All Forum Posts by: Jerome Morelos

I used a fixed rate second to finance the ADU, paying about $475/month for it. Currently renting the main house as a LTR and the ADU as a MTR. I am NET cash flowing just over 1k (includes maintenance, repairs, cap-ex, vacancies, utilities), which is pretty good considering this is in SoCal. This is also accounting for my increase in insurance costs due to adding insurance to the ADU. There is no rent control in my area. I bought the main house as a fixer upper and forced a modest amount of equity prior to the construction of the ADU, I did not incur a negative equity position. Property appraised for 620k earlier this year after the ADU construction (appraised it to remove PMI) and I owe $375k on the mortgage + 59k fixed rate second. So I'd say it's a good investment. But I could see your point @Dan H. as to why it might not be a good investment. I actually read one of your posts on this topic years ago, which influenced me to carefully choose the right market. 

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

I recommend converting an existing space, like a detached garage for example, rather than building from the ground up. The cost to build will be significantly more than the amount of "value add" of an ADU putting you in a negative equity position. Better to spend $60-80k for a conversion than over 120k.

 new construction gets valued at a way higher premium. this is a false statement. new construction will always beat existing 

Very market dependent. There are not many ADU comps in my SoCal area YET. It's starting to catch up though. A new construction ADU will be appraised significantly less than the hands-off construction cost. A new ADU will cost over 120k to build and will not be appraised close to that from my experience and many other investors I've spoken with. You can also find many examples in the forums of people experiencing poor valuations due to lack of comps. Building a new ADU will put you in a more "negative equity position" than converting a garage for example, which only cost <200 per sq ft.

please send me a case example I'd love to read. that's one appraisal. the knowledge I have as a licensed general contractor working with investors from 5 cities at a time all over the country buidling 3 different floorplans I would say trumps one ADU you read about online

This is from my own personal ADU that I recently built and recently appraised earlier this year. They only appraised it for 75k. They are not appraising ADUs equivalent to the construction cost in my area, I can guarantee that. There's just not enough ADU supply (IN MY AREA) for appraisers to base off of. Though I expect that to increase in the future when more ADUs are constructed. Like most things, the value of your ADU is relative to the area you're investing in. More ADU supply = more comps, potentially higher valuation.

there you go. the problem is appraisal. comparable sales, and your approach to building an ADU against the recommendation of your market. super beginner strategy it's popular in ohio as well but just not worth the investment.

There's an obvious housing shortage here in SoCal. More and more ADUs are being built. There are even ADU grants being offered. I personally used a 40k ADU grant with CALFHA HPP Cares that covered a chunk of the cost. So I almost "broken even" with the cost of construction vs. valuation aspect. It's still a worthy strategy to force cash flow that's rare to find in SoCal, especially if you can reduce the cost of construction by doing a conversion/using an ADU grant or even buying a property with an existing ADU

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

I recommend converting an existing space, like a detached garage for example, rather than building from the ground up. The cost to build will be significantly more than the amount of "value add" of an ADU putting you in a negative equity position. Better to spend $60-80k for a conversion than over 120k.

 new construction gets valued at a way higher premium. this is a false statement. new construction will always beat existing 

Very market dependent. There are not many ADU comps in my SoCal area YET. It's starting to catch up though. A new construction ADU will be appraised significantly less than the hands-off construction cost. A new ADU will cost over 120k to build and will not be appraised close to that from my experience and many other investors I've spoken with. You can also find many examples in the forums of people experiencing poor valuations due to lack of comps. Building a new ADU will put you in a more "negative equity position" than converting a garage for example, which only cost <200 per sq ft.

please send me a case example I'd love to read. that's one appraisal. the knowledge I have as a licensed general contractor working with investors from 5 cities at a time all over the country buidling 3 different floorplans I would say trumps one ADU you read about online

This is from my own personal ADU that I recently built and recently appraised earlier this year. They only appraised it for 75k. They are not appraising ADUs equivalent to the construction cost in my area, I can guarantee that. There's just not enough ADU supply (IN MY AREA) for appraisers to base off of. Though I expect that to increase in the future when more ADUs are constructed. Like most things, the value of your ADU is relative to the area you're investing in. More ADU supply = more comps, potentially higher valuation.

Quote from @Robert Ellis:

Quote from @Jerome Morelos:

I recommend converting an existing space, like a detached garage for example, rather than building from the ground up. The cost to build will be significantly more than the amount of "value add" of an ADU putting you in a negative equity position. Better to spend $60-80k for a conversion than over 120k.

 new construction gets valued at a way higher premium. this is a false statement. new construction will always beat existing 

Very market dependent. There are not many ADU comps in my SoCal area YET. It's starting to catch up though. A new construction ADU will be appraised significantly less than the hands-off construction cost. A new ADU will cost over 120k to build and will not be appraised close to that from my experience and many other investors I've spoken with. You can also find many examples in the forums of people experiencing poor valuations due to lack of comps. Building a new ADU will put you in a more "negative equity position" than converting a garage for example, which only cost <200 per sq ft.

