DENVER | Main Development Thread #7

[Stonemans_rowJ]

Originally Posted by UrbanT

Currently they are a small market because they are not zoned for in 70% of the city. Also, you spelled "boomer's with money" wrong.

They are economically not viable. Anyone who understands real estate investment knows this. Most boomers are getting squeezed big time and the ones who aren't don't need or want a rental in their backyard. I happen to know quite a bit on the topic. But, you're entitled to your opinion. Why don't you buy a house and build an ADU. Report back.

[Stonemans_rowJ]

Originally Posted by mhays

What an odd argument. In an area like Denver, developers will build the highest and best use. In areas that allow density, when more than a single house lot is available they won't build four townhouses. That sort of project will only proliferate when they're allowed on typical SFR sites.

As for ADUs, Seattle permitted nearly 1,000 last year, also more than 10x the typical old rate. It's a deep market.

Virtually every TU lot or MU zoned lot in central and NW denver that was a candidate for a scrape over the last 8 years (meaning the existing house was functionally obsolete and land was best use) got redeveloped into higher/more dense use.

If E. Colfax or Mayfair was zoned MU or MX it'd look like Sloan's/Jefferson Park/W Colfax today. Literally across from my kid's school in Mayfair, there's a single 50s house bought 1.5 years ago ($565,000), torn down recently, lot is 75' wide, I expect 3 townhomes, or possibly "luxury" duplex but likely 3 units. 9+CO area. There are hundreds/thousands of homes in the immediate vicinity like this that are tiny 50s houses, large lots, but they carry SU zoning. Only a small area immediately adjacent to the hospitals got the more dense zoning.

[mhays]

Originally Posted by TakeFive

Can I assume you prefer representative government as opposed to totalitarianism? Things can go against what you want and even stuff passed by a legislative body can be undone and changed.

You mystify me. I can only guess at your point.

Perhaps you're suggesting that state-level legislation is totalitarian, despite being passed by representatives?

[laniroj]

Originally Posted by mr1138

...I do think that it may be a bit optimistic to think that individual homeowners can build a duplex or fourplex - doing so takes quite a bit of capital, not to mention finding somewhere else to live in the meantime, so realistically it would still take some pretty deep pockets...

There are three homes on my block whose owners I know and operate the houses as rentals. They've owned the houses forever and have no debt. Each one of them would be capable of building a duplex and likely interested in doing so. Remember, single family building/code regulations are LIGHT YEARS easier than large commercial/multifamily ones. You're talking about 15-20 pages of plans vs hundreds of pages on the commercial side and maybe $50,000 of out of pocket expenses to get to construction (vs a couple to several million for large stuff - not including land).

Don't underestimate the moms and pops! People who have been around a long time generally have a ton of equity locked up in real estate often with little/no debt. It's not for everyone, but it is for some people.

[laniroj]

Originally Posted by mhays

As for ADUs, Seattle permitted nearly 1,000 last year, also more than 10x the typical old rate. It's a deep market.

^Denver throws tens of millions per year at affordable housing and definitely doesn't get 1,000 units/year consistently. Turns out, a simple zoning change can generate 1,000 affordable homes per year with no assistance needed from the gubment!

[laniroj]

Originally Posted by Stonemans_rowJ

They are economically not viable. Anyone who understands real estate investment knows this. Most boomers are getting squeezed big time and the ones who aren't don't need or want a rental in their backyard. I happen to know quite a bit on the topic. But, you're entitled to your opinion. Why don't you buy a house and build an ADU. Report back.

I have two friends building ADU's, but not for economic reasons. They're building them for their parents who are aging and on the cusp of not being able to take care of themselves. The choice was subsidize their folks $3k/month of the $4k total for assisted living in another state (b/c they're all full) or invest $250k in an ADU that costs them $1,500/month once built and adds several hundred thousand to their home's overall value. Yes, they are lucky to be able to afford to make this decision and this is certainly not the majority, but there are many people in this situation. The folks are lucky their kids care so deeply for them!

