All Forum Posts by: Jason Gettler

Hi BP fam.  I'm a 32 year old licensed GC in southern Cali.  I'm looking to invest in my first property and would like to hear your guys' thoughts.  In my mind this is a no brainer but what the hell do I know.  I have made several offers but none have been accepted yet.  Regardless, my eventually first deal will look something like this:

Purchase price - $750,000.00
Down Payment - 5% or 3.5% whichever makes more sense (will take advantage of owner occupied loan)
After closing, insurance, taxes, etc. if I go with the 5% down the loan agent and I figured I will be out of pocket $37,500 down payment, $10,000 closing, and need to show $17,000 in reserves. Total needed is $64,000.00 but $17,000.00 is reserves. They are estimating the rate at 2.875% and the payment at $4,201.00 (forget how much of that is PMI but I think around 300)

Now here comes the fun stuff...

I'm looking for properties that have a detached garage at the rear and plan to add 400 SF to the garage and convert the garage, making it a 750-800 SF ADU. The ADU will have 2 bedrooms and 2 bathrooms, a living, kitchen, laundry closet and have it's own entrance. Now normally this would cost a home owner in southern CA around 150-200k depending on the contractor. Being that I'm a contractor I plan on adding this 750-800 SF ADU for about $75,000-80,000 after plans, engineering, permits and construction (it will be turn key). I've spoken to a few lenders who offer construction loans on these types of projects and they are telling me I should be able to get a construction loan based on future appraisal (70% loan to value). Even if the give me a low future appraisal, 100k?, if they can finance me 70k to get the majority of the project done I can personally finance the rest. The monthly payment on the loan is anywhere between 600-1,200 depending on my credit and DTI at the time and how much I borrow. The rate can vary from 4.99%-12%. The ADU should be ready to rent 7 months into me getting the keys. I will be living in the front house for the first year and plan on renting it out after. I should mention that If the main house needs remodeling I will also do that at cost. So there is a possibility to increase value on the main house as well but not really factoring that in as it will be icing on the cake.

This is where it gets tricky for me since I'm new to this.  My plan is to eventually rent out the front house - according to different rent estimating websites I should be able to get 2,800-3,200 rent for the main house (remember the mortgage is 4,201.00).  Then I should be able to rent the brand new 2 bed 2 bath backhouse for 2,200-2,400, maybe more.  We have done similar builds for homeowners over the past year and they confirmed what they charge for rents so I'm going off their numbers plus similar rents in the area.

Once I can refi I plan on doing that and I think the property which now has a second house on it should appraise for much more than I spent.  Normally this wouldn't be the case if I paid full retail price $150,000-$200,000k but since I'm building it for myself at around 75,000-80,000, shouldn't I be able to refi now that I added at least 140,000 worth of value to the property (this number was given to be from an owner we built a similar ADU for, he got an appraisal for 140k after we finished and that was in a bad area).  Am I wrong here on how this all works?  I'm hoping after the refi my monthly payment would drop to 3,200?  Is this naive to think?  If it does drop to 3,200 and I receive 3,000 in rent for the main house, 2,200 for the backhouse, then this property would cash flow $2,000 per month.  In this scenario would I be able to pull out enough cash to do this all over again?  I plan on doing another owner occupied loan and doing everything exactly the same but with more experience.  My credit union said I can do a owner occupied 3-4 times before they pull the rug and make me do investment loans.  I figure by the 4th one I will have 20% to put down moving forward.

I know this is just a unique opportunity for me since I'm a builder and this won't work out for everyone.  Another thing I should add is this - The numbers seem to good to be true so when I tell my family or people who I think would invest with me they don't believe me or want me to prove myself first.  I'm okay with that but I want to mention that the reason this will work for me is that the state of CA just started allowing ADU's (first in 2018 but then they opened the flood gates in the bill they just passed in 2020).  There are basically no restrictions for ADU's under 800 SF.  Most builders in my area are barely catching on but once they do I believe they will try to do exactly what I'm trying to do.  Oh also, I should add that this works because Los Angeles and Orange county are overpopulated and there isn't enough affordable housing.  People pay 800-1,200 just to rent a room in some areas!  I actually will look at renting by the room down the line.

