All Forum Posts by: Tyler Hardy

Also, just for reference, attached are the sold comps in the area.  They compare my house to other 2 bedroom homes.  So I'm not 100% sure if an egress window would then have an appraiser compare my house to 3 bedroom homes.  In the appraisal, it does indicate the basement bedroom is non-conforming. 

Hey Team!

I've got a SFH with a garden-level basement. Currently there is a non-conforming bedroom along with a total of 1,000sqft of livable fully finished and well lit from natural light living space, including a bathroom and laundry — and a kitchenette area. The house is located in a highly sought after area one block North of Old Littleton, Colorado. The house is 1,000sqft above grade, 1,000sqft below grade. Upstairs has 2 bedroom, 1 bath.

My question — a recent appraisal of my home came in far lower than I expected at 455,000.  In doing some home improvements, a neighbor recommended to put  in an egress window for the bedroom in the basement, allowing me to list the house as a full 3 bedroom 2 bath.  

My open question — does anyone have a ballpark range of how much this would increase the value of the home by?

Thanks!  

Shot you a message on LinkedIn to connect. And to the second statement above, I agree. There is a unique value ADU's add the the right homeowner, and in many cases it appeals to my wife and I. Where we live is getting denser and this sort of development will be needed to keep with demand. But when push came to shove — I struggled with the $200,000 for 550sqft. Despite cashflowing the math wasn't screaming it was a good use of money. Thanks for letting my play devils advocate, but in the end, I agree with the statements above from multiple people. The sheer building costs of ADU's make them less than ideal as investments compared to other options.

@Bill S. - I hadn't really considered this but I'm connecting the dots. This starts to make some more sense — though losing any rental income puts TWO properties at risk. Take $140K out from cash-out-refi, qualify the appraised rental income to the balance on the home value, and start that way. $140K is more than enough as a downpayment. Cash flow the property @ roughly same $ amount but with a much higher value in owned assets. The $60K I was planning to invest in cash to the ADU I could just simply build out a garage and landscape, perhaps even a small kitchen (not a large house). It could work, starts to bump up against my risk appetite (my wife and I just moved to one income as she is going back to school, so there is that).

It wouldn't take 12 months, far closer to 6. There are also the added benefits (outside of the ADU) of getting a fully remodeled yard and outdoor living space plus a two car garage, neither of which I have now. I believe the garage and outdoor living space to add considerable value to a home in Denver.

Back to finances:
Sure, I can hire a PM, but then am I really cash flowing more?  I think you're also not accounting for a significant factor — if the average house is selling for $550,000 in Denver, you're path asks me to onboard considerably more debt, and therefore risk (going into an economic downturn).  

I'm lifting my personal mortgage payment $650/mo, giving up $60K of cash, and bringing on a new mortgage of roughly $2,000/mo for $350,000 of new home (550-140-60). That's $2,600/mo of net new liabilities, versus just $600 with the ADU. I will have gone from a $350K mortgage to something closer to $750,000 in loans; roughly $250,000 higher than just building an ADU. Assuming roughly $800/mo per room for the 4ish rooms I bought — that grosses $3,200/mo against $2,600. So $600 of cash flow before taxes, and before PM... Also the increased debt will likely get hit with increases mortgage insurance to cover the bank's risk. I'm not sure I am cash flowing more in this scenario, but open to your perspective if you think otherwise.

I'm not sure I would qualify for that additional mortgage load to begin with.  The upside of course, is that from a leverage perspective I'm getting more assets which, in theory, appreciate.  That's the longer term play.

Thanks Chris. Really appreciate that feedback.  I think that ADUs definitely have this trendy vibe that eclipses the economic realities of them.  

I have a pretty demanding job and am in the process of entertaining buying a small business on the side. My attraction to an ADU from a rental perspective is it's in my backyard. I don't have the appetite to mess with multiple renters / driving around town, etc.