I recommend converting an existing space, like a detached garage for example, rather than building from the ground up. The cost to build will be significantly more than the amount of "value add" of an ADU putting you in a negative equity position. Better to spend $60-80k for a conversion than over 120k.

Quote from @Matthew Trevino:

Hi there

I have primary residence that I would like to access its equity to begin my first RE investment. I have came across HELOCs and HELoans but not sure which would benefit me best?

I am leaning towards the BRRRR method or traditional LR once the right property comes across.

I have researched both but still not sure which of those 2 would benefit me best or if it even matters.

Just would like tips on this topic if anyone has any?

Thanks

I took out a fixed rate HEloan on my primary back in mid 2022 to do a garage-conversion ADU. I decided to go with a fixed rate HEloan over a HELOC because at the time, interest rates were rising and I knew that the rents can more than cover the fixed payments. I ended up locking in a 6% fixed rate and I'm glad I did because my interest rate would have doubled if I went with a HELOC. But just as Kerry mentioned, HELOC should be used as a short term loan due to variable interest rates. So be sure to have a clear exit strategy.

Quote from @Kerry Baird:

HELOC is best for short term money, because the interest rates are adjustable, while the second mortgage is a fixed rate for a period of time. I like them for an emergency fund, if I have over-runs with a renovation. I prefer this to using one for a down payment. Impossible to tell which would benefit you most.

I have found that lenders value the house in different ways; one is a full appraisal and the other is an automatic valuation…my credit union did a "drive by" valuation. Figure offers a quick HELOC, which we thought we'd get…but our DTI (debt to income) was too high. We also used PenFed for a HELOC, and that went well.

Tips: pull your own FICO score and call the local community banks and credit unions near you and ask what rates and terms they offer with a FICO like yours.  Make a table and compare, as interest rates and years of fixed vs variable rates will be all over the place.  Navy Federal has the longest draw and pay back period I have seen, whereas my local credit union has a very short draw/repayment period.  

Figure out what works best for your own situation.

 How was your experience with Penfed? What terms did you end up getting? Do they have high fees? I was looking into them.

I'm not sure if anyone has mentioned it but I would look into ADUs and pairing it with the MTR strategy to supercharge your cashflow. Find a home that enables you to convert an existing space into an ADU, near a level 1 trauma hospital and rent that out to traveling nurses/residents. My Socal property cash flows well over 1k/month from this strategy (but my interest rate is in the low 3's lol).

Even with today's interest rates, I'm still looking to apply the same strategy:

Buy a cosmetic fixer upper with the potential to convert an existing space into an ADU (ex: detached garages) in a great area within <20 mins from a trauma 1 hospital. Rehab, and rent out as a MTR to supercharge your cash flow. I recommend not building an ADU from the ground up as it can be costly and you will not get your return on the value-add side.

Quote from @Joshua Lee:

I have no properties yet - just working a regular job and doing some freelance work on the side. I'd like to start earning some "unearned income" and building wealth. I've read quite a bit and I've watched a ton of videos. I'd like to check and make sure I'm on the right track.

BTW: I make around 80k per year and I live in central Florida.

Here's my strategy:

- I'm currently living with family and reducing spending. Looking to save for a year or two. That should give me about $15k-$25k.

- Buy a multi-family home - I've seen some for as low as $250k, but I'm sure there will be different deals by the time I'm ready to pull the trigger.

- Take out an FHA loan for 3.5%. That's $7,500 on a $250k home which should be much less than my savings. That means I can either have a cash cushion for any renovations or covering some of my mortgage until I get a tenant or get into a property quicker.

- That puts my mortgage at around $1,500. Looking at the comps, I think I can rent it out for $750 - $1,000. That would put me at negative cashflow of -$750. Maybe call it -$1,000 to cover upkeep. Also, even though this is a negative cashflow it's basically what my rent would be. So, I guess I'm paying $1,000 to live in my home to earn equity in my duplex. 

- According to an amortization schedule, it'll take about 10 years to get 20% of equity in the property. Ideally, I'd put more towards my principle faster if I have the cash.

- Once I get 20% equity in the property, use another FHA loan to buy and live in another multi-family property then rent out both sides of my first duplex leading that to positive cash flow.

- Repeat..

Am I on the right track? Basically, take out an FHA loan for a multi-family, get 20% equity as fast as I can, and then do it again.

I would look into buying an owner-occupied cosmetic fixer upper in a great area that will experience steady appreciation and rent growth. That way, you could force some equity into the deal to get to your 20% equity goal quicker.

I came across a loan program called Renofi that will lend you a based on the future value of your home after rehab. Has anyone used this loan program before? What was your experience like?