Multifamily BRRRR: Is It Worth it To Add Another Unit? | ProjectRE

TL;DR

Adding units can boost returns but involves complex considerations.

Transcript

only problem i bought it from a fake seller james danner just walked over to my desk if you skip the first three steps that's the easiest way to lose money hey guys it's james daynard with heaton dana real estate and project re so today we're going to talk about whether it makes financial sense to add an additional unit to your next rental property... Read More

Key Insights

• Adding an additional unit to a property can significantly increase cash flow and property value, but it requires careful financial and zoning considerations.
• The triplex in Seattle was purchased for $1.25 million, with plans to invest half a million dollars in renovations, aiming for an ARV of $2.3 million.
• Checking zoning laws is crucial before purchasing a property to ensure additional units can be legally added, avoiding costly mistakes.
• Financial analysis is essential; sometimes buying a property with existing units may be more cost-effective than adding new ones.
• Renovations, especially adding units, can tie up significant capital and time, impacting the overall return on investment.
• Hidden costs, such as permit delays and mandatory upgrades, can inflate renovation budgets significantly.
• In Seattle, seismic upgrades and special inspections are required when taking properties down to studs, adding to renovation costs.
• Despite the challenges, if the financial upside is substantial, such as increased equity and cash flow, adding units can be worthwhile.

Questions & Answers

Q: What is the initial investment and projected ARV for the Seattle property?

The initial investment for the Seattle triplex is $1.25 million, with an additional half a million dollars planned for renovations. The projected After Repair Value (ARV) is approximately $2.3 million, indicating a significant increase in property value post-renovation.

Q: Why is checking zoning important before adding a unit?

Checking zoning is crucial because it determines whether adding an additional unit is legally permissible. Failing to verify zoning laws can lead to costly mistakes, as unauthorized construction may result in fines or the inability to complete the planned renovation.

Q: What are some hidden costs associated with adding a unit?

Hidden costs can include extended permit delays, mandatory seismic upgrades, special inspections, and additional architectural fees. These expenses can significantly inflate the initial renovation budget, making it essential to account for them in the financial planning stage.

Q: How does the renovation affect cash flow and equity?

The renovation increases cash flow by generating additional rental income from the new unit. It also boosts equity by raising the property's overall value. This allows for potential refinancing opportunities, where increased equity can be leveraged for further investments or to recover renovation costs.

Q: What financial returns are expected from the additional unit?

The additional unit is expected to generate a cash flow of $1,600 per month and a 19% cash-on-cash return. Furthermore, it adds approximately $300,000 in equity to the property, enhancing the overall financial returns from the investment.

Q: Why might buying a property with existing units be more economical?

Buying a property with existing units can be more economical because it avoids the costs and complexities associated with adding new units, such as zoning verification, permit acquisition, and extensive renovations. It can also provide immediate rental income without the delay of construction.

Q: What are the seismic upgrade requirements in Seattle?

In Seattle, seismic upgrades are required when taking properties down to studs. This involves reinforcing the building to withstand earthquakes, which includes bolting down structures and potentially upgrading framing. These measures, though costly, ensure the building's safety and compliance with local codes.

Q: What is the role of market analysis in deciding to add a unit?

Market analysis helps determine the potential rental income from the new unit, ensuring that the additional cash flow justifies the renovation costs. It also assesses the property's exit value, confirming that the investment aligns with market trends and will provide a satisfactory return on investment.

Summary & Key Takeaways

• James Dainard explores the financial viability of adding an additional unit to a triplex in Seattle. The property, bought for $1.25 million, will undergo half a million dollars in renovations to achieve an ARV of $2.3 million, promising increased cash flow and equity.

• Before purchasing, it's vital to check zoning laws to ensure additional units can be legally added. Financial considerations are also critical, as buying a property with existing units may sometimes be more economical than adding new ones.

• Renovation projects can be costly and time-consuming, especially with hidden costs like permit delays and mandatory upgrades. However, if the financial upside is significant, such as increased equity and cash flow, the investment can be justified.