[Interzen]

Originally Posted by laniroj

There are three homes on my block whose owners I know and operate the houses as rentals. They've owned the houses forever and have no debt. Each one of them would be capable of building a duplex and likely interested in doing so. Remember, single family building/code regulations are LIGHT YEARS easier than large commercial/multifamily ones. You're talking about 15-20 pages of plans vs hundreds of pages on the commercial side and maybe $50,000 of out of pocket expenses to get to construction (vs a couple to several million for large stuff - not including land).

Don't underestimate the moms and pops! People who have been around a long time generally have a ton of equity locked up in real estate often with little/no debt. It's not for everyone, but it is for some people.

This is similar to the situation on my block. I've been here 17 years and the zoning has supported ADUs the whole time but they are just starting to be built.

The house across the street sold in 2017 and the new owner built an ADU in 2019. She moved into the ADU and rented the house short term until the city cracked down. Now she rents both out and lives elsewhere.

Next door the owners moved to the burbs 20 yrs ago when their kids where school age but kept the house as a rental. They are finishing up an ADU with garage and plan to rent both out until thier kids leave home then move into the ADU for retirement while still renting out the house. They spent ~300k total.

My neighbor 3 doors the other way has permits in hand but is still trying to finalize a contract with a builder. He has been calculating more like $380k but his may be larger and or nicer and the other neighbor started 2 years ago. I don't know his rental plans but he could legally go short term as he lives in the house up front.

I have no mortgage and have toyed with the idea of building one but will need to rebuild the back half of my dilapidated house first. I need to access it from the alley so it will have to wait.

One caviat that makes this block different from most areas that are being rezoned now is that we are directly downtown adjacent so rental rates might be a bit higher.

[UrbanT]

Originally Posted by Stonemans_rowJ

They are economically not viable. Anyone who understands real estate investment knows this. Most boomers are getting squeezed big time and the ones who aren't don't need or want a rental in their backyard. I happen to know quite a bit on the topic. But, you're entitled to your opinion. Why don't you buy a house and build an ADU. Report back.

"They are economically not viable." - I know
"Anyone who understands real estate investment knows this." Most of us probably do understand that, at least I'd hope that on this nerdy forum most do. I was merely pointing out that your comment on "Trust fund millennials" was dumb and singling out generations is also silly, that is why I poked on Boomers but seemed to be misunderstood. I just hope we permit ADU's to be built in more areas so costs go down. Look at what other cities have done in regards to opening up accessibility for building ADU's. Seattle is now permitting more ADU'S than single family homes. Mhays is correct that piece-mental zoning is ineffective in regards to ADU's.

[Stonemans_rowJ]

Originally Posted by laniroj

I have two friends building ADU's, but not for economic reasons. They're building them for their parents who are aging and on the cusp of not being able to take care of themselves. The choice was subsidize their folks $3k/month of the $4k total for assisted living in another state (b/c they're all full) or invest $250k in an ADU that costs them $1,500/month once built and adds several hundred thousand to their home's overall value. Yes, they are lucky to be able to afford to make this decision and this is certainly not the majority, but there are many people in this situation. The folks are lucky their kids care so deeply for them!

Interesting. What neighborhood(s)? Specifics would be helpful. Maybe you've cracked the code. I question the $250,000 build cost and the $1,500 a month. Can you elaborate how those numbers are possible? a simple stick built 2 car garage is $50k. Did they do a cash out refi and change their first lien to 6.5%? Did they use their 8% heloc? 2nd mortgage? construction loan? self financed in cash? specifics matter because they speak to why these are not possible at any scale for individual people. You basically admit that your friends are wealthy and are subsidizing their parents. Small demographic able to do that in my experience and the ones who can may stick their folks in a nice condo nearby. Much better and safer investment.

My parents moved here two years ago. They bought a house close to me with 100k down payment. Mortgage out the door at $2,500 in Central Park. Likewise, in-laws did the same thing in Wash Park. Downsizing into 400-600' ADU off a disgusting alley, up a flight of stairs? Wake up to the sound of garbage trucks? Yea, this has mass appeal.

