Rutherford family Real Estate Investing Intro Letter
By: Preston Rutherford
Tags: Investing, Accessory Dwelling Units, Real Estate Investments, Real Estate, Financial Freedom

Hello, we are Jackie and Preston Rutherford and we would love to partner with you on future investments to do good and create outsized returns.

Our background

Jackie

Jackie graduated from UCLA with a degree in Economics and Financial Accounting. She has spent the last decade-plus at Facebook in a variety of roles, ranging from launching advertising platforms to directing the small business efforts at the company, evaluating investment cases on a daily basis in excess of $100m.

Preston

Preston graduated from Stanford in 2008 in Urban Planning and Design. Then, he started an e-commerce company called Chubbies (website) with over 1m customers and an Instagram following of over half a million, with the simple goal to bring levity to men’s fashion. He then joined a real estate private equity firm as a partner leading acquisitions, doing over $50m of deals across mobile home parks and apartments, all in California. Now, he leads a new business line related to real estate at a financial technology enterprise software company that was just valued at $1.7b. His LinkedIn.

Our purpose

Our purpose driving our real estate investing is to have the biggest impact possible fixing the housing crisis (an affordability crisis driven by lack of supply).

How:

Add 1,000 attainable units to the California Bay Area rental housing stock.

Inspire other people to implement the same business model and therefore drive the creation of 1,000,000 additional units added to the California housing stock.

Read our vision for 2035 here

The Investment Opportunity

Unprecedented and time-sensitive

Passionate about finding the best way to add additional units, the recent change in the state-wide ADU regulations creates a unique and time-bound investment opportunity in CA real estate.

Initial ADU regulations were good

The initial ADU regulations were meaningful because they very clearly laid out what was required to add a new ADU, and mitigated the largest risk associated with the creation of any new units in desirable CA markets: NIMBYism.

However, still problematic

However, 3 problems remained: 1) the opportunity was limited to owner-occupants, and 2) you could not remove existing parking from the property, and most importantly, 3) multi-family properties were NOT included.

But 2 things have happened in 2020:

1) Updated state-level regulations and 2) reduction in construction costs and timeline via expanded acceptance of manufactured homes.

Updated regulations address all 3 original shortcomings

ALL THREE of these constraints have been removed until 2025, making the next few years a very special window of time for being able to have a dramatic positive impact on the housing shortage, while creating immense value in the process.

Minimum 3 Additional Units are Allowed. All multifamily properties (attached units) allow for 2 new construction detached units AND at least 1 conversion unit (e.g., convert a carport to a unit) up to 25% of the existing units (if you have an 8 unit property, you can add up to 2 (.25 * 8 = 2) conversion units for a total of 4 total additional units.

All multifamily properties (attached units) allow for 2 new construction detached units AND at least 1 conversion unit (e.g., convert a carport to a unit) up to 25% of the existing units (if you have an 8 unit property, you can add up to 2 (.25 * 8 = 2) conversion units for a total of 4 total additional units. Manufactured homes are permitted as ADUs . This dramatically reduces construction costs required in order to provide an approved housing unit.

. This dramatically reduces construction costs required in order to provide an approved housing unit. No Parking is required. Parking does not have to be replaced if you add a unit in a location previously used for parking. AND, you do not need to add new parking for the new units you add (if your parcel is within .5 miles of a public transit stop).

Parking does not have to be replaced if you add a unit in a location previously used for parking. AND, you do not need to add new parking for the new units you add (if your parcel is within .5 miles of a public transit stop). No Owner occupancy requirement. The property owner no longer needs to live on the property, which allows investors to make use of these regulations.

The property owner no longer needs to live on the property, which allows investors to make use of these regulations. 60 day permit approval timeline. Cities must process your completed permit application in 60 days. This is a speed that is otherwise unheard of in California real estate development.

