Dan keeps making reference to "safe" unpermitted units and that can be interpreted in many ways.
I had a client that had an illegal garage rented out for $1k per month and when he attempted to sell the property, the tenant went to the city and the owner had to pay the tenant back 2 years worth of rent. Why? ask them...
The problem I have seen with many unpermitted units or additions particularly in Altadena CA : is that what looks nice, well done and safe many times is not...
Sometimes they still have the garage door and drywalled the inside... meaning that they did not do a foundation on the garage door line : they did not use a deputy inspector, they did not use the appropriate hold downs (metals) for structural integrity, they did not use the right calculations for framing (ie rafters for ceilings ) that are often changed in a garage conversion... did not use proper headers for windows and doors... etc etc
I have been faced with these a lot when representing the buyer and I would :
1. Go to the city and see what is permitted and what is not (for main home and "ADU")
2. I would make sure that I'm not paying a premium for an "ADU" that should really not be there...
3. I would bring in a drafter or architect to assess it and see if you only need the building plans and pay permits: Building plans about $3k to $4k since everything is done... and city permits about $4k to $7k and make sure that you don't have to do anything major... front foundation could easily be $5k or more plus engineering work and stamp. : so, assess all systems and see for obvious things like : garage door, ceiling height, perimeter foundation and drainage, framing if you can, attic space, electrical, plumbing etc
4. Bring in a trusted contractor : to assess the current property and how much will it cost to get everything up to code (if any)...
5. Do an assessment of value now and after you get the ADU permitted
* We have been in situations where $8k for permits could mean an extra $100k in value or $2k per month in rents.
There are many benefits in getting the permits and the risks of not getting it permitted are high...
As part of my team: I have a city inspector and will ask them about the unpermitted law Dan is talking about...
Good luck
We just helped 2 clients build and rent their ADUs
Highland Park: 2 bedroom 2 bath (840 sq ft) for $3k per month
Pasadena: 400 sq ft garage conversion : $2,200 per month.
Claremont: Ours: 380 sq ft garage conversion : $1,850 p/ month
Garage conversions all in: $100k to $110k (total ready to rent).
New construction ADU: $120k (+ permits and plans) : 1/ 1
Rents: $2,300 in El Sereno
** I think that if you are building for $300 per sq ft or higher.. yes, it will be difficult for that to appraise, but this is why it is important to work with people that will give you reasonable pricing for building plans and construction.
A $100k Heloc payment will be around $750 per month (verified with el sereno client) and rents are $2,300 p/m so you tell me if this is a good idea or not.
My co-worker has built ADUs for $150k and sold them for $350k on the MLS.
Other investors I know have bought an SFR and put in 2 more ADUs and sold them each for $700k in LA. Netting $350k total on one property.
Timing for permits: every city is different and if you will use this strategy then you have to do your homework and look for cities where permits will be less than 3 months so that it doesn't take you 1 year to build.
Reach out if you need help making sense of your investment or a property you want to buy.
Hi @Jaycee Greene thanks for the welcome. The draw to Airbnb Arbitrage is due to not a lot of capital to start with. I don't have a lot of capital to buy a property right now in the area that I would like.
People that get into businesses like these have a common thread, they are go getters and hustlers! Which is great. But do look at the shiny penny and spend big sums of money to learn. If you would really like to explore the sector : why not go and message 10 to 20 operators and offer to look after their property or clean their property for a month in exchange for their knowledge and details on the numbers. I bet they would jump on it to save the money- or simply help them with social media marketing etc. The point is to work for knowledge instead of the $11k price.
