Joshua Kamali Pellego Agent Adding ADU's to a flip

Okay, go ahead. All right.

Well, let me put this in full mode. Okay, thank you. So I work— my company is called Red Door Investing. It's an LLC, hence the LLC at the end. Our mission is to find dilapidated houses in mid-level markets here in LA County, update the houses, add an ADU, and either sell them or hold them as rentals. We do this for investors. And that's the only slide that I will read off of, I swear. It started— and this is our, this is our story, and it's an interesting story— it started with a condo. In North, uh, North Hollywood, 5257 Radford Avenue. Me and my wife met in 2010, and she literally moved me into my condo, a little one-bedroom condo. And this is when the market was really in the toilet, and we bought this condo for $150,000. And at the time, I thought that's how much condos cost because I knew no better, and I worked for an early childhood nonprofit and was just at a point where I was ready to buy a condo. My wife owned a condo too. My— she wasn't my wife at the time. Um, I soon moved in with her and this became a rental. Uh, and 3 years later, 2 years later, we decided to buy rental property. And for those of you who know LA, you know that most duplexes and triplexes are underwater, inevitably underwater if you try to buy them, because there's some tenant in there who's paying $1,000 for a 2-bedroom and they've been there for 30 years. So we decided to buy a house. The house could immediately charge market rents, and we bought a house on Zelza Avenue in Northridge. And just a couple of pictures of that house. But when we were house shopping, the very first house we looked at had half of the garage carved into a studio. And I said to my wife, well, why don't we do that? If someone did that, then we can do that. We bought this house with the intention of cutting the garage of Creating a second unit. This was 2018, and at that time I started looking into the process of creating a second unit. And as you may know, that's when the ADU laws became— came on the books. I learned all about ADUs and said to my wife, we'll convert this garage into an ADU. So as I said, that house led to an ADU. You can see the picture on the left, that was the garage. 8456 is a house, 8454 was a garage. I am not a great picture taker. Any good pictures you see during this presentation will have been done by someone professionally. Any bad pictures you see will have been done by me. But you can see what the ADU looks like on the right, and they're, they're really quite good looking. Everything is prefab. The floors are click-lock vinyl, the cabinets are prefab shaker cabinets, the quartz countertops are prefab. That little vanity comes from Home Depot. When we did this and moved the renter in, we were $800 cash flow positive a month, whereas with the house we were break-even. But what was most remarkable to me is when the house was reappraised, I saw that had I sold it, I would have made half of what I was making as a nonprofit fundraiser. And I said to my wife, there's a business here in flipping these. And as my wife is fairly Even-keeled, she said, well, why don't you prove it? So in 2020, this was a year later, the market dipped in the beginning of the pandemic, and we bought a house in Panorama City, 3-bedroom, 2-bath, 1,200 square feet for $525,000 on Sylmar Avenue. And you can see it was pretty rundown, pretty beat up. The intention was to clean up the house, build the ADU, and flip it. So this is sort of a, a table of what we did: landscaping, painting, added the ADU. We added square footage because there was nothing behind the garage, and so we expanded the garage to make a 2-bedroom ADU. We rehabbed the bathrooms, the kitchens, put on new— put in new flooring. And now you can see what the house looked like after. And, you know, I, I am pretty proud of our projects. I think our projects look, look quite stunning. The lower right-hand corner, that's the ADU. That is the living room and the kitchen of the ADU. And of course, you see the red door, and that's what my wife eventually said we'll name the company after. Again, the flooring is click-lock vinyl, but, you know, from the top it looks like wood. And just to see a quick budget, in the end we made $55,000 on this flip. And I won't go into much detail about the numbers, but if you're curious, you can sort of see them there. We had some friends who wanted to invest with us. And I create— I crunched more numbers and built a model and said, yeah, we could do this for investors and get a pretty healthy return. So we did our first one for investors in 2020. We called it Red Door 1. It was on Cedros Avenue in Mission Hills. Purchased it for $655,000 in November 2020. As you know, the market was just starting to creep up then, and January is when it 2021 is where— excuse me, this was 2021, my apologies. We purchased it in November 2021. The market was creeping up. January, I think, 2022 is when it really went nuts. And we sold it 7 months later in July. And we sold it right after that 5%, 6% correction that had happened in May and June. But we were still able to get our investors a 6% return in that 7-month period of time. And we're able to do that because we just add so much value the ADU probably adds 50% more value than you spend on creating it. And then when you clean up the house, you're adding more value there as well. And here you can see some before pictures. This was a pretty beat-up house also. And you can see after pictures, and it really came out quite nicely. And the picture in the upper left-hand corner, you can see the ADU and house right there next to each other. Entrances were right next to each other. But again, on the lower left, you'll see A shower. That was existing tile. We glazed the tile. The flooring, if you can see the flooring in there, looks really cool. Looks like this funky tile. It's also a click-lock vinyl. Bottom right is the kitchen in the ADU. We'd like to put in these 2-in-1 washer-dryer machines both in our rentals and the ones we flip, because look, now the person in the ADU has their own washer-dryer. And where we are today. So that very first house on Zelza, we spent $600,000 buy the house in 2018. We spent $80,000 to build the ADU and we sold it this last February for $980,000. We did a 1031 exchange of that property. We bought a large duplex, really large duplex in Long Beach, 2 4-bedroom units that has 2 2-car garages in the back. We are just about to get our permit and build those into ADUs. We have, for our own personal holdings, we sold that condo that my wife owned. We bought 2 homes in Panorama City, added ADUs. We hold those as rentals. Um, we are currently in the process for ourselves personally, uh, we started flipping buildings. Um, when the housing market was crazy between January and May, June, it turned out the multifamily market was not as crazy. We bought a building in Harbor Gateway that's sort of east of Torrance. for $100,000 under asking, and we were the only bidder. It has a 3-car garage, and we're in the process of adding a 2-bedroom unit in the front of that house where the garage is. We'll repaint the units and we'll flip it. Our original investors in Red Door 1 are now Red Door 2. Each one of these houses that we buy is its own distinct LLC. We form the LLC, we buy it, We close the LLC after it's done to limit liability. And again, to show you— and you all know how the market's changed— that house was 1,600 square feet listed at $750,000. We bought it for $710,000. We got another $20,000 knocked off during the request for repairs. That just wouldn't have happened in the last 3 years before. So we paid $40,000 more and we got a third more house. When all is said and done, we will have completed or be in the process of constructing 8 units and actually I did the math again, it's 9 units. And we're fundraising for Red Door 3. It's 30— our shares are $33,000 for a half share. We sell half shares. $66,000 for a full share. And we are one share away from beginning that project. Um, this is my information. And these days I put my DRE number because that's a fancy thing I get to do. And that's our website. So that's all about us. And I'm happy to answer any questions. Hey, Josh, this is George.