Again, this is niche at best (which you admit) but I don't doubt that you have a "couple friends" who did it, even if I do doubt your numbers. I don't see "many people" wanting to do this, or being able to. I see some people thinking it's cool- mainly the Airbnb bros (that market is already cratering).

Where it makes most sense is on new build or new construction, or large corner lot, basically you need an alley, where are utilities? you are going to run new sewer and water all the way back around the existing house? Isn't ADU required to have separate water/sewer? There are so many logistical and economic hurdles beyond the zoning is my point.

Upzoning what we have is the answer. Polis is trying.

[Stonemans_rowJ]

Originally Posted by UrbanT

"They are economically not viable." - I know
"Anyone who understands real estate investment knows this." Most of us probably do understand that, at least I'd hope that on this nerdy forum most do. I was merely pointing out that your comment on "Trust fund millennials" was dumb and singling out generations is also silly, that is why I poked on Boomers but seemed to be misunderstood. I just hope we permit ADU's to be built in more areas so costs go down. Look at what other cities have done in regards to opening up accessibility for building ADU's. Seattle is now permitting more ADU'S than single family homes. Mhays is correct that piece-mental zoning is ineffective in regards to ADU's.

Most comments on ADUs fail to acknowledge the economics and how the economics do not make any sense.

How would costs go down if we permit ADUs to be built in more areas?

[TakeFive]

Originally Posted by Stonemans_rowJ

Most comments on ADUs fail to acknowledge the economics and how the economics do not make any sense.

How would costs go down if we permit ADUs to be built in more areas?

Just curios? How much would you say the cost of construction has gone up over the last several years, like pre-pandemic to now for ADU's?

Isn't the average lot for 50's built homes neighborhoods ~6,200 sq ft? How does lot size impact building a new multi-plex. You mentioned 75 feet width on your example.

Nicer new developments - say ten years ago in Scottsdale - offered a model with an attached accessory unit up front with it's own entrance (obviously).

[Stonemans_rowJ]

Originally Posted by TakeFive

Just curios? How much would you say the cost of construction has gone up over the last several years, like pre-pandemic to now for ADU's?

Isn't the average lot for 50's built homes neighborhoods ~6,200 sq ft? How does lot size impact building a new multi-plex. You mentioned 75 feet width on your example.

Nicer new developments - say ten years ago in Scottsdale - offered a model with an attached accessory unit up front with it's own entrance (obviously).

Correct, 50x125 (two city lots which is standard for houses in Hale/Mayfair) is kind of the gold standard for duplex and these lots are everywhere in my area, but also everywhere around the city. 5' setbacks so building units are 20' wide. Most of these 6,250 lots are single unit zoned. again, not just in my area, but everywhere. Only a small pocket by Rose and the 1400 block, little bits of the 1500 block. My first house in Mayfair was 6,250' with alley, on 1300 block, but zoned U-SU-C.

There are some lots that are 1.5 lots wide 35' in Hale/Mayfair and those obviously wouldn't work. There's no reason to redevelop a lot like that since there are so many 6,250 lots.

I am quite familiar with the one I referred to since I tried to buy it. It's on 8th/Elm next to the Catholic Church/School. It was either 2.5 or 3 lots, can't recall but it could have supported 3 units. Actually it could have supported 4 units in the front/back duplex form since it was MU-2.5 You see these quite a bit over in West Colfax.

I did a lot of research about a year/year and a half ago on a new build for a rental property I have in East Mayfair/Montclair. At that time, we were told $250/ft for "luxury" build (builder mainly builds in Wash Park/Highlands, more expensive areas, really nice houses) which had risen from the $200/ft area not too much earlier, which had risen from $185/ft not too much earlier, probably more in the 2018/2019 time frame. In our case would have been about $1mm for 4,000' house. Numbers and risk didn't make sense anymore. Good little rental property for now.

