Quite often, new home construction is the result of new residents moving in who are middle class or wealthier, attracted by jobs, a healthy local economy, or other amenities as they leave nearby or far away areas for greener pastures.

The raw dollars coming in need to be attractive, and the % return needs to outpace the general market at such a rate that the deal is worth the additional effort. 

For example University City could be a great opportunity to AirBnB with all of the attractions and Wash U nearby but they only allow it if it’s your primary residence.

We will totally rehab the interior of the lower level too and then stucco everything to make it look attractive. 

However, this home is in Berkeley and I am concerned about destroying historical elements and potential added structural engineering costs that could make the house attractive to a buyer in future years, along with the opportunity cost of construction now versus getting rental income from the house in the next few months. 

Also figure out who you want your market to be, who do you want to attract to your properties, because that I think will help you to narrow down on where to buy in the LHV.

The tenants of that property didn't seem to take good care of the property, so that kind of questioned the type of tenants we would attract in the area. 

So you fix a place up to a reasonable level (say $2500 reno), but you don't attract the best tenant at the highest rate.

However, one thing I would add is that, when vetting a Sponsor/deal, their acknowledgement and analysis of a "bad" situation is certainly welcome.For example, a sensitivity analysis that supports say a 2-3% return even if occupancy and rents don't come anywhere near projections, is still relatively attractive given potential returns on other investment vehicles.If a Sponsor you're considering is all rainbows and sunshine, I would take that as a red flag and move on.

@Mike Zimmerman If you're going this route, I'd make sure you buy in a neighborhood that you feel comfortable living in with the type of clientele it attracts.