What's the time factor on your ADU permits? How long does it take usually for you to get a permit in LA County?

That's a, that's a good question. It's somewhat— excuse my vicious attack dog back there. It's somewhat city-specific. The city of LA is actually really good about it. It used to be in the city of LA, it used to be one day. You got them over the counter. That was before COVID These days with COVID it's about a month in the city of LA. Long Beach is really— it's taken about 2 months. But the— and I didn't mention this— these are speed projects for our investors. They are speed projects. We get these things done in 6 months from purchase to sale. They are 6 months. And that's why we can get such a handsome return. We get 6 to 7% in 6 months. It's an annualized return of 12 to 14%. If it took us longer, the annualized return would obviously go down. So it is— they are speed projects. The faster we can get the permit, the better. LA City so far has proven to be a good place to go. Melissa, we find our properties through Redfin and the MLS like everybody else. We just know at this point what type of property we're looking for. Middle-class neighborhoods like Hawthorne, Gardena, Northridge, Panorama City. We look for 3-bed, 2-bath, about 1,200 square feet. We'll go down a little smaller. If there's only 1 bath, we can certainly add a bathroom, but we have a model there. And we also know what kind of houses to buy. And this is really one of the most important parts of our model is you've got to avoid the Los Angeles Department of Water and Power, or they will sit on your— another permit, it's called an encroachment check— for 3 months. And that just kills a project. And we've learned it because we bought one that was underneath their wires, and it slowed down our project. It took us almost 10 months. So we also have to be very specific on the layout of the house to make sure it's, um, it'll work and we won't, we won't get involved with DWP. And as you all know, as agents, we can change certain things, we can't change other things. So we're looking for houses in the middle of the block with a nice backyard where there's There's not a school behind the backyard. There's no power line, you know, there's not a huge power pole right behind it. So that's a lot of the work to find the property is to find it in the right place. And that looks nice.

