This week, Aaron Norris is joined again by Kristi Cirtwill. Kristi is president of Cirtwill Investments, a real estate investment company. Twelve years ago, she moved from Toronto, Canada to Long Beach to start her business, and she discovered she had a niche working with sellers with hoarding disorder. Currently, 80 percent of the houses that she ends up buying are hoarder houses. Over the last couple of years, Kristi has also been on the front end of accessory dwelling units here in California. She currently lives in Los Angeles. When she’s not looking at buying her next hoarder house or building an ADU, she enjoys the outdoors, playing guitar, and driving her 1979 Volkswagen bus.
Aaron began by asking Kristi what the response from her tenant has been regarding the properties she has. She said she incentivized one tenant to allow her to do this. A couple of others were actually vacant, and she had just bought them to flip them, but then she thought they were good keepers. She was renovating the main house at the same time she was getting the ADU plans approved. It’s case by case. Part of the other thing she didn’t realize last year is she is supposed to be living in one of these and fronting the other, whereas come January, you can rent both of them. There won’t be that restriction.
There are exceptions. In Long Beach, you can rent both units as long as it to the same tenant. She has had to do some workarounds like that for each one. She’s glad that that rule will be changing come January. There won’t be that restriction where you have to live in one. Aaron said that’s a big deal, although he’s curious who is monitoring that. Cities can’t even keep up as it is, so they’re probably not going around knocking on doors to check.
You never know, but the Planning Department needs to get it together. Code enforcement may need to plug that money since the REO tickets aren’t making any money anymore. Aaron has been warning investors too. He would want to know going in how friendly they are to investors and non-owner. His complaint to several cities and is they’re cutting off the people who have the inventory, have access to private capital, know what they’re doing, and they know how to be a landlord. Instead, they’re pushing it on owner-occupants that have never been landlords. It just sounds like a recipe for disaster, whereas if they’re really wanting to get affordable housing out, it would make more sense. But, that’s just too practical.
This all takes effort. Kristi said she finally got smart and decided to go into one city and try to meet the guy in charge of some of these things. Surprisingly, he was open to talking to her. She told him she would really like to get a couple more investment properties in his city and asked if they could meet. He was completely open to it, so they have a lunch scheduled for January. The key is finding the ones that are investor-friendly because there might be some money for us eventually.
Aaron has been talking about this a lot, too. Somewhere in Los Angeles, there was a joint partnership by several cities that were putting together something on affordable housing. With the bad news of the city of L.A. spending $1.2 billion for a little bit more than half of what they were hoping. Oon the average cost being $530,000 for “affordable” units, imagine what that could have done in the ADU space. If the average is costing around $150 grand for the structure, it could have been spread out all over the city. It’s just it’s sad. Aaron thinks the private space could deal with bureaucracy better and faster, but he doesn’t know if they’ll ever do it.
Aaron next asked Kristi about the properties that were vacant and she built on them. Aaron asked if she rented them while building the ADU, which she said she did. She was trying to get them to the point where it wasn’t a total construction site in the back yard and so was almost all the way to completion. She ended up with a few months vacancy on a couple of them, but that was OK because she could see the vision with them. They’re all up now.
Aaron asked if having two tenants is like having a duplex. She said, again, it’s case by case. She has two rented to the same tenants for. For another, she did an AITV wraparound. Here, the owner is technically living in one of the units. Another is being held by a gal who Airbnbs both units, which is legal since she has a permit to do that. She had to get creative case by case going forward on these. She is excited because she is not going to have to worry so much about planning a covenant and trying to live in ten different ADUs all across the state. Soon, in Southern California, she will be able to rent them all herself.
Aaron went and visited Michael and Dennis out in Los Angeles, who were on the panel originally with Hugh, and they were building in Los Angeles at the time as well. They do the strategies where they do Airbnb in the front while they’re building the back and they fully disclose to the vacation rental tenant what is happening. Most people they attract are out there doing things during the day anyway and don’t care what’s going on at that time. They’re not there to take a nap, but they killed it on that front.
Kristi said the city of L.A. is really clamping down on all kinds of Airbnb rules and regulations. She doesn’t really want that as a business model going forward just because it’s too risky to have cities telling you what you can do and what you can’t do with the property. That was one thing that the bills did spell out. The state gave a lot of permissions and a few different interesting fronts, but one of them was the 30 day and less rentals that the ordinances could outlaw. This was a move for affordable housing. Aaron received a call where they asked him if he could write a letter. He said he can’t and is doing what he can at the top level. At the end of the day, we need more affordable housing. He thinks almost every city is going to come in and this is going to give them an excuse. No more vacation rentals, or they’re gonna make it very onerous, unfortunately. Now, it doesn’t mean that you can’t do longer-term rentals like traveling nurses. There are things like executive rentals and other opportunities.