Anyways, sorry for the run on sentences and bad grammar. I'm typing all of this from my cell phone.  I'm really excited about this and if this works I don't see myself working after I turn 36.  I can swoop up 2 of these the first year, 4 the second year and then so on and so forth.  We're strictly talking about cash flow here too.  Once we factor appreciation and depreciation for tax purposes it seems like the deal gets sweeter and sweeter. 

@Jo-Ann Lapin

Thank you! Los Angeles and Orange County

@Paul Dashevsky

Sorry! Left out the most important info! We are looking to work in the Orange County and Los Angeles area.

Hey BR community! I'm looking for a great realtor to help me find and purchase deals. My companies goal is to purchase single family homes, renovate, build an ADU on the property, rent out the main dwelling and ADU, refinance and repeat. Any great realtor's in the southern California area? Also looking for wholesalers too.

The ballpark estimate for garage conversion in my area are 60-80k.  Dan do you think a stand alone new construction ADU can bring back enough value to justify the price?  I built a 900 SF ADU for a customer of mine in Garden Grove and he spent 180k give or take with us.  He got an appraisal done afterwards and they appraised it at 140k.  The appraiser told him to wait a couple years and there will be more comps.  His 900 SF ADU is basically a 2-bd house.  We could have built it for under 100k if it were a personal project.  He's currently renting the unit out for $2,400 a month.  I'm not an investor but it seems like a good BRRR?  Your thoughts?

@John A Murray

Sorry for the late reply. You must insulate the unit.

Hey BP family. Would any investor's out there be interested in partnering up with us? We are a licensed, honest and reputable GC company with much experience in the ADU field (accessory dwelling unit/basically a second house on a single family lot). Since 2019 we have completed around 15 ADU's which include new ground up builds, garage conversions and garage conversions with additional square footage added. I personally own the company and also handle all of the pre-construction process so I am very familiar with the plans, engineering, title 24 and permitting. The value we bring is our in-house labor. We will handle most of the construction in-house which will keep construction costs down and provide immediate equity. We completed a 900 SF ADU project in Garden Grove a few months back and it costs us around $100,000.00. We got the job for $180,000.00 and her other construction bids were $210,000 and $197,000.00. The average selling price of construction in CA right now is $225-$250 per SF but I can get it built for much much cheaper by running the job efficiently and economically. The immediate equity gained by getting a construction cost of $100k versus $200k is huge. We can do the BRRRR method and cash out refi and get the second one, third, and so on. If anybody is interested or knows somebody who is please reach out to us. You are more than welcome to visit any one of our 5 projects we have in progress right now and talk to references. We can provide vendor references, homeowner references from past job, personal references and so on.

I do want to add that the ADU opportunity in CA will not last forever. Since we do the plans and permitting, we speak to the local cities and we know they hate ADU's. It over populates their city and street parking becomes a nightmare. The local cities hands are tied right now because the state is mandating them to approve these plans. But like I said I dont think this gravy train will last forever.

Hi John, 

Yes, the ADU is considered new construction as the garage was never considered "living space" and you'll have to make major changes to bring it up to code (ie: footing where the garage door used to be, insulation, drywall, new ceiling joists to hang the drywall because the old ones won't meet code, moisture barrier or new slab for the concrete). Also, most cities are requiring you to connect the water, sewer and gas directly to the main lines and not connect them to the existing main house (which adds to the costs).

Kim- I would suggest budgeting to demo the unpermitted structure as most times this will be the case.  In CA you buy as is and it’s the buyers responsibility to figure out what is permitted or not.  Most unpermitted structures are unpermitted for a reason, and won’t pass today’s building codes or planning setback requirements. If you attempt to try and reverse engineer it, good luck! You’ll likely waste a lot of time and money on blueprints, city permits, etc. only to find out that the structure won’t pass inspections and you’ll end up tearing it down anyways. 

I'm a GC and normally we like to build houses but in 2018 we built 7 ADU's between Orange County and Los Angeles so we are pretty familiar with the process.