Pre-development costs would have run about $75,000. Survey, soils, asbestos, architect, structural and civil engineering, Hvac plan, demo and tree removal. We had deposit with architect and then begged off due to handwriting on the wall.

You'd have all those pre-development costs (or most of them) plus tap fees etc. It's not like you are just putting an addition on your house. I would imagine ADU costs up also 30% (your $250,000 is now $300,000) plus your total cost is insane with the cost of capital. It's so far from pencilling out that it's laughable.

In summary though: I think they're neat and I am all for opening up the whole city to them, and for people that want one, to be allowed to build one. Wanted that to be clear.

[mhays]

The ADU discussion is looking at a limited scenario. I'd look at a broader one.

First, cost. When the whole city allows ADUs, there can be less land cost premium. If parking isn't required, there goes a huge cost. If you can standardize some designs and speed permits (as Seattle has done) that's another. In Seattle's case there are also limits on square footage, designed to keep ADUs affordable (two units are allowed, one can be detached). It probably helps being in an expensive city, as construction costs might have less variable vs. cheaper cities than rents.

Second, who's building them. No, it's probably not the middle-class earner with a mortgage. It's often investors/developers/flippers who either tear down and redevelop or renovate and repurpose the basement for example. Or it's upper-middle earners who want to provide for mom or the 20-year-old, with the option to rent the unit out later.

It doesn't work under some assumptions. Change the assumptions and production can be pretty significant.

[laniroj]

Originally Posted by Stonemans_rowJ

Interesting. What neighborhood(s)? Specifics would be helpful. Maybe you've cracked the code. I question the $250,000 build cost and the $1,500 a month. Can you elaborate how those numbers are possible? a simple stick built 2 car garage is $50k. Did they do a cash out refi and change their first lien to 6.5%? Did they use their 8% heloc? 2nd mortgage? construction loan? self financed in cash? specifics matter because they speak to why these are not possible at any scale for individual people. You basically admit that your friends are wealthy and are subsidizing their parents. Small demographic able to do that in my experience and the ones who can may stick their folks in a nice condo nearby. Much better and safer investment.

My parents moved here two years ago. They bought a house close to me with 100k down payment. Mortgage out the door at $2,500 in Central Park. Likewise, in-laws did the same thing in Wash Park. Downsizing into 400-600' ADU off a disgusting alley, up a flight of stairs? Wake up to the sound of garbage trucks? Yea, this has mass appeal.

Again, this is niche at best (which you admit) but I don't doubt that you have a "couple friends" who did it, even if I do doubt your numbers. I don't see "many people" wanting to do this, or being able to. I see some people thinking it's cool- mainly the Airbnb bros (that market is already cratering).

Where it makes most sense is on new build or new construction, or large corner lot, basically you need an alley, where are utilities? you are going to run new sewer and water all the way back around the existing house? Isn't ADU required to have separate water/sewer? There are so many logistical and economic hurdles beyond the zoning is my point.

Upzoning what we have is the answer. Polis is trying.

800 SF at $300 psf = ~$240k, inclusive of all the other design, permitting, tap fees, etc. Mortgage (if you didn't use cash ) at 6.8% = $1,565 monthly payment. I build stick frame (amongst other) housing - pretty sure I know the costs in excruciating detail. If you can't build a basic garage with loft above for $300 psf then get rid of the quartzite countertops, metal siding, bay windows, and faux tuscan drywall texture! In the instances I spoke to, they used cash - you could use a self directed IRA to do it with a 0% interest rate and if it's a roth, your investment would grow tax free too!

Many older folks can ONLY buy homes in cash because they no longer have a job with current income and can't get a loan. The older folks who can get loans don't need them because they have huge stacks of cash. Buying a 1 bedroom condo at $250k? There are 3 available in Denver right now from I70 to Evans, Colorado to Sheridan. Good luck. Once you factor in $300/month+ of HOA fees on top of your $1,300/month loan payment on the $200k loan, you're underwater compared to a brand new ADU.