Josh, had you mentioned that you were also a contractor?

No, we work with general contractors and we started with one general and now we have 4 that we pull from. Okay.

Josh, this is Doretha.

Yeah.

And your model is the exact same as what I've been doing on the East Coast, and I'm trying to now replicate it on the West Coast. I was doing it for about 15, 17 years. And I was getting my property sourcing them through auctions, and I was buying and holding a number of distressed properties. And as I got closer to retirement, I figured I'd need to start renovating them, and I got mine ultra cheap. I mean, and most of them were cash sales, and I used contractors. that were very low priced because some of them have gotten into trouble and had, you know, blemishes on their records or their licenses. And I gave them jobs, so I was able to get the work done pretty cheaply. So to try to replicate all that to the West Coast is probably not conceivable to be able to do it as low price as I did it. But my biggest challenge now is going to be financing because I was using private equity And I was bootstrapping and financing with my own equity. So I am very interested in hearing more about your investors and how your 1031s got started and what your future plans are for your model.

Yeah, you know, we, we sort of work in 3 spaces, right? Me and my wife flip in our own company called Kamali Properties. Then we have buy-and-holds that are like those condos we owned, and then we just 1031 them. And then we have our Red Door, which is what we do for investors. The financing we use is— it's a hard money group, private funding group, I guess is what they'd call themselves, called Arixah Capital. And they're phenomenal. And we pay 1.5%, maybe 2% above the 30-year prime. So, excuse me, a 30-year mortgage. So this last project we did that we just started 2 months ago, you know, was 8.5%, which I think is pretty phenomenal for hard money. Back when interest rates were really low, we were paying 7%, 7.5%. So that's, that's, that's what we use. For our investment model, we raise the down payment, we raise all the fees, we raise the construction costs. But we still do get a loan for the other 75% of the mortgage. For our personal properties, if we're going to do a buy and hold, we might have the construction in the bank, we have our 25% down, we get that bridge loan from Orixia Capital, and when it's done, we'll do a cash-out refinance, pay them back and pay off any construction costs. And just the value you add when you clean it up, clean up the house and add the ADU is more than enough to cover your costs. Even if the market went down, you're just adding so much value with the ADU that cash-out refinance, we've never had a problem. And I'm not worried about having a problem covering paying off the hard money folks. I'm going to answer a couple other questions. Christian, The first contractor we ever got, and I hope I pronounced your name correctly, our first contractor was referred to us by a cousin of mine and we just kept going with him. Our second contractor was referred to us by a friend who's an architect and he's turned out to be really good. Now, each contractor has their own style and there's things I'm learning about our contractors as we go along. We have one contractor who doesn't do DWP and I'm out there doing meter spots. And the first contractor sort of did everything. The third contractor we brought on was a family member who didn't do ADUs but did every component of an ADU, and now they're doing ADUs. So it's just sort of friends and family kind of thing. That's— we obviously look up their contractor number to see if there's anything against them at the state level. And our preparation to continue— continuation, drop in prices, recession. Well, My hope is, as housing prices drop, we can buy at better and better prices. And in theory, within a 6-month period, things will not have dropped so that we can sell where we're at. As I'm monitoring the market, the finished product that we want to sell doesn't seem to be going down, and there's not a lot of competition for it. But, you know, if the— if we had a 2008 scenario and nothing sold, well, then we would not really have much of a business, would we? That, that I can't control for. But right now, the market looks flat. And our product just needs a flat market. We don't need appreciation to make money. We make 7% in 6 months for our investors in a flat market. And that's all I'm looking for is a flat market, or maybe be able to get a couple of bargains on a purchase and really make money on the sale.