Aside from this: I would become a middle woman! You could look into different sectors in real estate and see what you like and what you are good at; think
1. Real estate sales
2. Construction
3. Air b and b
4. Staging
5. Design
6. Marketing
Etc etc
I have done this all my life. Ill give you some examples:
1. Real estate : you could become good at advertising and marketing or simply asking people you know if they want to buy or sell: Any realtor will give you $1k to $5k depending on the price to get that buyer or seller. It will take you about 60 to 90 days to create some momentum but think about it. After 6 months : if you start getting 1 per month. That’s 6 in 1 year : or $6k minimum
That’s more than any rental out there would give you per month in cash flow lol
2. Constuction : Any contractor would again, give you $1k to $5k for a ready to start project.
Same idea.
3. Marketing ; the same and the ideas keep coming and coming
My thinking is that you need more income and a sellable skill.
Once you make some money - you will prove the concept and once you prove it, you will have a skill that you can charge a lot from and then use it to make more income and then invest in RE ;)
appreciate the comments above… but there is always a way.
https://www.zillow.com/homedetails/3936-Broadway-San-Diego-C...
All i did was search SD homes and in less than 3 seconds saw this home. I’m not saying this is perfect… but if you can find a home like this one for $600k that could work long term, trust me, with a little effort and patience, you can find even a better one off market or make this one work. Now, maybe the location is not the best, you will have to do your due diligence, but follow my train of thought on this one.
@ $700k with 5% down : you would need $35k : why $700k if this is listed for $600k
Bc as an example: you could do a construction loan where you buy the home for $600k and use $100k for the ADU. The full payment would be around $5,400 : The ADU could rent for $2k per month and you would be left with $3,400 per month on the main home. Rent one of the bedrooms for $1500 and your side would be $1,900 monthly. You would be building equity and paying down the loan over time. The tax savings will be around $8,100 per year or $680 per month at a 20% tax bracket. Ultimately making your side of $1,900 per month go down to $1,220 per month… where can you rent for that much right now…. ? No where…
Once interest rates go down to the 5.5% range, you could refinance and be in a way better position.
**
Another way: you could do all of the above and then use a company I use to split the lot. The back ADU could be its own property where you could sell it for at least $450k on its own. Even if only 400 sq ft. Mainly bc where could you find a home for that much. Let's be conservative and say that it would only sell for $300k : you spent $100k on it anyway… and now your over all mortgage would go from $700k to minus $300k or $400k. And you could put another ADU on it and now it could work.
Some may say… this is too much work… or too difficult to do… Well, if you don’t like this type of work or industry… simply don’t do it.
The creative people will always find a way. If you cannot get approved for a $700k loan, then work on that, but saying I don't know how to do it is not an option. I will help you do it in SD if you decide to do it! With the numbers above. Other people will charge you way more for a new construction ADU or Reno for the home. But this is more than doable.
You could also go for a condo:
https://www.zillow.com/homedetails/4310-54th-St-APT-109-San-...
Again, this is only an example that I found in less than 5 seconds. This is how I got started actually in LA county. For this similar price. 2 bedrooms under $300k : rent a room, Reno the condo, increase value and let it ride while paying down the loan , taking tax benefits and growing equity. I did just this, and in 4 years sold it for a $200k profit and that's how I bought my home and build an ADU conversion. And yes
@Dan H. says that ADU is not a value add… but we pay $800 per month now bc of the ADU and our home is worth about $900k now. You cannot beat the power of an ADU for peace of mind, leveraging your home to pay less monthly and reduce your expenses and give you the experience and confidence of doing constriction, getting permits and working with the city and managing a very easy rental. The knowledge you gain from it will enable you to grow 10X in the future. Don't listen to dooms day people like DAN H (lol just kidding ) but Dan you are so negative in the forums… you know a lot but there is a way! The main thing for you is : 1. Can you get approved? 2. Do you have enough funds for down payment and closing costs + emergency funds 3. And now you have access to me and my people (and of course you can meet your own people)! but if you are doubting my intention… look me up online and on Zillow reviews. Very difficult to get 60 people to lie on reviews :) Good luck and reach out if you like. Sebastian in Claremont CA
These are photos of the condo: https://www.zillow.com/homes/991-W-Sierra-Madre-Ave-.num.2-A...