ADUs are easily possible, and at scale, but a person has to move past preconceptions to succeed in anything they don't already have significant knowledge of. Brain block is real. I'm not singling you or anyone out, just pointing to the fact that most people believe what they believe - for whatever reasons they have - and it's hard to change their minds.

[Stonemans_rowJ]

Originally Posted by laniroj

800 SF at $300 psf = ~$240k, inclusive of all the other design, permitting, tap fees, etc. Mortgage (if you didn't use cash ) at 6.8% = $1,565 monthly payment. I build stick frame (amongst other) housing - pretty sure I know the costs in excruciating detail. If you can't build a basic garage with loft above for $300 psf then get rid of the quartzite countertops, metal siding, bay windows, and faux tuscan drywall texture! In the instances I spoke to, they used cash - you could use a self directed IRA to do it with a 0% interest rate and if it's a roth, your investment would grow tax free too!

Many older folks can ONLY buy homes in cash because they no longer have a job with current income and can't get a loan. The older folks who can get loans don't need them because they have huge stacks of cash. Buying a 1 bedroom condo at $250k? There are 3 available in Denver right now from I70 to Evans, Colorado to Sheridan. Good luck. Once you factor in $300/month+ of HOA fees on top of your $1,300/month loan payment on the $200k loan, you're underwater compared to a brand new ADU.

ADUs are easily possible, and at scale, but a person has to move past preconceptions to succeed in anything they don't already have significant knowledge of. Brain block is real. I'm not singling you or anyone out, just pointing to the fact that most people believe what they believe - for whatever reasons they have - and it's hard to change their minds.

I've always liked your comments and it's clear you know your stuff on the build-side. Many existing sites have impediments that already exist like tree placement, existing garage, utilities up front ,etc. that each example will be different and price could vary pretty significantly. you say 800'. So you have no existing garage? 800' is 40' of width. That's basically the entire usable width of a 50' lot. Is the side setback for garage 3' or 5'? Probably 70% of all the houses in Denver already have some sort of structure on the alley-side, assuming they even have an alley. Bid to remove 3 trees can be $5000-7500. you know all this. Can one be built for $250,000? Sure- if you have ideal conditions and you know your stuff, which you do.

I don't think you are up to date on mortgages or loans that would be available for this. The mortgage you refer to would be impossible to get. It's not a stand-alone primary residence that you are getting a new mortgage for (this is an investment property to the bank or more likely a home addition), it's a cash-out in this case (maybe 65-70ltv) not getting market rate, etc. etc. you can't get financing like that today, in my experience, at least bank financing. Sure, you could get private lenders but you'd be a hell of a lot higher than 6.5% and it'd come with points. Whatever though, probably splitting hairs. you'd be asking for a new mortgage that's basically for a home addition is the way the bank would see it. Long story short, it's not easy, and it's not $1,565. How much would the backyard unit with low-end finish rent for? $2/ft?

I have a self-directed solo 401k being a real estate agent. I know what they are. I don't know anyone who doesn't either work in finance or real estate who has even heard about them. You have to be self-employed to even set one up (I think). I currently don't have anywhere close enough in it to self-finance a 250k-300k pet project in my backyard with an incredibly negative return. I'm getting 5% now in money market for crying out loud. Point-being, unless you are independently wealthy, and quite wealthy, you generally don't like to torch your money on terrible investments. I would put people who have self-directed IRAs not only in the "very sophisticated" category, but also in the category of people looking for return.

I do plan on flipping out of my self-directed account (using leverage, private or even banks like 1st Bank will lend this way) at some point in the future when the account is large enough and when flips come back. (I hate the word fix and flip but it's known terminology).

Plenty of older people can get mortgage if prices and rates were what they were a couple years ago. My folks qualified just off of their soc sec monthly (retired), and they are in their 70s. Banks don't care how old you are and it's illegal to deny someone a mortgage based on age. It's the rates and that's squeezing everyone, not just boomers.

I do not believe ADUs will happen at any scale in Denver, and I don't believe they are "easy" at all. Even if the zoning allows for them in every neighborhood, under the current rules. I applaud anyone who builds one though. Duplexes, townhomes, etc. everywhere are possible and this is a distraction in my opinion from the real prize.

