Continuing our Q&A with our past client, Brennan, on the success of his ADU project that Build Forward designed and built, we will be discussing more specifics on best practices for financing, maximizing cash flow, and navigating the world of real estate investments.
Brennan is a part time real estate investor with eight years of experience in the Portland metro area. Brennan got his start in 2015 when he moved to Portland and purchased a small 1000sqft bungalow in NE Portland, less than 6 months later his first ADU project was underway. In his free time, Brennan enjoys biking, yoga & a deep passion for travel, the more difficult the location the better.
Q: Let's talk a little bit about multi-family residential zoning. In what ways does that lead to a successful investment?
A: Definitely, multi-family residential zoning can be an excellent investment strategy. I recently observed a prime example of this within my neighborhood. A builder purchased a 1920s Portland house, originally a 2-bedroom, 1-bath structure. Through clever renovations, they elevated the house, introduced egress windows, and created a new unit in the basement. What's even more intriguing is that they constructed a townhouse unit in the backyard, essentially dividing it into two separate units. This innovative approach resulted in a total of four units on the property. This kind of investment strategy offers remarkable potential for cash flow and long-term financial stability. Plus, having multiple units provides a safeguard against vacancies and rental challenges.
Q: Would you say that’s the same premise as what you did with your other house that was already built, where you already had a basement, turned it into an ADU, etc.?
A: While my approach slightly differs, the underlying principle remains consistent. In my case, the property already featured a two-unit setup. Initially, I had intended to build an ADU from scratch but then stumbled upon a property that was already designed for a dual-unit configuration. Recognizing the immediate financial benefit of having two income-generating units, I pivoted my plans. The significant advantage here was that from the very beginning, I was cash flow positive due to the existing rental income. This history of positive cash flow over a couple of years even assisted me in securing financing for the subsequent ADU project. The prior rental income demonstrated my ability to manage and maintain properties effectively, which lenders appreciated.
Q: Do you have other properties?
A: At the moment, I only own the ADU property and a unit within my personal residence. For the unit in my primary residence, I've chosen the Airbnb route, which has been quite manageable thanks to a team of cleaners who handle turnovers and upkeep. Particularly during the summer months, I offer it for a minimum 30-day stay, attracting digital nomads and remote workers seeking extended stays in Portland.
Q: If you had any advice for someone who wanted to do the same thing, what would you tell them with the market and circumstances we have today?
A: My advice would be to explore properties with existing structures that can be creatively repurposed into multiple units. If you come across a property with a detached, two-part garage or a house with a basement that can be transformed into separate units, you're well on your way. Acquiring a property that necessitates minimal demolition and reconstruction is a budget-friendly strategy. Alternatively, if a blank canvas is available—meaning a lot with no existing structures—you can maximize returns by constructing duplex or even triplex ADUs. In today's market, ADUs are in high demand for rentals, and the potential for generating substantial cash flow is significant. Remember, this is a long-term investment, so envision how it aligns with your goals for the future.
Q: When you think of an investment, what is the time frame you have in mind for the ROI to start showing up?
A: When it comes to real estate investments, I would estimate a timeframe of around 5 years to begin seeing substantial returns. This duration provides ample room for steady growth and cash flow to materialize. It's important to note that while early profits might not be immediately significant, they accumulate over time, and your equity steadily builds. Having the patience to invest with a long-term perspective is crucial. Even if you experience some periods of contributing rather than profiting in the first few years, it's a worthwhile trade-off for the substantial rewards that will follow.
Q: Given that rates are going to change, what is a good investment amount in terms of ROI?
A: Metrics employed by large real estate firms may not fully apply to individual investors or those with only a few properties. Rather than fixating on a specific percentage return, focus on what aligns with your financial situation and goals. While general guidelines suggest not contributing more than $500 to $1,000 per month toward an investment property, your own financial standing will dictate the threshold. Flexibility is key—consider your income, expenses, and risk tolerance. Aim to strike a balance between manageable contributions and the potential for substantial future rewards.
Q: When looking for lenders, which are most beneficial for homeowners and which should you stay away from?
A: While larger lenders can have rigid processes that might not fully accommodate unique ADU projects, regional banks or credit unions tend to offer more personalized solutions. Building a relationship with a lender you've worked with before—such as a bank that handled your home loan—can streamline the process. In my experience, these banks were better equipped to understand the value of ADUs and work through the financial intricacies. Stay away from lenders who exhibit inflexibility and do not take the time to understand the nuances of ADU investments.
Q: How was your loan structured? Was it a line of credit?
A: My loan was structured as a construction loan with progress payments. Rather than receiving the entire loan amount upfront, the funds were released based on specific milestones of the construction process. Surprisingly, no physical inspections were carried out by the lender; instead, I submitted invoices and pictures from the construction site to demonstrate progress. This approach may vary, but it's important to choose a lender who is willing to work with your specific project and understands the intricacies of ADUs.
Q: So would you do it again?
A: Absolutely. The journey, though challenging at times, has proved incredibly rewarding both financially and personally. The initial worries and doubts faded as the project unfolded, revealing the true potential of real estate investments, especially with ADUs. For anyone considering embarking on a similar path, I wholeheartedly recommend it. Despite the uncertainties, the end results can far outweigh the initial challenges, and the long-term financial gains are well worth the investment.
We hope these insights provide a comprehensive view of the journey and considerations involved in ADU investments. If you're looking to embark on your own real estate venture, remember that while challenges may arise, careful planning and a focus on long-term gains can lead to success. Reach out to us here or email us at info@webuildforward.com to get started!