Nevertheless your point is well taken.  I’m not sold on the value it adds to the home, and I believe there are other avenues (especially from a rental perspective) that would have better returns.  But if larger quantity rentals are out of the picture, it does make me think this is a good use of trapped / dead equity.  

Hey John — Expenses are annual, income is monthly :-) Expenses are just an estimate of 1% of total project cost related to the ADU specifically (around 120,000 if that was a separate item), again on annual basis. So the income is $1,200/mo, against my mortgage increase of ~600, plus ~$100/mo for expenses. So there should be cash flow.

Great point about the mortgage being fixed and rents going up.  

Hello Everyone!

I had posted many months ago about ADU plans I had for my house. At the time everything was hypothetical. Fast forward today, I have the zoning required and the necessary variances to build a full new build garage with ADU above. Green light from the city as the 1st legal ADU, in fact. While this was certainly all a large hurdle, what's becoming more cumbersome is the financial justification of the project as a whole. Construction costs are far more insane than I had thought. I'd like to disclose the financial picture I am looking at and invite any financial and real estate advice / experience anyone can bring to the table. I'd like to hear from others on whether or not this makes financial sense.

Current Property

Current Mortgage Balance: $334,000
Home Value: $500,000
Equity: $166,000

ADU + Project Overview

Total Estimated Cost: $200,000

• Two car garage with work shop (property does not have garage today)
• 576 sqft of livable space in ADU above
• 1 bedroom, 1 bathroom, kitchen, living room, & laundry
• ADU has private entrance outside of garage
• ADU has 140 sqft patio with mountain views

    Additional Projects to be Included for Main Property 

• Landscaping my current yard (no improvements to date)
• Adding oversized deck/patio that extends living room outside
• Includes all infrastructure, sewer taps, designs, permitting, etc.
  
  

Financing & Home Value

As a Veteran I have access to the VA Home Loan which I used to purchase the property back in 2016. I would be leveraging a VA Cash Out Refinance because it permits 100% LTV at 3.5% rate with continued absence of PMI. The cash out refinance would be on the total $500,000 value of the home, those new numbers are reflected below.

1st Mortgage: $1,950/mo (escrow + taxes)

2nd Mortgage: $2,602/mo (escrow + taxes)

Mortgage Increase: $652

Cash Out: $140,000 (after closing costs, taxes, VA funding fee, etc.)

Additional Personal Cash Needed: $60,000

Est. Home Value Increase: $200,000

Operating Expenses & Income

Est. Monthly Rental Income:$1,200

Est. Annual Operating Expenses: 1,200

Monthly Cash Flow: $448 (before taxes)

At times I look at the above numbers and they make sense. Other times, I struggle. I’m fronting $60,000 of cash which is far more than I was hoping to. I’m also onboarding $600+ more in my mortgage which is always a risk. The cash flow on the backend is tighter than I was hoping as well — easily could be whipped out should any major issues arise. I’m not well versed in how taxes will come into play, and for the most part, have not factored them into my calculations.

The garage, large patio, and landscaping are projects that will add great joy and utility to the home. I see these projects as being funded by the renter, which is huge a benefit. All said, I need to sh*t or get off the pot. With a pending economic downturn, I’m nervous about spending such a high premium on labor/construction when I know in the next 12-18months it could be 30-40% cheaper. I’m not sold that this is the best use of my money either.

Anyways, any thoughts?

I don't discriminate with my blame.  I blame ill-equipped cities that were unprepared for growth as much as I do the developers whose primary goal was to take advantage of the lack of restrictions to maximize their investment at the cost of community.  

People owning slot homes doesn't mean they like them — that's particularly true amongst a shortage in supply.  I'm sure some people do...  but most of them are from out of state, and few locals I've spoken to approve of them.  If you'd like to pretend these are good for communities and widely supported — have at it.  I'm just not going to ignore nearly every city putting a moratorium on them because of public uproar.