Josh, to ask you—

go ahead.

Go ahead, Ziad.

Thank you. I wanted to ask you about the ADUs, if you can give us a little more information about them, the cost per square feet, how many square feet, and all of that. The permit for it, do you have it like prefab and then you take it to the city and they just How is that?

Yeah. So are we— we have, we have used contractors to date to draw, to do the drawings for the ADUs. We have not needed, uh, we've not brought in architects. Um, we are bringing one person who's a draftsman, but not an architect, because architects really charge a lot of money and it's just not necessary. It's a fairly simple, um, drawing.

I'm an architect by trade.

Maybe, maybe you and I'll talk afterwards. We don't do— I didn't— I don't know if I specified this. We do garage conversions. We do not do ground-up ADUs. It would be cost prohibitive. We wouldn't make money on this model. It's all garage conversions. When lumber and everything was reasonably charged, we would add square footage onto the ADU, or actually that one we did on Cedros for Red Door 1, What's really cool is a lot of houses will have a bedroom right behind the garage. You just knock that open and you take the bedroom into the ADU, and now you have a 2-bedroom ADU. You add a bedroom onto the house somewhere else and keep the house as a 3-bedroom. Um, but always it starts with a garage conversion, adding a room onto the garage, adding square footage behind the garage. Um, once the, once the contractor draws it, he's taking it to the city and he's getting out, pulling all the permits for it. We— the price of the ADU has climbed up as, as labor and everything have climbed up. The very first ADU we did in 2019 was $65,000 flat. Right now I'm paying our contractor $80,000 flat. And since that's the price my best contractor can do, that's what I will pay every other contractor to do. And if they're willing to hit that mark, then they'll work with us. And if they're not, then we won't work with them.

Uh, here is the, the question. So you never did any from the ground up, uh, ADU?

No, it basically, it costs another $35,000. I've priced them out with our contractor and it's about $35,000 more to build from the ground up.

But longer process.

And a much longer process. Yeah. I mean, this is a speed game. Um, yeah. And Christian, I do one, we do one-bedroom ADUs. We don't do studios if we're doing a garage conversion, right? 2-car garage, 400 square feet. It's a small 1-bedroom, but it's— you can charge more for rent and you get more on the flip to make a small 1-bedroom than a large studio. Now again, we've also done 2 bedrooms where we'll add 125, 150 square feet for a small second bedroom, or we'll subsume a bedroom from the house in the ADU and add another bedroom onto the house. That slows us down, right? The permit takes longer, the construction takes longer to do the addition of a bedroom onto the house, and now you're running up more money on your finance fees from your hard money people. So the ones we're doing right now, I think we're just going to do 1-bedroom garage conversions, wait for the cost of things to come down, and see if it makes sense to do adding square footage. We used to be able to add square footage at $185. per square foot. And now, was it 10 square feet? $185. And now it's $400 right now. So it went up really significantly. We'll see if that cost comes down.

Josh, when you go out looking for your projects, do you care what neighborhood you go into? And what I'm referring to is, You can either be the first, the middle, or the last person to put an ADU in that area. I don't know if I'd want to be the first because when you go to appraise it, it's going to make it more difficult for the appraiser. So have you run into any of those issues?

Yeah, no, we have been the first. By, by all means, we've been the first. But knock on wood, And my desk is wood or something like it. We have not had a problem with appraisals, but it's certainly something we've, we've thought about and been concerned with. Um, but so far so good. Our appraisals have all paid out, including the ones that we've held for ourselves and needed to do the cash-out refi. I wish some of the appraisals had come in a little higher, but it seems like the appraisers are starting to get hip to ADUs and how to appraise for them.

Okay. And, and, uh, along that same line, how are they appraising for them? Are they looking for more ADUs in the area or are they using multifamily?

No, they're using their— they look for ADUs in the area, but usually they'll extend out.

