All Forum Posts by: Dan H.

The BP calculator uses a percentage for both cap ex and maintenance.  Cap ex and maintenance across markets is not accurately reflected by a percentage.   

Here are some examples

- 3/2 in class a rents for $6k in my market.  3/2 in class c- rents for as low as $2.5k.   Which do you think will have lower maintenance/cap ex?   Even with the finishes being better in the class a, I suspect it will have the lower maintenance cap ex due to better quality tenants.  
- a 2/1/1 650’ units 4 or 5 houses from the beach (mission beach) and a 5/3/3 3500’ inland (Jamul) both rent for $4.2k.  Which is expected to have higher maintenance/cap ex?   The larger unit will have higher maintenance/cap ex even with coastal environments being harsh on some items.

I suspect your expense estimates are far too low especially if you kept the BP calculator default percentages.  

The 50% rule is not perfectly accurate, but if your underwriting differs significantly from the 50% rule (which it does in this case), be sure you can justify the discrepancy.  

I agree with @Nicholas L. that the 50% rule is likely to be the more accurate indicator.   

Good luck

BRRRR have some items that flips do not (plus most of the flip items):

- refi appraisals in my market are conservative.  This means the value will be at the low end of the comp range.  
- just as it is possible to be overly optimistic on ARV, the same can, and often does, it can happen at the rent that can be obtained. Underwrite with conservative rent. It is likely better to under charge on rent than over charge as vacancy can quickly overcome the rent delta. currently, this is my issue with brrrr. Prior to 2022, I could get some cash flow. In the current environment, my under writing (that most would consider to conservative) depicts large negative cash flow after a maximum LTV refinance.
- cash out refi loans have higher rate than if cash out was not occurring.  This implies rate will not be the lowest rate.  Recognize this.

I have not purchased to brrrr since December 2021 due to the 2nd item.  

Good luck

Similar to @Mike Dymski, i plan to make all investors whole even if the $hit hits the fan.  This means I will take a significant loss to ensure investors do not lose their initial investment.   

This mindset limits the size of investments I can pursue more than if I did not have this objective.   

There are investors that do not have the means or desire to cover losses.  Recognize the sponsor is at least as critical as the deal.  

Good luck

Quote from @Delbert Standifer:

@Dan H.

Greetings I promise to most definitely let you know when I receive the report. My guess is 1M.

That would be real rare.   I hear appraisals associated with ADUs regularly in southern Ca and they are typically less than 50% of hands off cost.  My initial protege also had one (garage conversion) a few years ago that was not hands off that received a pathetic appraisal.  

i do know one female investor in beach areas of Orange County that sometimes chooses to add ADU on her flips and does well, but she is not hands off and is selective where she adds the ADUs.  

I also get the same story from national lenders that state virtually everywhere ADUs are getting values far less than hands off costs.  According to those sources, it is not a southern CA specific issue.  

good luck

Quote from @Robert Frazier:

Quote from @Dan H.:

Quote from @Robert Frazier:

Quote from @Dan H.:

Ca has been passing statewide ADU laws for the last half dozen years. Most years a few new laws are being passed.

Adding a single ADU in southern CA is typically a poor investment. Small unit in small unit count is the most expensive development. In most single family zoned areas, a single ADU has a value far less than the hands off cost to develop it. They even have a value add less than performing a garage conversion. This initial negative position can consume years of the small real cash flow (when using realistic expenses). It explains why very few flippers are adding single ADUs and if they are they are usually a conversion of exhisting habitual space (bunk houses, detached offices, workshops, craft rooms, etc.

Some jurisdictions are taking the statewide ADU rules and going much further extreme. This land was from my initial protege. I told him I am glad I did not live on that street. https://www.cbs8.com/article/news/local/working-for-you/new-...

In these extreme cases there is money to be made like most large development. But for the homeowner adding a single ADU, they likely have far better investment options. They need to do all their due diligence including understanding the value that will be added by the ADU, the finance options available, the consequences of adding the ADU (rent control, property taxes, rental limitations, etc), etc.