And
And these above are the new home (ADU) rented for $1,875 p.m
Just trying to motivate you… that’s all.
Good stuff to think about, thank you Sebastian.
It's cool to see extra replies from time to time on this post as I continue with the ideas.
It's interesting, I looked into different DSTs and had conversations but just didn't feel comfortable with what I felt was a lack of control or ability to really know the operators and properties.
I also kept running the numbers and just couldn't make 1031s into other properties make sense with the new interest rates compared to what I have now.
Ultimately I just raised rents and got better with outsourcing the maintenance in a cost effective way (wasn't doing that very well before). I keep thinking about this though, revisiting it and thinking if there is a better path forward.
You should come to some of our meetups and ‘home crawls' where we walk some of our current projects with clients in LA. That will give you an idea of what we can help with and what other investors in similar situations are doing. Keep in mind that you don't have to do everything at once. Look 1 property (probably one that is not performing as well as the others), and see: #1 how can you infuse value into it (ADU, More sq ft, higher rents etc)- take it to its best and highest use for more value and then see what you could buy instead. If what you buy next gives you either: more cash flow or more equity or both, then it's a no brainer (even with higher interest rates). Example: we had a condo rental in Azusa, CA : bought it for $290k worth $450k in 2018. We had a 2.8% interest rate. And we were getting a net $300 per month cash flow- pretty passively. We had $180k sitting in the property. Most friends in the industry were telling me to keep it bc of the interest rate… so I sold it. We took the same amount of money and transferred it to a different investment. Now, instead of $300 per month, we are making : $2k from an ADU rental and $2,500 per month from another investment (with $150k invested ).
Next year: we are likely buying another single fam. Home on a corner lot. Making the front of the property : Main home + ADU and taking the back of the lot and will put 1 or 2 units (top and bottom) : depending on how much capital i have to work with. So we will go from 1 unit to 4 units, with a combination of personal funds and construction loans. My cost to build is pretty low, so it makes sense. Full construction costs will be around $300k with $50k for purchase and closing costs. On a $700k purchase. Just including the numbers on here to give you an idea.
Thank you for the replies and different opinions! It's nice to consider different viewpoints. Excellent point on the IRR, I haven't built my spreadsheet out to accurately calculate that yet but I know it's pretty high for the SoCal properties. The appreciation has been no joke!
I’ll add some details to the mountain houses which will shed some light.
The houses are aging and I’m doing a lot of wood, siding and deck component repairs plus they need staining quite often. There is a lack of good management options up there so I manage myself. There is a lack of handymen as well so I do a good amount of the work myself or using helpers. The biggest issue is that eventually those decks will need replacement (I’m keeping them alive as long as I can). Replacement costs are 35-45,000+ EACH! Ridiculous. The other issue is forest fire risk plus insurers are dropping policies and most insurers won’t write policies there anymore. These factors cause a bit of anxiety and have led to this whole re-evaluation. On a second look, one of the houses I could probably get up to 5% ROE, the other 4% max, not sure it’s worth it though.
The other rental down the hill is a different story. Stucco, no decks, I’m renting individual rooms, 10min away from my house, easy maintenance. If I’m being honest with myself, I just haven’t been keeping the rooms up at market rate. I used to live there myself and know them somewhat personally (one pretty well) so I’ve been soft on price increases (when someone rarely moves out that room goes to market rate though). If I put on my business hat I realize I could really increase cash flow from ~900 to 1400-1700. That could get that house to ROE 6% plus the benefit enhanced appreciation. I just need to give them the tough news about how much I need to increase prices and deal with potentially some leaving. So the performance here is really on me.
Based on the opinions and realization I’m now leaning towards a middle of the road approach - keeping the SoCal room rental house, get that to market rates (~6% ROE) and 1031 the mountain houses. Thoughts?
Hello All!
