All Forum Posts by: Geo Cruz

I have an off market opportunity that I wanted to get the community's opinion on. I'm currently in negotiations on this property located in San Marcos, CA (North San Diego County). As some of you might know, San Marcos is a booming city with properties well over the 500k price range. This property is a "rural" part of town but within walking distance to schools and great parks. I would say, the block it sits in is a rural area but nothing really in San Marcos is rural to me. The current structure is a 949 SFR that sits on a 25,000 SF lot. It seems like they started renovations and stopped in the middle of a significant remodel. There are open stud walls and extensive clean up needed in the lot. The owner shared that they had stopped to wait for the city to issue permits for a sewer connection, as the existing septic system was not going to get approved (percolation issues with the soils). My first take on this property is a total demo and re build with a potential add of an ADU or an additional SFR if the city allows it.

I wanted the community's take on how to approach negotiations. Title shows that the current owner bought the property in 2017 for 300k. He also mentioned that he had recently sold the property or had offered to sell it to his niece, I think unofficially because no transactions were recorded. Comps in the area are sitting in the 700-800k. My initial thoughts are as follows:

• Offer 350-375K
• 140K repairs + 75K for a new ADU = 215K total
• Target ARV is 710K+ could be more
• Target rents are 5000-5500 with ADU
• Planning to use private lender for purchase and repairs with a 9% interest only loan then putting it on a 30 year
• Potential to add an ADU
• Initial plan is to buy and hold if I can BRRRR

My questions and concerns are:

• Does it make sense to flip in lieu of BRRRR
• Does it make sense to wholesale
• Does it make sense to try to split the lot and build an additional SFR + ADU? City said it might be possible to split.

My current goals are to build my buy and hold portfolio but I'm running low on capital to keep parking in down payments. I have a capital partner who is willing to finance my deals but I don't want to partner with him on long term holds. I really think I should keep this property as it's in a booming city that will only skyrocket in appreciation in the next few years. Any advice from you guys out there? 

I’ve had great communication with Beyond Property Management but ended up self managing. I’ll PM you their contact info. 

@Cathy S.

You are definitely in the right mindset of trying to maximize your rents by using the available space. I'm actually going through a similar process where I'm converting my 3 car garage on a single family rental to a 2/1 ADU. This is my first investment and I quickly realized that ADU's are the way to go to be able to make deals work in our expensive market. I 100% also agree with @Justin R. on the options for your project. I personally chose the DIY method because I'm greatly maximizing my ROI's and I'm learning the process along the way. In the future it might be different for me. Feel free to PM me any specific questions and id be happy to help in any way.

@Dan H. Yes ADU will be a lot of sweat equity and personal involvement. I'm in the industry and feel that cost is aggressive but achievable with heavy involvement on my end. I've gotten quotes from small GCs and have read a few posts of local people converting attached garages and self managing subs directly that end up more or less in this range so I feel it's doable. Now if you're hiring an "ADU contractor" you're looking at double the price.

Cap ex, same concept. The reasoning for the aggressive number is sweat equity from my relationships in the industry and the fact that a few cap ex expenses will be taken care of now, during the renovation (adu will be new, AC equipment is being replaced, water heater is being replaced to tankless) 

I also agree with the appraisal on ADUs hence the aggressive construction target. Nevertheless, since the plan is to hold long term, not too hung up on getting the ARV right away. It would be nice so I can BRRRR the deal but not a must.

I appreciate all your insight so far. It definitely helps me plan better for the next one. 

Here's an update on the final numbers for the deal. 

3 bed 2 bath 1530 SF with huge 3 car garage that will be converted to 2x1 ADU

Accepted Offer $550,000 -$10,000 credit at close = $540,000 (listed for $575,000)

P&I - $1,989

Taxes and Insurance $630

Maintenance - $176 (4%)

Vacancy - $133 (3%)

Cap Ex - $67 (2%)

Rent - $2650 + $1900 (after garage to ADU conversion) = $4,550

ARV - $650,000 - $690,000

ADU and House Repair estimate ~ 50-60K. Funded by HELOC on my primary residence.

Any thoughts comments appreciated. This will be a long term hold for us, its our first deal and there is tremendous value on all the knowledge we acquired by the process. We have learned so much on the importance of value add and the intangible benefits that come from taxes. We are exited to repeat and keep the snowball going this year and the years to come. 

Just closed on one today with BBVA at 84%. They will go up to 90% for qualifying individuals. 

Just went into contract on my first rental SFR/ADU deal thanks to the help of many of you guys on this thread. I'll keep you updated with the details soon.

@David M.

The seasoning is not a parameter coming from the HML but rather from the conventional loan lender. They said that they wouldn't be able to refinance to the ARV on a cash property until after 12 months.

They can refinance at any time but it will be to the original purchase price. 

I agree with both you and @Joe Villeneuve that I need to keep looking for one that will allow me. 

@Joe Villeneuve

I’d have to go back and double check but the broker was telling me seasoning on cash out was 12 months not 6. 

I've gotten mixed information from conventional lenders in terms of being able to refinance a cash or hard money property. My intent is to use the hard money loan for the acquisition of distressed, non conventional qualified properties, then stabilize them to a long term conventional loan and pull out the forced equity (essentially BRRRR).

The couple mortgage brokers that I have talked to have told me the following:

1. If the property has been acquired as cash or hard money, I will need to wait a 12 month seasoning period before I can refinance to a conventional loan and use the after repair value. I am able to refinance in 6 months, but I will be limited to the original purchase price, not the ARV.

2. Most investors in Southern California are successfully doing BRRRS on owner occupied properties because the numbers are not working on investment properties (higher rates etc). Many investors are having a heck of a time trying to stabilize hard money loans to conventional loans, therefore most hard money loans are just being used for flips and not buy and holds.

Has anyone out there successfully recently used hard money for long term buy and holds? Particularly in expensive markets such as So Cal?