Here are two things in my opinion that would possibly change ADUs adoption rate:

Get rid of the STR rule that it needs to be your primary. If that was removed, an ADU added to an existing rental property would possibly pencil out since STR revenue in general is higher ROI, but more importantly it would just open up ADUs to many more people, the type of sophisticated person Mhays mentioned like flippers, investors, etc. You could have de facto duplexes everywhere.

Eliminate minimum zone lot size so the back unit could be deeded separately and sold separately. There are ADUs separately deeded from the 1930s in Platt Park, at least a couple that I know of. I sold one of them a few years ago. The lot size size was like 800sq ft.- an original detached 2 car garage converted in the 30s.

[mhays]

To expand on my parking requirement point, it's a huge factor, and can disqualify many potential sites. The amount of space for the parking itself plus any driveway, any new curb cut, the much greater construction cost...avoid that and things pencil far more easily. That's why Seattle got rid of it.

[laniroj]

Originally Posted by Stonemans_rowJ

...I don't think you are up to date on mortgages or loans that would be available for this. The mortgage you refer to would be impossible to get. It's not a stand-alone primary residence that you are getting a new mortgage for (this is an investment property to the bank or more likely a home addition), it's a cash-out in this case (maybe 65-70ltv) not getting market rate, etc. etc. you can't get financing like that today, in my experience, at least bank financing....

Lot's going on here but I'll address the primary impediment, financing. The others you bring up are generally solvable (trees, water/sewer connections, build cost, etc).

Say you've been renting your home for 10 years, owned it for 30 and raised your family there then moved on. Say you have no debt on the property. You could easily refinance with a cash out loan at 6.84% today - if this is your situation it's likely you have excellent credit.

https://www.bankrate.com/mortgages/mortgage-rates/

Alternatively, you could go to a credit union or utilize an ARM and get even lower rates - some still in the low 4's! Or...maybe you have several hundred thousand saved up earning money in the bank - your bank will generally lend you dollar for dollar that balance at cost - say low 4's AND you still have access to your cash - we'll call this a cash backed option. Maybe you have a universal life insurance policy you can take a loan against while your policy still keeps earning its return. My point is this, there are MANY MANY ways one could finance a $250k investment, but you're right it's not for everybody and nobody is implying that. What I am suggesting is that some people are wholly capable of some and/or all of the above methods and they are the ones who could 'make the numbers work'.

Say your actual (not desired) cost of capital is generally 8% (high, but we'll go with it) - $20k/year. You setback your structure 5' from each lot line and 20' between ADU and the home, 40'x20' structure with ground level garage (or you could scrap the garage and fly under the radar with two ADU studios up and down ^as mhays suggests, parking costs a lotta $$$) - 800 SF living space. On the low end you could get $1,500/month for that ($18k/year), which means you're losing $2k/year net operating losses. Now, let's factor in the full picture. Say you make $150k/year, you pay $50k in taxes. Your $250k residential investment depreciates $9,100/year, saving you $3k - so you're $1k cash positive. Now you factor in build cost vs market (you should have some accretion there). Let's call it $25k (10%). That's $26k of profit at the end of year 1. Factor in 3% annual appreciation (very low) and that's another $7.5k ever year. So at the end of year 2, you're $33.5k to the positive (unrealized), $1k to the positive less $1k in taxes so breakeven on cash (realized) and someone is paying off your debts for you while your asset increases in value. This is how people use leverage to build wealth and if you use cash, it's how wealthy people put their money to work not just sitting in a bank or index fund. 5% compound interest would have netted you a gain of $25,625 vs a conservative $33,500 if you did an ADU 'flip'.

Is the above 5% every month the same as interest on the bank statement? No, BUT in 1-2 years you can significantly out earn a 5% return by doing something like this and if your opportunity cost of capital is 5% (say you have cash), then it looks even better. Will the first couple be learning on the job and maybe cost you more? Probably, but folks learn fast!

