behavior; the police knew our address without being told). 

All is good that ends well.

Good luck

Goals between now and end of 2025   

- finish the last rehab on my last purchase.  This starts tomorrow.  My 22 year old son will be leading his second rehab and will be performing his first live-in rehab.  This purchase will be up ~1m over purchase price after this rehab is done (3 sources: 1) purchase below value (or value add from addressing the rent issues - depends on your perspective) 2) value add from 4 class b+ unit rehabs 3) natural appreciation).   ETC: February

- buy a high end home at a destination location.   I suspect an offer is going out this week on a >3000’ cabin that Garth brooks used to record in. Needless to say it has nice finishes.  We plan to turn the small recording room into a small office.   If purchase this RE, ETC Mar 2024.   

- convert new RE purchase to STR. ETC: if above cabin, May.
- determine how I can assist child in purchasing his own home in San Diego. I can buy investment RE but due to crazy bad DTI (far worse than 100 to 1, possibly approaching 500 to 1), I cannot get reasonable financing on an OO and not sure my co-sign will help on conventional financing. We likely need to look for local lender that is keeping loan in house. ETC Dec 2025.

- Son to have RE license and path to life he desires.  This week he met a syndicator that has a lot of success (by a lot I mean lives in easy 8 digit home, local and in Detroit), but did not really know what to discuss or what to try to learn from him.   It did give him a peek into what a kick a$$ syndicator can achieve.
- determine allocation of my last accelerated depreciation allowance and execute it.   I have like $500k that needs something to allocate against.   I do have stuff to allocate it, but picking which stuff to do will take some time.  ETC Dec 31, 2024 (yes, 1 month).

I want at least 10 trips in 2025.  I have many goals for my son, but my goals are not necessarily his goals.  

Hope everyone has a great and successful 2025.  

I see a lot of good suggestions, but I see the OP not following them or trying to do more than suggested.  Why?   
- OP offers to take full responsibility.  No one suggested this. 
- OP offers to send handyman to diagnose the lower unit’s issue,  no one suggested this.

- OP has not indicated they will involve HOA even though multiple replies suggest doing so.

OP asks for advice, but seems to ignore it.   Even his posts are not getting up votes.   His responses do not encourage providing any advice.

good luck

Quote from @Sean Lambert:

@Allan C.

Cash flow is king. Debt pay down and appreciation is gravy.

Is this serious or sarcasm?

if it is serious I have a couple of questions for you 1) what is the last syndication that you have seen that did not project a majority of the return from value increase?  2)  Is every syndication wrong?

my property appreciation varies from a low of $2700/month to over $10k/month.   

In addition cash flow is taxed annually.  Tax on Appreciation is deferred and can be put off indefinitely with current rules.  

good luck

Thoughts

- ADU additions are not usually value adds. They typically add less value than the cost of adding an ADU. Make sure you know the value that will be added by an ADU before adding it. It is cheaper with better financing to purchase a property with an existing ADU than add one. You may be able to find properties that only have $50k value added from the ADU. Also make sure you understand everything about adding an ADU including value of the ADYPU, financing, impact from rent control, duration between initial expense and initial income, true cash flow (know the 50% rule, at 50% rent ratio initial property tax will be near 20% of income)

- educate.  Attend RE meet ups.  
- it is far cheaper to rent than own in the near term.   Is your outlook long term?  The rates and market have made San Diego a tough buy and hold market.  It has been my path to financial independence, but I mostly am not looking in San Diego currently and I get many off market offerings daily (so even below retail the hold is cash negative).  There have been at least 3 studies that show this is true for virtually every large city in the US (you can internet search this).

- buy and hold is currently tough in San Diego.  Currently flippers are much more active locally than buy and hold.  
- 130k does not go far in San Diego. At 95% LTV (I would choose 95% LTV over the fha) the down and reserves is easier than the monthly. Basically you can afford -3500/month which equates to ~$500k if no rental income. A portion of rental income can be applied to your income if separate units (not for bedrooms in your unit) which could bump the value a little, but this will pose a challenge.

For me

- I have not purchased local since Dec 2021. I purchased $4m that month.   Note that a few months after that date rates started to rise and quickly got to over double what I got on these purchases which would significantly increase the P&i.  I have no purchased local due to the extreme cash negative reflected in my underwriting (that many would consider conservative).

- I have an offer going out this month not local.  I expect I will be purchasing this property as the offer will be strong with options to make it work.  Someone who has made the money I have from local RE is purchasing not local.  That says something about the current buy and hold market.
- we are starting a local rehab on Dec 1 (last unit in a quad).  My son will be leading this effort (it will be the second effort he has led. He will be doing a live-in rehab.  He has a vacation scheduled, but otherwise maybe 5 to 6 week effort (plus live-in may add some complexities)) .  I expect it to be moderate size rehab which to me means no significant plumbing or electrical and no walls being added or removed.  I have offered to show some newer RE investors the pre rehab on Dec 1 and will extend the offer to you.  We can discuss the finances on this purchase (I will be up close to $1m on this after this rehab from 3 sources: 1) purchased below retail 2) value add 3) natural appreciation).  Contact me Friday or Saturday if interested.  It is in Pt Loma.  

good luck

Make sure you know how much value will be added by the ADU. In general in single family areas they add significantly less value than the hands off cost to add the ADU.

My initial protege added an ADU in Escondido which is working class like El Cajon. It added far less value than the cost of the addition. I hear the same thing at local meetups and on this site. Especially a meet up on private lending, ADU additions are discussed regularly (new attendees looking for money for their ADU additions without being aware that no one there will lend on ADU additions).