I am currently a builder of ADU's throughout San Diego as well has high-end remodeling of custom homes and commercial projects. I'm looking to do our first 2000+ sq ft ground up residential build in the near future. In the meantime, I want to start putting my own deals together.
I have some potential partners willing to invest, and I am starting to understand what a good deal can look like. I'm writing today to see if there is anybody out there that has intimate knowledge of the entire process from sourcing the deal to closing it and rolling profits into the next deal and ideally avoiding taxes through the expenses of the next deal. I'm looking for somebody that has done this first hand multiple times and would like to mentor or partner with me in a hands-off situation for at least 1 deal.
Don't want to rant on, so I will leave it at that for now.
All the best,
Ryan
Independent studies (1, 2) and basic logic show you will make more selling it yourself. Do a flat fee MLS listing (costs $100-200) and offer a market rate commission to buyer agents. Get a transaction coordinator to help you with the paperwork (~$450).
FSBO and Flat Fee MLS are different things, it's useful to understand the difference.
100% wrong. The only people that could actually do this would be people that were Realtors in the past and have sold probably more than 10 homes as a Realtor. The problem is that people will never know that they sold their home for $30k to $50k lower than what they could have gotten.
I would say the only people that could sell their property for market value or higher are people that have cookie cutter homes (ie Condos, town homes or homes in HOA communities and where homes are renovated). And even then… i have seen home owners get less bc they lack stamina, negotiation skills, they lose money when negotiating for repairs… or they don't know how to quantify a repair. For example… Home needs paint, flooring, has rusted plumbing in the bathroom and has termite damage. A buyer may ask for $20k in credits. Is that a good number? Is it fair? Will that buyer walk away if you don't agree… can you repair the items for a lower price or do you have contractors that will charge you $30k so you now think that $20k credit is fair… ? This is where experience, resources, negotiations skills and understanding the market to know if you have leverage to negotiate will come into play… people that want to sell by themselves are usually people that only sell a home every 5 to 10 years and are the very people that should not be selling on their own… :) but hey…. You are saving a 2% commission right! and forgoing $50k or more. Good luck
Hello Everyone! My name is Sebastian Marroquin and I am excited for another Meet-up in the city of Upland, CA.
This event will be mainly to talk about how ADUs are helping single family Rental investors and flipping investors in this market as of Oct. 2024 and into 2025!
Agenda:
6:30pm to 7pm : Sign in and network
7pm to 730pm : formal talk about ADUs , flips, and rental property with some case studies
7:30pm to 8pm : Finish with networking (rem to bring your business cards).
Looking forward to meeting you there!
Send me a DM if you have any questions.
Sebastian : Realtor and Investor of 13 years.
Currently helping 12 families build ADUs in their properties for rental purposes.
More important question now is: How much equity does each home have now? Depending on how many years you have own each property, maybe it is time to assess them: their individual performance, ROI, what type of tenant do each attract? and what is your ROE (return on equity?).
For recent purchases: less than 3 years, you probably have to grow with them and think about how can you maximize returns: maybe ADUs, or Coin-laundry or e-pay, renting space on the property for storage, air b and b or mid term rentals, splitting the lots, Tic sales etc... or value add to increase appreciation faster!!
For properties you have owned for more than 3 to 5 years +
Take a look at what is performing and 1031 the problem children... :)
For some, I imagine you will have more than $200k sitting in them as "potential equity"
you could sell 2, 3 or more of them and now trade them for a 6 or 10 + unit property. Increase your cash flow and wealth and reduce overhead and management time.
Many of my my investors started with 2 or 3 homes, used a value add strategy , and renovated or added adus or sq footage, and now 1031 into a 6 unit property with the same amount of money, but now going from about $1,500 cash flow from 3 properties to a 6 unit property that now gives him $3,500 gross profit.
Now he re-started buying single fam. homes which are less costly to buy with 5% down owner primary loans. Buy, live in it for 1 to 2 years and then rent it out to buy the next one!
Good luck!