All Forum Posts by: Marco Cruzatt

will it be cheaper to buy a manufactured little home to put on your land as an ADU? will it be cheaper than building from scratch?

The only reason it makes sense to get financing is if you can leverage your cash elsewhere. For example, you finance this construction, but use your $250K to buy another cash flowing property. It starts to become dollar cost averaging.

Keep in mind with the Junior ADU, you have to live somewhere on the property. Otherwise, when you move, it will need to be absorbed into the main house or ADU as additional living space.

When it comes to adding units versus buying another place, there are pros and cons to both. One major pro to adding units is you are "saving" on the cost of land and increasing cash flow on one property. It becomes economies of scale. 

However, having another property can be beneficial because now you have multiple properties appreciating, giving you potentially more leverage opportunities down the road. 

purchasing a different place maybe one with an ADU is in most markets a far better investment than adding an ADU.

The advice to look at comps for input on the decision is very sound as ADUs in most CA markets add less value than the hands off cost of adding the ADU. This negative initial position consumes the cash flow many times taking years to recover.

One of the few worse RE investments than an ADU is a JADU that in most markets lowers the value of the property. This means not only does it not add as much value as the JADU addition, but it lowers the value of the property such that at selling the typical approach is to remove the JADU. This loss of value is due to you have eliminated most of your buying market and to get best value you are limited to house hackers.

Here are reasons an adding an ADU in CA is one of the worse RE investments:

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

Good luck

@Marco Cruzatt are there any other comps in your neighborhood that have 2 ADU's? I'm asking because getting financing on properties with 2 ADU's is almost impossible. So, if you ever go to sell your home...you might have some issues with it depending on who is buying it and for what reason.

I'm jumping in here with layered curiosity and time sensitive URGENCY. Stepping right into a few things that I've read in this thread that may help others while I am seeking knowledgeable resources in return as well. First, I am a newbie so, please excuse my lack terminology and possible redundancy. 

As of today, I opened escrow for a Duplex in East Los Angeles. Things have happened quickly but we are looking forward to the potential of this first investment. I'll start with the good: We initially came into the deal with a Investor loan pre- approval (Hard"ish" money) at 70% with no contingencies. My brother is a general contractor so, we knew what we were walking into. The plan was for a flip and hold, then possible refinance into a conventional loan at a later point. In the midst of making our offer, we realized how limiting, going into an older property in need of a fair amount of rehab, a hefty down payment in cash resource would be. Luckily, on the day our offer was accepted, we were ultimately put in touch with a lender that presented what is seeming to be an amazing program, that only required 5% down, no PMI, 3.5% interest along with 2 qualifying grants of $10k provided town the down payment- and up to $7500 in closing costs. We have been approved thus far and are officially in motion. I am sharing to say, it IS definitely possible if you find the right property. The move forward is now looking much more imminent.

On the flip side, one unit is vacant and the other is occupied. Not initially an issue, as my desire is not to displace anyone during this time. However, we are now aware that the tenant has in fact exercised their right not to pay rent in compliance with city ordinance. I must mention that this property is also intended to be owner occupied. Leaving zero income revenue during the ordinance and/or rehab to the vacant unit.

From what I understand, the ordinance allows for deferment with the requirement to pay back in full within (12) months- (6 months in unincorporated east LA) after the mandate is lifted. However, the extension recently announced leaves the unknown at a much higher level than before.

Here are my questions: 

Any advice on how to best approach this challenge while still in escrow?

How important are estoppel contracts?

Is it worth it/ are we able to offer relocation support to alleviate back rent debt in order to offer a release to vacate ( and if so, what amount is standard?) 

What would you do? 🥺