You also see this in the action of the flippers. In general they will add the ADU only if it is existing living space such as workshop, bunk house, office, etc. they will not usually do garage conversions. They virtually never do ground up ADU additions. Profits do not justify their effort even with the ADU addition in this case typically not being hands off .

Here is a list of things that make ADU additions a less than optimal RE investment but the value added and starting with tens of thousands negative is a big one that needs to be well understood.

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search 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 than ADU additions 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 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.

Quote from @Dan H.:

Quote from @Natalie Johnstone:

@Dan H. THanks Dan! Always good to hear the good bad and the ugly.  I we really are only looking at 2 properties.  We know the area very well.  Will keep you posted.   Can I ask, do you recall how high bids went over opening and how competitive it was? sounds like it was pretty competitive..

My bet is both those will be redeemed prior to auction. We have only bid on 2. One went for over what I expect a wholesaler would have sold. I do not remember the numbers but this property obviously needed full rehab. I suspect someone with cheaper rehab costs than mine purchased it with thinner margins than i seek. The other we were striving for 70% of ARV. It was maintained on outside but a fair amount of junk. ARV (maybe in 2018 - it would be much higher today) was ~$600k so we wanted $420k. It went for nearly $100k over our price. My belief is purchaser had more info on inside condition than I had or was buying to OO. There is no way I could pay close to that amount with risk on needing a full interior rehab.

My estimate is that maybe 1 out of 10 “normal” properties are not redeemed.  If you only have 2 candidates the odds of having one complete the auction is small.  

Between late redemptions and insiders, it is a tough purchase.   In addition, exerting time and effort on properties that are not for sale is not worth it to me. 

However, I am curious if your experience is different.  

Good luck

@Natalie Johnstone did either of your two candidate properties make it to auction close?   Was my description accurate to your experience?   

I am try to determine if it is worth looking into these again.  As indicated in either 3 or 4 years of looking at these properties only 2 properties of interest to us were auctioned.  We usually started with a list of ~25 properties.  After driving them we were down to a handful.  Then the redemptions left us 0 or 1 to bid on.   Never won, so it was a waste of our time.  

Hopefully it worked better for you.   

Quote from @LeOla Fletcher:

Hello everyone,

This is my first property bought April of 22 @342,000 w/a 3.7% interest rate. I owe $320,798.76. Estimated value is about $404,379 but may not be accurate(it’s the amt that shows on my mortgage companies app). A home next door to mine is on market for $399,000 very similar to mine, just bigger. 3/1 renovated about 1300sqft. Mine is 3/1 renovated(paid for by me) & 1020 sqft.

I am currently 2months behind on my mortgage. Payment is $2332.48. I have listed my house for rent for $2400 trying to get a section 8 tenant because of the guaranteed money from the state but willing to lower that amount if need be. I am ok w/having to also pay a few hundred dollars to cover my mortgage if I can’t get $2400 monthly for it. I only listed it at that amount because $2460 is the most I can ask for in rent w/section8. 

My question is, is it a good idea to try to rent the property or should I try to sell it? I want to get into real estate investing. So, renting out my property seems like a good start. However, because I am behind on my mortgage, I am not sure if it’s a good idea. Any advice on this matter is greatly appreciated.

It is a terrible rental. 1) The rent may not cover the PITI. Add maintenance/cap ex, vacancy, PM, misc and this is likely negative more than $500/month even if self managed (much more than the negative $200 that you indicate you are ok with) 2) if you are behind on mortgage, how are you going to handle being negative $200/month, or more like negative $500/month? 3) where are the necessary reserves?

You need to contact the lender to make arrangements in addressing the delinquency.  I suspect you will be required to sell the property and for less than $399k.   The subtract off selling costs which will get you to near what you paid for the property (which will net you a small amount after paying off the loan and the missed payments).

Before investing in next RE 1) get you finances in order 2) build up adequate reserves 3) learn to analyze the numbers better.  Understand the 50% rule.   Even though it is not accurate in all markets, recognize there are markets worse and better than 50% rule and be able to justify any discrepancy.  Understand why conservative underwriting is desired. 

Quote from @Don Konipol:

Investors bear responsibility for doing their due diligence on any investment they make - or being willing to suffer the consequences IF the sponsor/syndicator did the following and possessed the following 

1. Laid out all the risks beforehand

2. Vetted the investors so that it was reasonable to belief that each investor understood the risks and could afford to lose their investment

3. Had the ability, experience, and knowledge to succeed

4. Disclosed all fees, compensation and incentives

5. Operated on a fiduciary capacity

in other words if the above was done and the investment still went south, then that’s just x% outcome (risk) occurring, and a natural part of the investment process.  We’ve got to separate this type of loss from those in which the 5 items listed above weren’t followed. 

 I cannot agree with this more.   Every LP should realize there is risk even if the sponsor does a good job.  In the recent times it was easy to forget this when many/most syndications were achieving 20%+ annual returns.   Did LPs believe such returns were being achieved at zero risk?

I am an LP in a syndication that I believe is struggling.   The sponsors continue to state an all is good sentiment, but distributions do not lie.   If the distributions do not start when they were projected, that is an early indicator that things may not be going well.   I would like more frank communication.

My other syndications appear to be doing fine but one was a conservative offering (lower risk but also lower upside).  The other is a non-traditional offering (higher risk and ideally higher return that even with some large issues seems likely to hit the high returns and is very frank about the problems they have encountered).