Reduce construction costs with off-site construction

Our ADU team was is co-founded by the previous head of one of the top green, pre-fab modular homebuilders (blu homes), is partnered with the top pre-fab manufacturers, and has been able to secure venture capital financing from some of the best firms in the valley. The net benefit is that they can construct something that looks great at or below $300/ft, all in.

Huge opportunity for good while creating outsized returns.

And, when you can construct all-in below $300/ft and get rents up near $4/ft with essentially no vacancy risk (see page 3), it transforms the value-add return profile of California small multifamily real estate. Where previously, investors would purchase at a ~4% cap and hopefully get above a 5% cap with improvements to the property and operations, the current opportunity has completely changed. By being able to nearly double the rental income on the property without any added land costs, low-cost construction, and mitigated time risk, you can add enough value to where you can refi out all your initial capital into long term fixed-rate debt in the time it takes to go to through the permitting, fabrication, installation and lease-up (~ 7–8 mo in total).

The Investment Thesis

Because you can control what are normally the biggest risks in ground up development in California (construction costs, land costs, building timelines, entitlement process, and customer demand), investors can create a massive return.

Construction cost risk mitigation — use pre-fab construction

— use pre-fab construction Land cost risk mitigation — you have already paid for the land by purchasing the existing cash flowing property. No additional land costs exist. And, you can remove parking spaces in exchange for adding housing units, which dramatically changes the value calculations of larger lots (to the upside).

— you have already paid for the land by purchasing the existing cash flowing property. No additional land costs exist. And, you can remove parking spaces in exchange for adding housing units, which dramatically changes the value calculations of larger lots (to the upside). Building timelines risk mitigation — prefab construction removes the time unknown when you’re building homes in a factory.

— prefab construction removes the time unknown when you’re building homes in a factory. Entitlement risk mitigation — cities have to review your plans in 2 months. The process is NOT a discretionary approval process. Therefore, if you are meeting the objective criteria, you will get your approvals in 60 days. This is unheard of.

Business Plan

Acquire 2–4 unit properties in the Bay Area on lots with over 15,000 sf with an accessory structure (like a carport)

Add 3 ADUs. (2 new construction and 1 conversion unit)

Water & electric submeter implement (bill back water to residents to drive sustainable water use while driving NOI)

Cash-out refi or sale after ADU lease-up and expense reduction

Unit Economics

As long as you can purchase the property at a reasonable go-in value, and you are able to maximize allowable square footage (buy a large lot where you can build on all of the available land), every additional square foot you add is profitable.

therefore, the goal is to add as much square footage as possible.

1200 sf is generally the largest ADU size

Therefore, if you can add 3 1200 sf units, you can bring 3600 sf to the housing stock.

Considered differently, if you can bring 9 additional bedrooms to the housing stock, the value creation is massive.

For example, a bedroom is generally renting at around $1500 in many areas in the Bay Area. The cost (all in) to deliver that unit, is roughly $150,000 (using round numbers of course).

For real estate investors out there, that’s hitting the famed “1% rule” where you’re getting 1% of the total cost of the unit in monthly gross revenue.

California investors, especially in the high demand markets, are rarely, if ever, able to get to those sorts of unit economics.

And, because these are brand new units, under warranty, your maintenance and repair allocations are much lower than buying an existing value add property.

Why we are ideally positioned to execute on this plan:

Local

We are local investors committed to improving properties over the long term. We have proven our ability to be stewards of property in the area, developing positive relationships with the residents, neighbors, and the community at large.

Long term

We are not flippers. We intend to hold our properties for the rest of our lives. That mindset dictates how we treat the residents and execute our business plan.

Summary:

Address Housing Shortage…

Our purpose is to help address the dramatic housing shortage in the Bay Area by adding additional units to the property.

…By providing reasonably priced housing

Our approach allows for the addition of safe, clean, reasonably-priced housing. Other approaches price out the majority of residents.

Thank you

Preston & Jackie Rutherford (and Ryan)

Projects:

Resources: