# Wow, Nice Lil Profit

See, it is easy to make money when you have money…

Profit is not as good as it looks. They spent a whole year doing the remodel. So the amount of work is fairly substantial. The holding costs alone is more than 100K, maybe even close to 200K depending on interests rate. After accounting for all the costs they may net only 200K, if that.

Wow, tough crowd…

First of all, they probably only put a fraction of that down and the remodeling cost from the looks of it probably wasn’t that expensive. Come on, a remodel like that should not have taken that long. There must be more to the story. I am pretty sure they ain’t crying about their return.

I am not being tough. I did a flip two years back and return was pretty abysmal. Things just aren’t as rosy as it looks on TV.

You can do the math just on the interests payment. If they go traditional bank route, which is unlikely for professional flippers, how much would that be? Assuming they put 20% down, and use my quick-and-dirty rule of thumb:

\$500 per month payment for every \$100K financed

Their mortgage payment is \$7K per month. So 12 months is \$84K. Round it up to 100K for good measure. There are points and crap to account for.

Most flippers go the hard money route though, and interests rate for that starts at 8% for seasoned pros with a track record, all the way to 12% for lesser souls. Taking that loan would run you more than 200K a year in interests alone.

Assuming they put \$100K into the project, their return is somewhere between \$200K to \$300K. There is also property tax, which is \$21K, and selling costs (4% = \$90K). Let’s be charitable and round it to even 100K.

So all said and done profit is between \$100K to \$200K. Let’s say \$150K.

Doesn’t look that stellar, right?

The folks who make the most money are the hard money lenders. So you are right. It takes money to make money. Where else can you find investments yielding 12%?

Fair enough, Manch, so are you telling me that this was not a good project after all and that there are real estate projects that would have exceeded this return in the same time frame taken?

Now, granted, I still think the flip could have been much sooner, so the costs would have been way less and who is to say the flippers had to borrow this kind of money at such high rates? I am sure you and I know people who have a few hundred grand each, sitting in some pathetic bank account. They don’t like stocks but have some experience with real estate to know what may be a decent project or not so they partner up and split the return. Isn’t that quite plausible?

If they could finish sooner, why were they dragging their feet? Do they hate money?

The typical flippers borrow at high interests rate. Their income is not W2 and unstable, and may not be high enough to afford a 1.7M house to begin with. They also need money to pay contractors and buy material.

But anyone brave enough to tackle a 1.7M project obviously knows what he/she is doing. Who am I to judge?

Filpping and new construction is all about speed…The faster pros make the most on the velocity of their money…IRR is the key…

Sure, speed is everything so there has to be more to the story than just average flippers here. Maybe, these people intended to keep it as a rental property. Granted, this is a fairly expensive property so it is going to take some time to sell it. From all appearances, this was not an addition or reconfiguration of the floor plan so interesting why it took so long to remodel a kitchen, bathrooms and lighting. Come on, that shouldn’t take more than a few months at most, unless hangups at the planning dept. Def not to this scale, but still, I just referred my architect/permit expediter friend to my wifey’s friend who wanted to build an inlaw unit and they have nearly finished building it after getting the a-ok from planning. Introduction to now - 2 months tops. Sometimes, it is who you know.

If I want to build a bedroom and bathroom in the garage of a typical SF 2-story house, how much would it cost? And how long would it take?

Well, according to my wife, her friend said she is spending about 80k to build the inlaw. Not sure if that includes the architect plans, the handholding and the permit cost which I understand has really gone up since I did my remodel. I believe the inlaw is a 2 small room unit with a bathroom. Supposedly, she did get competitive bids but I can not attest to contractor and work quality. This sounds consistent with what my architect was trying to beat into my head when I was considering adding a 3rd floor to my house and a contractor whom we used for some repair work at our Chinatown building gave me a visual ballpark of 250k she flat out said that is not happening. She said construction costs are so much more now and I guess that is true from what that inlaw is costing. I seem to remember many moons ago my friend built his decent sized inlaw in the Richmond for about 20-30k. Time frame? Pretty fast, if you are working with someone experienced who knows the process/people at Planning. My architect boasts all the time that when big architect firms have issues, they sometimes consult her for assistance. I introduced the architect to wife’s friend about 2 months ago I think and according to wife she said she saw at least framing done. So maybe 2 months or so more if you can get sign-off on time at each phase which could be challenging and if the contractor doesn’t jack up anything. So, let’s say at most 6 months just to be conservative from start to finish.