I fully support your comments on changes to ADU. We need to stop putting so many damn parameters around everything. The government needs to have a little faith in the people for a change!

[Stonemans_rowJ]

Originally Posted by laniroj

Lot's going on here but I'll address the primary impediment, financing. The others you bring up are generally solvable (trees, water/sewer connections, build cost, etc).

Say you've been renting your home for 10 years, owned it for 30 and raised your family there then moved on. Say you have no debt on the property. You could easily refinance with a cash out loan at 6.84% today - if this is your situation it's likely you have excellent credit.

https://www.bankrate.com/mortgages/mortgage-rates/

Alternatively, you could go to a credit union or utilize an ARM and get even lower rates - some still in the low 4's! Or...maybe you have several hundred thousand saved up earning money in the bank - your bank will generally lend you dollar for dollar that balance at cost - say low 4's AND you still have access to your cash - we'll call this a cash backed option. Maybe you have a universal life insurance policy you can take a loan against while your policy still keeps earning its return. My point is this, there are MANY MANY ways one could finance a $250k investment, but you're right it's not for everybody and nobody is implying that. What I am suggesting is that some people are wholly capable of some and/or all of the above methods and they are the ones who could 'make the numbers work'.

Say your actual (not desired) cost of capital is generally 8% (high, but we'll go with it) - $20k/year. You setback your structure 5' from each lot line and 20' between ADU and the home, 40'x20' structure with ground level garage (or you could scrap the garage and fly under the radar with two ADU studios up and down ^as mhays suggests, parking costs a lotta $$$) - 800 SF living space. On the low end you could get $1,500/month for that ($18k/year), which means you're losing $2k/year net operating losses. Now, let's factor in the full picture. Say you make $150k/year, you pay $50k in taxes. Your $250k residential investment depreciates $9,100/year, saving you $3k - so you're $1k cash positive. Now you factor in build cost vs market (you should have some accretion there). Let's call it $25k (10%). That's $26k of profit at the end of year 1. Factor in 3% annual appreciation (very low) and that's another $7.5k ever year. So at the end of year 2, you're $33.5k to the positive (unrealized), $1k to the positive less $1k in taxes so breakeven on cash (realized) and someone is paying off your debts for you while your asset increases in value. This is how people use leverage to build wealth and if you use cash, it's how wealthy people put their money to work not just sitting in a bank or index fund. 5% compound interest would have netted you a gain of $25,625 vs a conservative $33,500 if you did an ADU 'flip'.

Is the above 5% every month the same as interest on the bank statement? No, BUT in 1-2 years you can significantly out earn a 5% return by doing something like this and if your opportunity cost of capital is 5% (say you have cash), then it looks even better. Will the first couple be learning on the job and maybe cost you more? Probably, but folks learn fast!

I fully support your comments on changes to ADU. We need to stop putting so many damn parameters around everything. The government needs to have a little faith in the people for a change!

Bank Rate is teaser rates and it's for primary mortgages. Read the fine print. ADU is not a gov backed mortgage.

Arms are priced barely lower than 30FRM. You'd have to go to a local bank for this. Cash out Refi like this is generally 65-70LTV. Lending at 4%? No way. they're paying 5% on deposits now.

Not trying to be argumentative, but it aint easy. Maybe there's a local bank you know of who has a great niche ADU portfolio product?

I have universal life through NW Mutual. It's 8%. you can borrow 50% of cash value. How many people have cash value policy's for $700,000 to tap $350,000.

you are correct that there are certainly ways to do it- but all the examples you lay out are certainly not possible at scale. Very few people meet these parameters you speak of

[Stonemans_rowJ]

Originally Posted by laniroj

Lot's going on here but I'll address the primary impediment, financing. The others you bring up are generally solvable (trees, water/sewer connections, build cost, etc).

