All Forum Posts by: Mike Akerly

@Matthew Forrest I just haven't pulled the trigger on making ADU development my priority business plan. That being said, I do think it has a lot of legs. I'm also getting increasingly weary of SoCal purchases for a number of reasons, though I'm still planning to pick something up this year locally.

@Peter Mai the shift will definitely come. As the starting point, ADU's need to be built in larger quantities, which I think we will begin to see in the coming year. Eventually, properties with ADU's will begin to trade and those sales will set the comps. The problem now is that if you're looking to do a cash out re-fi (e.g. as part of a BRRRR strategy involving the development of ADU's), there typically are no comps for an SFR + ADU + JADU, so an appraiser makes adjustments to SFR comps and gives very little value to the ADU's. However, when the business model of "value add via ADU addition and rehab" gains some traction in a given market, and those properties with begin to trade, there will be comps. I can certainly tell you in SoCal if you had a single family home with an ADU that generates an extra $2k per month in income, end-user buyers will not be thinking "I'd pay an extra $20k for that." Those properties will sell for significantly more than SFR's without ADU's (six figures more), and then appraisers can base their valuations on actual comps that more appropriately reflect the market value.

In the meantime, BRRRR may be difficult to achieve. I've half-thought about the possibility of doing a couple of flips in the same micro-market by adding ADU's. To the point above, then there would be comps and BRRRR may be viable for the third and subsequent properties in the same market.

Any suggestions on SoCal markets that are a good place to look for reasonable duplex and triplex deals?  

I'm hoping to build a system to do a few of these a year in the same market for the next few years. My intention was to rent all three units (main house and two ADU's), but now I'm thinking it might sense to develop the first two properties and then sell them. Most likely hold for one year for capital gains treatment or 1031. But, then those two sold properties can be used for comps making the BRRR method more viable on subsequent properties. There will be other investors building these for sale as well, so eventually, there will be comps for this product type. I'm extremely confident that buyers will pay WAY MORE than $40k over similar SFR prices for a property with two units that offsets their mortgage substantially.

So the title is overly simplified in that obviously no one can answer that question in the abstract for someone else.  But, how would YOU go about determining the answer for yourself?  What metric would you use to roughly calculate your anticipated cash flow from future equity invested?  

Perhaps look at this via a hypothetical situation (not my own circumstances).  Maybe you're about to get an inheritance that you believe will leave you with x$ in cash to buy real estate with and you want to figure out if it will make enough monthly cash flow for you or your spouse to quit your day job.  What back-of-the-napkin numbers would you apply to estimate what your cash flow expectations should be once you've invested the funds (knowing what you know about what you can accomplish in the market once you have the funds in hand)?  Similarly, perhaps you're busy building equity in your current portfolio and are fantasizing about what that equity would have to reach in order to restructure the portfolio to maximize cash flow to enable you to quit your day job and invest full-time.  What assumptions do you make in trying to pencil that out?

I'm fully aware that there are tons of variables (the use of financing or not and the terms thereof, the property type, investment strategy, etc.) - my point is to cut through all of that assuming that you know what you would do with the funds and can estimate what your expectations would be based on your experience.

Thanks for playing!

@Archie Robband @Hubert Kim - thanks so much for the awesome advice!  Much appreciated.  I wasn't sure what's customary here in SoCal.  I'm all setup with the CAR forms and planning to use Cozy now as well.  Hoping this first application goes through and I can wrap up the leasing process for this property.  Again, thank you both!

Hi Bigger Pockets - I'm renting out my first property in Los Angeles (Inglewood actually). It's a SFR that I purchased last year, moved into, and renovated that's now ready for the rental market. I've been a landlord in other cities (e.g. NYC), but not here, and I wanted to ask locals about their best practices.

I'm using SmartMove for the application process.  What supplemental materials do you typically ask for?  Paystubs, letter of employment, bank statements, etc.?

Secondly, do you use the CAR residential lease?  If so, is it known to be landlord friendly or are there typical provisions that are commonly added as a rider to protect landlords?  Kind of wondering if there's a generally known opinion about how good this lease is for landlords.

Lastly, are you using any online tools for collecting rent and/or managing the landlord/tenant relationship?  Any great services out there that you recommend that make it more convenient for all involved? 

Thanks in advance, I appreciate any advice! 

I'm evaluating an opportunity to participate in a small development project by co-signing on a construction loan.  The construction loan proceeds will be used to take out the existing debt on the land and to build the project, which should take 6 months.  I'm not asking for advice on evaluating the project, but rather, does anyone have experience that would indicate what the market is for participating in this way?  

If it's a flat fee, how much?  If it's a percentage of the deal, how much?  The intent of the developer is to hold the second phase for rental, so I can decide now if I'd prefer to participate via an ongoing interest or ask to be taken out with a refi after lease-up of the project.  I would have no other cash or performance obligations, but obviously remain at risk, along with the project sponsor, until the loan proceeds are paid off.  So, suggestions for terms for either or both of these options would be appreciated.  A few facts:

• the loan is in the $850k range, 1 year interest only.  I am not obligated to contribute to the debt service
• I won't be an active participant in the development process
• At the end of the 1 year term we can extend for a fee, refi, or pay off the loan.  I guess that's probably obvious.
• This is the second phase of the project, so there is some proof of concept in pricing, demand, absorption, etc. as well as some lessons learned in the construction that should improve efficiencies (essentially building more of the same plans).
• The developer is 20 year friend.  We both have our respective real estate businesses focused on different aspects of the business.  The basic reason he needs a guarantor is that he made $20k in 2017 while he moved his family and business to a new state and a project was delayed resulting in $170k in income pushing from '17 to January of '18.  Then he had $300k in income in '18.  The co-signer request is coming from the lender and the developer feels like it would also be asked for by other lenders, the terms on this one are good, and there's no point in starting over on the loan only to end up with the same result but a different bank (and possibly less desirable terms).

Again, I don't have a strong sense of what I should ask for in return for playing this role if I decide to move forward and how my participation might be structured.   Any thoughts would be greatly appreciated.

I'm planning on purchasing a property with low money down in early 2019 and using 203k financing to acquire and rehab it. I will move-in during the rehab (making it my primary residence), but ultimately, my goal is to shortly thereafter take out the FHA loan with conventional financing. I've been doing the research necessary to understand the trials and tribulations pertaining to 203k, but I'm not asking about that part of the process. My question basically comes down to the "repeat" part of the BRRR Method. Is there any reason that would prevent me from repeating this process multiple times in the span of a few years? Basically I'm asking if FHA has some sort of policy I'm going to run up against that would prevent me from obtaining repeat 203k loans on residences that I've used as a primary residence, but maybe for only 9-12 months each time before refinancing and then applying for a new 203k loan on a new primary residence?

What are you seeing out there now with regards to loan terms for non-owner occupied, small multifamily properties (1-4 units)?

• Max LTV?
• Rates?
• Points?
• Cash Reserves requirement?
• Minimum loan amount?
• Any other interesting terms or trends to touch on?

I'm preparing to make a couple of these investments in the next 6 months and trying to start by planning my financial life accordingly.  I thought the conversation might also be helpful for any and all purchasers without deep financing relationships that they always turn to.