They won't—

it's not just a half mile. They'll sort of extend out to a larger, uh, radius. And if you have the ADU rented out, like this doesn't help on a flip when someone else is buying it. But, you know, when we've had the ADU rented out and there's a lease we can show, that's helped. I think they gave us like a 4th of the rental or something like that.

A question about the parking, converting a garage. For example, I just sold a property in Long Beach. They do have some program, which is you should have some parking space. You should have parking space. You should have a garage. Otherwise you pay. What would you do about that? How was it?

All of the single family that we've done, you know, there's the rule that if you're within a half mile of public transit or it's a permitted street, then you don't have to have parking. You don't have to replace the parking in the garage. You have to have 2 stalls for the house. And every stall, every house we've done, we've had the 2 stalls. Now, I believe multifamily is the same, that you, that you, as long as you have stalls for the existing tenants, exist, then you don't have to replace the parking for the garage as long as you're within a half mile of public transit.

Thank you.

Anybody else? Questions? I think it's fascinating what you're doing, and, um, that you can make this cash flow here in California is also amazing.

Yeah, and that's, that's really the key. You can't go out and buy a duplex and make it cash flow, but if you can buy a duplex that has a 2-car garage or 2 2-car garages, you can do it. And that's significant.

You know, I actually thought of something like this before in one specific— in a couple of specific cities where the lots are like quarter acre and stuff. There is some really big lots and they don't mind ADUs. And I also look at— there is a company, they have Prefab, so they just bring them in, and I, I believe it costs you $120K to, uh, to bring it to, uh, to place, you know, and it's ready. It's just about the permitting situation.

Yeah, Dorothea mentioned the same thing. We have not considered prefab because we're making our money on garage conversions. Um, so we just haven't, haven't considered that, Dorothea. But that doesn't mean that a prefab couldn't work. I've just not priced it out myself. We've kind of— we've got our model, so we're just replicating what we do. You can do 2 ADUs if they're detached from the house. And so certainly, if you bought a piece of property with— that was big enough and you found prefab and the numbers all worked, maybe you could dump 2 prefab ones on there. And and make it cash flow. We just, again, have this model and we've gotten pretty good at it.

So you kind of stick to one city or—

Oh, no, no. We've gone from as far north as Mission Hills to as far south as West Long Beach. It's just our model is middle-class neighborhood, right? Where we can buy a house at this point, it looks like we could get them for about $625,000 for this 3-bed, 2-bath. Um, as I said, Hawthorne, Gardena, Lenox, the parts of the San Fernando Valley, you know, Northridge, Mission Hills, Arlita, Panorama City. And as I said, we're just getting out into Long Beach. I think Carson's an interesting neighborhood. I haven't bought there yet, but I think it's a very interesting neighborhood because I think it has the right types of houses at the right prices.

So you kind of don't care about the appreciation at all? You look to cash flow, you don't care about appreciation.

Yeah, I mean, for the ones that we're flipping, appreciation doesn't mean anything to us. These are short-term and they're being flipped. For the ones that we're holding, it's, it's the, you know, the cash flow comes from the ADU. But the appreciation is going to be there, right? When everything goes up, everything goes up. So those neighborhoods will go up too. As you saw, the very first one we bought for $600,000, put $80,000 in and You know, 4 years later, 3 years later, sold it for $980,000. So if you hold on to them for long enough— now, you know, this is where I'm going to talk a little beyond my expertise because I've only been doing this for a few years, but I don't see these things appreciating in the next few years. I think, you know, $1 million for a 2,000-square-foot house in something like Northridge with an ADU is probably where it's going to be for a while. And that's okay. You know, again, we're We add so much value between cleaning it up, adding the ADU, because you got to remember the ADU is not just adding a second unit, it's adding 400 square feet to the house, um, at a really cheap rate. So we get enough value out of just the ADU and cleaning up the house to be able to turn around if we wanted to sell it in 1031 into something else.

Thank you.

Anybody else? Any other questions? Thank you, Josh. I appreciate your time this morning and, and letting us know what you're doing. I think it's awesome.

Thank you.