Say you've been renting your home for 10 years, owned it for 30 and raised your family there then moved on. Say you have no debt on the property. You could easily refinance with a cash out loan at 6.84% today - if this is your situation it's likely you have excellent credit.

https://www.bankrate.com/mortgages/mortgage-rates/

Alternatively, you could go to a credit union or utilize an ARM and get even lower rates - some still in the low 4's! Or...maybe you have several hundred thousand saved up earning money in the bank - your bank will generally lend you dollar for dollar that balance at cost - say low 4's AND you still have access to your cash - we'll call this a cash backed option. Maybe you have a universal life insurance policy you can take a loan against while your policy still keeps earning its return. My point is this, there are MANY MANY ways one could finance a $250k investment, but you're right it's not for everybody and nobody is implying that. What I am suggesting is that some people are wholly capable of some and/or all of the above methods and they are the ones who could 'make the numbers work'.

Say your actual (not desired) cost of capital is generally 8% (high, but we'll go with it) - $20k/year. You setback your structure 5' from each lot line and 20' between ADU and the home, 40'x20' structure with ground level garage (or you could scrap the garage and fly under the radar with two ADU studios up and down ^as mhays suggests, parking costs a lotta $$$) - 800 SF living space. On the low end you could get $1,500/month for that ($18k/year), which means you're losing $2k/year net operating losses. Now, let's factor in the full picture. Say you make $150k/year, you pay $50k in taxes. Your $250k residential investment depreciates $9,100/year, saving you $3k - so you're $1k cash positive. Now you factor in build cost vs market (you should have some accretion there). Let's call it $25k (10%). That's $26k of profit at the end of year 1. Factor in 3% annual appreciation (very low) and that's another $7.5k ever year. So at the end of year 2, you're $33.5k to the positive (unrealized), $1k to the positive less $1k in taxes so breakeven on cash (realized) and someone is paying off your debts for you while your asset increases in value. This is how people use leverage to build wealth and if you use cash, it's how wealthy people put their money to work not just sitting in a bank or index fund. 5% compound interest would have netted you a gain of $25,625 vs a conservative $33,500 if you did an ADU 'flip'.

Is the above 5% every month the same as interest on the bank statement? No, BUT in 1-2 years you can significantly out earn a 5% return by doing something like this and if your opportunity cost of capital is 5% (say you have cash), then it looks even better. Will the first couple be learning on the job and maybe cost you more? Probably, but folks learn fast!

I fully support your comments on changes to ADU. We need to stop putting so many damn parameters around everything. The government needs to have a little faith in the people for a change!

This person would be much better off, if they are interested in tapping the equity, taking the cash out refi as you suggest, putting debt back on this property to create a bigger loss (they still have 17 years of depreciation), and then buying 3-4 more SFHs with it. Levering their investment to now own 4-5 properties. Clearly, this is not someone who is trying to house their MIL on their property, and they have income (150k/yr) so they could easily acquire more properties like this.

[TakeFive]

You say tomato, I say...

Originally Posted by mhays

To expand on my parking requirement point, it's a huge factor, and can disqualify many potential sites. The amount of space for the parking itself plus any driveway, any new curb cut, the much greater construction cost...avoid that and things pencil far more easily. That's why Seattle got rid of it.

I recently picked up a guy who was about to buy a new (used) car. His previous ride was totaled and his (minimal) insurance wouldn't cover the loss. Said he moved to Phoenix from Seattle which led to him saying Seattle has great transit but in Phoenix you definitely need a car. Would you consider moving back to Seattle? "Nope, I like it here."

There's a reason for this anecdote. Denver is somewhere between Phoenix and Seattle.

The Denver neighborhoods I'm more familiar with are decidedly more suburban in character. The 'hoods that Stonemans_rowJ is talking about are more urban-suburban.

RTD services are decent and they're fortunate to have a nice dedicated revenue stream but they pale in comparison to Seattle's revenue and spending on transit. More suburban areas are less likely to have sufficient transit and it's more likely that transit wouldn't take them where they need to go.

Consequently, attitudes about transit, cars and car storage are very different from Seattle. But closer to the urban center things continue to evolve. Residential streets are of course narrower.