80K seems to be pretty decent price. Even rounding it up to 100K looks OK.

I want to have that number in mind next time I bid for a 2/1 house: how much does it cost to make it into a 3/2.

Assuming you are doing the same where you are chopping some of your back garage space for that one bedroom one bath unit that should be the same pricing then. Obviously you want a project house that has a high ceiling garage so that you can make the sub flooring and still have the min height for legal sized rooms. Too low and then it might not work or cost a lot more to dig down in order to get the min height. Also you want a layout that makes the inlaw accessible from the street via a private door. No one wants to share doors or have to cut up the main house in order to separate the units. Now if you want to just add the space as part of the same main SFH should be cheaper of course with less separation walls needed.

I want downstairs to be part of the same SFH. Making it into in-law and I am looking into rent control issue again… I do want a separate door entry to make it old-people friendly.

What is the min height for garages to make this type of project workable?

You probably should check with your contractor, but I believe it had been 7’ 6" for the min height of a legal room in CA but then CA revised it to 7’ but certain jurisdictions like SF may not have adopted it. With the push to add housing now, perhaps the recent legalization guidelines of making inlaws legal allows one to go to 7’ but you should check those guidelines. I have only built from scratch. And of course, you probably need to meet windows/egress or fire escape requirements. My recommendation is that when you are prospecting, look for garages that have at least 8 ft unfinished since you will need to cover it and do subflooring that will take that down to near the minimum. More height is obviously better so that the unit would be nicer and not feel like a cave. Another tip that worked out extremely well for me is to ideally find a corner house. Yes, those are harder to find and tend to be more expensive but with a corner house (assuming the backyard entrance is accessible via sidewalk) you can then easily make a separate unit that if you did want to rent out would be perfect. Totally separate entrance for secondary unit from main house. One will never see the second party unless one wants to.

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It’s 7.5 feet for SF. Usually for inlaws you can get OTC permits in SF, pretty easy actually

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Thanks @sfdragonboy and @Esfgiants for the info. I am kind of tall so even 7.5 feet can feel claustrophobic. Corner houses always feel kinda weird to me in SF because of the zero lot line. Random strangers can walk right up to your ground floor side window…

Do you guys think it’s better to start from scratch? Meaning start with a empty garage? Or to fix the coding violations of an existing in-law and bring it up to code? Let’s say the work is not too bad already, and there are no obvious flaws to a layman like me.

No way, corner houses can be quite nice. Typically, they can be pillars of the block. First of all, you get a lot of natural light with all those windows. Who doesn’t like that? Sure, you have more sidewalk to be responsible for (landscaping, the occasional left litter on the corner) but if a nice one would provide much payback. On the window thing, use casement windows that are harder to break into or use bars (interior, opening kind) that are not ugly looking. There are ways around this.

Depends what you find really. I mean, beggars in this market can’t be choosers. Demo on an inlaw is not that expensive or you can do it yourself but I like a clean slate myself. I don’t like having to figure out what some idiot did (since it is not permitted, more than likely). In my experience, even if permitted, work can be shotty and me no like. At these elevated price points, I think it is always worth it to get it permitted out right and documented/drawn. When you sell for it later for millions you want your buyer to be comfortable and confident that what they are paying (which is a lot) is for documented, code compliant work.

I always like to gut the places out and do my own design. Instead of modifying an existing structure