This house sat on the market for 3 months in the midst of the frenetic pandemic housing boom. It had nuisance existing tenants in the form to two families, one rats, the other wood boring beetles! Nobody wanted it!
Would-be homeowners didn't want it because it was a ton of work and didn't have even have a proper, private backyard. Flippers didn't want it for pretty much those same reasons. Even the home inspectors said it was a "crappy house" that should be avoided.
But we wanted it! We saw HUGE POTENTIAL. This house was just a problem needing to be solved.
How did we make this work?
We knew the City allowed 2 ADUs per single family property so the permitting would be straightforward. We knew the existing bathrooms were in decent condition and in good locations. We knew we could re-use the existing kitchen's plumbing and that locating new plumbing nearby would keep those costs down.
We figured the pest issues would be taken care of during construction and associated costs would be overcome by the greater return of a triplex.
The City did make us add sprinklers and make the garage unit ADA-adaptable BUT they also agreed that this was a single-family Home with 2 ADUs and was not, officially, a triplex and so it didn't come with all the impact fees it otherwise would have.
Why not just do a duplex?
We thought about that but every number we ran screamed triplex. It just made so much more sense. The pest issues, which was why the purchase price was low, required that much investment that just doing a duplex wouldn't have been worth it. We wanted a long term investment that would last, so it had to be the triplex.
What was the result?
The ARV gave us a 37% return on our investment when we refinanced. We are holding the property and will do for quite some time (after doing all that work!) and it is cash-flowing well so that return will grow.
What does it look like now!!
Here are the before and afters:
How do you know a creative deal when you see one?
This actually took a lot of patience. This was a seriously hot market at the time. We couldn't compete with homeowners making emotional decisions and couldn't compete with the flippers who had crews in place, could make cash-offers, and whose investment strategy could made higher offers make sense.
We needed to sift through potential deals and look for creative ways they could work. There is nearly always some way you can add value to any piece of real estate, the question, is if it is worth the time and energy to do so.
If you see a house that is over 1,000sq.ft feet and only has two bedrooms, that can probably be turned into a three bed pretty easily. If it has a 2-car garage, that's a 400sq.ft ADU waiting to happen (in the right jurisdiction). If it has some, existing unconditioned that meets certain dimensions, or can be make to without much work, you can probably add an ADU. If it is a larger lot, you could consider a pre-fab ADU, such as adu.works who are using innovative techniques to built ADUs very economically.
Seeing what can be done is just one exercise. It is definitely the fun part of doing creative deals like this! You do still, of course, have to run the numbers to see if it stacks up and is worth time and energy investment.
Was it a smooth process?
Of course not. Construction pretty much never is. As soon as you open up a house, you will likely find problems you didn't know about BUT which you likely DID want to find out about. We found more structural problems than were in the home inspection, though the very diligent inspectors were not to blame - they did say it was a "crappy house" after all.
Having to add sprinklers was annoying but did make the house a safer place and reduced insurance costs. Having to make a unit ADA-adaptable made things a little awkward but we the key to that solution was having a contractor who saw solutions instead of headaches.
How do you find a solution-driven contractor?
Talk to a LOT of them! We walked the site with quite a few contractors. Some were quick to see problems, the ones we liked however were the guys who knew they could figure out whatever problems came up. That's the story of this whole project - problems only exist because someone hasn't found the solution yet!
How do you cash flow in hot markets!?
This is pretty much how! You invest some time in learning a market, finding a good local agent, learning the necessary parts of the local zoning code, and spend time analyzing properties by looking for creative ways to make them work. Most investors are pretty good at testing deals financially (or at least they should be!), this process is about testing them spatially (and legally) too see what's possible. Eventually, you start seeing the opportunities and space where it might not be obvious and can use that to be competitive.
Can Dwelling Lab help?
Yes! We created our quick-turnaround Deal Test service for this very reason. We've spent years testing deals and are very familiar with California's ADU legislation and the Building Code. Our knowledge in the bank can help investors quickly imagine the possibilities of a property before they pull the trigger on a deal.
Please reach out to Dwelling Lab to see if we can help turn your property, or potential property, into an amazing deal!
(312) 952-9680
Comments