[USER]

We have a rental property in Hayward, CA that currently brings in $300 net cash flow after all the expenses. The property has a huge backyard and we’re thinking of building an 2 bedroom ADU there to rent out.

The current rough estimated cost would be $300K and rent will be ~$2200. We would fund this with our entire brokerage account.

Would you do this? What would be the pros and cons?

Thank you.

[Michael]

The 1% rule would put the rent at $3k/mo and in most places you’ll just break even after expenses. I’m thinking there’s no meat on this bone.

[Davese]

I know someone who had a Tuff Shed one room house built on her property in California for $17,000…. May be worth looking into. It’s absolutely beautiful. Bath, kitchen, porch and all.

[Linda]

Not if it was me. Before you do anything major I would research rental property so you understand more of how that business works. The 1% rule is napkin math but a basic concept. Rentals can be lucrative but very risky unless you really take the time to learn before you leap.

Good luck with whichever way you go.

Bigger Pockets Real Estate and Afford Anything are 2 great podcasts you find interesting. I know Paula Pant has a real estate course.

I have no idea how much it is but she really knows that market.

Don’t miss: For those who invest in real estate do you finance a rental property or pay it with cash?

[Jule]

I don’t think that’s an amazing return in that investment. Not to mention the work to get it done and that building usually costs more than anticipated.

[John]

Not just that, but the $300K isn’t “spent” per se — the money is transformed into greater equity in your property.

So, your net worth does not decrease when you pay for construction, and probably increases.

Plus, you now have decent cash flow.

[Sharon]

Do you ever see yourself living in one of the units or creating a family compound?

Would a smaller investment to add on to your existing property be something to consider?

[Laila]

Personally, I would not. It seems like you might get more bang for your buck saving up for a second entire property.

Also, you would want to have a significant buffer not only for any unexpected life/health/job/family/car/primary residence expenses but also a big buffer for unexpected capital expenditures/repairs/vacancies for your rental units.

Also, in addition to renovation costs often going 20% over what is expected and sometimes taking up to twice as long as expected, make sure to account for any carrying costs.

One thing you could do is read a few books on building ADUs and watch That ADU Guy’s channel on YouTube.

And then use the books to build out a detailed scope of work and timeline and also a big spreadsheet with anticipated material costs, and then ask or hire several experienced people to look over your documents before having any contractors review then.

People in your area may also have a good sense of how long and costly and likely successful permitting might be for different parts of your project.

—

Also, I like to have some diversity in my investments.

Explore these too: For those with rental property, are you seeing insurance rates increase?

[David]

I’ve been selling multifamily units in Hayward & throughout Alameda County for 15+ years. I say this to give context to my input.

Depending where in Hayward $2200 for a 2 bed seems a little low. We just leased 800sf place for $2400 not far from downtown.

$300k is a decent price for a new unit and would certainly impact the value of the property with some margin, so that’s a plus.

$26,400/$300k = 8.8%

This may not include expenses or any vacancies. Be certain to factor recurring expenses, such as utilities, maintenance any impact on taxes and deduct from your cash flow to get an accurate estimate of return.

What are you earning on the $300k?

Will there be any tax implications for pulling those funds from there current investment?

What is the time to completion for rent ready unit? Factor in any loss of return then.

Is there a way to use leverage rather than all your investment reserves?

On the surface, it’s a solid idea.

Just crunch the numbers.

In Hayward, I’d probably do it.

[Author]

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