Good luck

 As with all things, it depends on the investor and the equity.

If they are able to leverage existing equity to buy it under a HEL or HELOC, then they are adding equity with no out of pocket expenses, and adding immediate and longterm cashflow to existing stock.

We like ADU's because there isn't more land being created in our city that is landlocked...but there is more density available to those with large lot under-utilized sfh.

In my market, it typically costs $2 to add less than $1 of value on single build ADUs.  Even if the rate was 0%, that is not the type of investment I seek.  The cash flow borrowing full cost via heloc will be marginal, possibly even negative if using realistic expense estimates (I.e. something near the 50% rule).  

In larger volume, you can get better return.  Someone tackling that type of development effort can achieve returns without ADU laws.  

good luck

Here in Boise, I have a client, he is having an ADU put on his property this week:

1 br 1 ba, 448 sq ft. 32 feet long, 14 wide. All in, his cost was $136,000.

In our market with a standalone ADU, the equity would be about 1:1 immediately if he wanted to price and sell the property. 

Cost to borrow on a HELOC right now is about 7.25%, which puts the interest costs at $9860 per year. Lets say $10,500 with taxes. (these numbers would go down significantly with a refi down the line).

Rental income would be $12-14k per year, so your netting $1500-3500 the first year before lowering the interest cost over time and increased rent (rising at 8% per year).

So for $0 out of pocket you get another unit, equity growth(over time), income that grows and you created a unit of housing that didn't exist before. Not bad at all. 

 Let’s project realistic expense estimates via the 50% rule:

$12k rent / 2 (50% rule) - $19332 P&i = negative $13332/year or negative $1,111/month.  

That is huge negative.  If we use your interest only numbers:

$12k / 2 (59% rule) - $9860 = negative $3860/year or negative $321/month. 

>the equity would be about 1:1 immediately if he wanted to price and sell the property. 

Can you provide an address where you believe a refi appraisal valued a single ADU addition at the same cost as the hands off addition. This is contradictory from what I see locally and what I have been told by multiple national lenders.

There are far better investment options. In addition, adding an ADU is a lot of work. Likely more than most brrrr, but with an ideal brrrr I can make infinite return. In addition, the capital outlay starts long before any income and the detracting of something from the primary structure even if it is just yard space.

As indicated, my original protege made a lot of money (over $500k) on a land transaction associated with a large count ADU development. However, this was not adding a single ADU. https://www.cbs8.com/article/news/local/working-for-you/new-...

In large counts, there is money to be made in ADU additions. In single count, the ADU development costs are too high to typically not have a negative initial equity position

Good luck

Quote from @Robert Frazier:

Quote from @Dan H.:

Ca has been passing statewide ADU laws for the last half dozen years. Most years a few new laws are being passed.

Adding a single ADU in southern CA is typically a poor investment. Small unit in small unit count is the most expensive development. In most single family zoned areas, a single ADU has a value far less than the hands off cost to develop it. They even have a value add less than performing a garage conversion. This initial negative position can consume years of the small real cash flow (when using realistic expenses). It explains why very few flippers are adding single ADUs and if they are they are usually a conversion of exhisting habitual space (bunk houses, detached offices, workshops, craft rooms, etc.

Some jurisdictions are taking the statewide ADU rules and going much further extreme. This land was from my initial protege. I told him I am glad I did not live on that street. https://www.cbs8.com/article/news/local/working-for-you/new-...

In these extreme cases there is money to be made like most large development. But for the homeowner adding a single ADU, they likely have far better investment options. They need to do all their due diligence including understanding the value that will be added by the ADU, the finance options available, the consequences of adding the ADU (rent control, property taxes, rental limitations, etc), etc.

Good luck

 As with all things, it depends on the investor and the equity.

If they are able to leverage existing equity to buy it under a HEL or HELOC, then they are adding equity with no out of pocket expenses, and adding immediate and longterm cashflow to existing stock.

We like ADU's because there isn't more land being created in our city that is landlocked...but there is more density available to those with large lot under-utilized sfh.

In my market, it typically costs $2 to add less than $1 of value on single build ADUs.  Even if the rate was 0%, that is not the type of investment I seek.  The cash flow borrowing full cost via heloc will be marginal, possibly even negative if using realistic expense estimates (I.e. something near the 50% rule).  

In larger volume, you can get better return.  Someone tackling that type of development effort can achieve returns without ADU laws.  

good luck

Quote from @Delbert Standifer:

@Jesse Rivera

Yes, the value of the property right now is 800,000. I paid a total of 200,000 for my ADU.

Any thoughts?

I will venture an educated guess that if property without ADU has a value of $800k and $200k was spent on hands off ground up ADU, the appraisal associated with a refinance will come in no higher than $900k.

Let me know how well I did with my educated guess.  

Good luck

Ca has been passing statewide ADU laws for the last half dozen years. Most years a few new laws are being passed.

Adding a single ADU in southern CA is typically a poor investment. Small unit in small unit count is the most expensive development. In most single family zoned areas, a single ADU has a value far less than the hands off cost to develop it. They even have a value add less than performing a garage conversion. This initial negative position can consume years of the small real cash flow (when using realistic expenses). It explains why very few flippers are adding single ADUs and if they are they are usually a conversion of exhisting habitual space (bunk houses, detached offices, workshops, craft rooms, etc.

Some jurisdictions are taking the statewide ADU rules and going much further extreme. This land was from my initial protege. I told him I am glad I did not live on that street. https://www.cbs8.com/article/news/local/working-for-you/new-...

In these extreme cases there is money to be made like most large development. But for the homeowner adding a single ADU, they likely have far better investment options. They need to do all their due diligence including understanding the value that will be added by the ADU, the finance options available, the consequences of adding the ADU (rent control, property taxes, rental limitations, etc), etc.

Good luck

My opinion is anyone that has to ask where/how to find off-market (underground) properties is better served by purchasing off the MLS.

It is a rare off-market property that does not involve work and/or have risk items. Typically they are not eligible for traditional financing which implies other funding sources (HML, private Monet, self funded, etc).

Someone that has to ask the question will typically be best served by having an agent represent them and hold their hand.   Granted it is unlikely to result in a home run, but it also is less likely to fail big and negatively affect prospects for years. 

A base hit with virtually no risk is a fine place to start.  After a few base hits, you are better prepare to go for home runs.  

Good luck

Quote from @Jonathan Greene:

Quote from @Mitchell Gunlock:

Quote from @Jonathan Greene:

It probably sounds easier than it will be in practice. It's technically not an ADU if it's the only property on land as it's an accessory dwelling unit to a main unit. You are talking more about a cottage cluster. You would want to check local zoning to make sure you could build more than one as a lot goes into that beyond just being close to plumbing, electric, and gas.

When you mention "a lot goes into that beyond just being close to plumbing, electric, and gas," what are the top things people tend to overlook when preparing to build ADUs?

Access roads and if multiple are needed for each unit.

City regulations and zoning.

Impervious cover requirements or percentage across the whole lot.

Drainage per units built.

 In some jurisdictions, off street parking can be a requirement.   I knew a developer before the exception for being near mass transit planned to build 4 units but was only able to build 3 units.   It heavily effected his under writing results.   If he was building it today, the parking would likely not be an issue.   In my market they keep reducing parking requirements while removing public parking.   This has mostly been for bike lanes but the most recent is a statewide prohibition on parking near cross walks.   The city is eliminating a significant amount of parking near the cross walks.   In many areas there is already not enough parking.   It is not uncommon to have to park blocks away from your residence.  At isle vista, my son skate boarded to his parked car because he sometimes was blocks from his residence.  

The ADU hurdles are jurisdiction specific.

Good luck