Kristi said people are getting creative with it, but at the end of the day, she wants something simple. She doesn’t want to be having to think about whether there is enough toilet paper at this property for her Airbnb guests? She’s trying to just think ahead and simplify things a bit. It’s not always bad when they come up with rules that irritate you initially.
Aaron asked Kristi if the tenant she rented both properties to was excited about the ADU, which she said yes. Aaron wondered what the situation was. She said one was a big family and friends or colleagues of some sort. The other is she is renting both to the guy in the main house, and he is leasing them back. That was the incentive for him to allow her to build the ADU in the first place. She said she wanted a certain amount of money, and you can get this much more for it and make the spread. She knows he’s not going to be there forever, so when he finally moves out, she will get more cash flow. That was the incentive to allow her to safely dig up his backyard and build this thing.
Aaron asked how the utilities are handled with more than one property and whether both units are on the same meters and included in the rent. He wondered if it was this or if she uses a sub-meter bought on Amazon? She said she is not sure how they’re doing it. She is still paying the utilities on a couple of them. She hasn’t turned that over to the tenants yet, but she will at some point. If she does, then she might keep the utilities in her name and have them pay her. The other ones are sorting it out amongst themselves, and she’s not quite sure how they’re doing that.
Aaron also asked how the mail would work. Kristi said technically, before the city signs off on your final permit for the ADU, they have to see a separate house number and a separate mailbox. He wasn’t sure how they were going to handle the people in a community who had the boxes. It’s strange because there’s a couple of them that are right in behind the main house, so it’s like the mailbox is attached to the main house but on the corner of the house where you would walk back to go to the ADU. It looks a little bit weird that they wanted a separate number identified on the house. The mailbox and house numbers are both on the main house. Aaron next asked how trash is handled. Does the city give you extra bins, or are they forced to share? She said so far they’re just sharing. She has not had to get extra bins for any of them.
Janet and Larry French, the people who run the Coachella Valley, built one on the back of a property out there, and they bought a sub-meter on Amazon. It hooks up to Wi-Fi and helps them separate the utility bill. This is definitely something Aaron is interested in investing.
There’s a lot of different tools that will come out. Financing will probably get up and running sometime this year. There are some opportunities to get creative as well. Aaron has seen some companies out there that are asking homeowners if they can build an ADU in the back. It’s almost like a sublease, and the homeowner is basically collecting lot rent. This is a couple hundred extra bucks a month, and they are in control of the ADU in the back, including all the property management.
Kristi reiterated that each property is case-by-case and there’s no cookie-cutter way to do each one. You just have to look at each case and ask how it would make sense. In fact, she just bought a house this week to flip and is seeing where she can put an ADU and junior ADU. That’s not even coming into play until January. Now the question is whether to wait or not. If the city is gonna be a stinker and you talk to them early, they could decide not to grandfather you in on purpose. She said in the city of Cerritos, where she used to live, they are strict on a lot of things. She can’t imagine they are any less strict with ADUs or any easier to deal with the juniors coming into play. That may rule that one out.
Aaron said when he called Long Beach, it was right before he taught the property managers. Just for fun, he asked them if they were working on their new ordinance, and she just seemed annoyed. Aaron wondered if four years from now whether they are going to grandfather him in or giving him one of those letters. Anaheim did that with the vacation rentals. They decided they didn’t want them in Anaheim anymore. They gave everybody a timeline where it had to go back to all long term lease or you had to sell it. That works in a good market. But if it’s a down market, that’s painful.
This brought up another good point that you should not just have one exit strategy. Even with the property that she has Airbnb’d for cash flow, the backup plan is always to rent it as a normal rental, which will hopefully always be legally allowed to do. She can also get PIPI covered, so it’s not like she is base buying that only on the Airbnb income. There’s a backup plan that goes with that. We just have to have that in mind because you never know what the cities are going to do next.
Aaron asked Kristi if she has ever had to get political and go to city council members representing where the rent your rentals reside to complain to them about development departments. She said no, although she would speak up if needed. She is a small-time investor, but she knows everybody has a say. If there was something she really felt strongly about, then she would show up and say her bit.
It’s hard. Here in Riverside, we have four new council members, so the majority is brand new. They’re all, for the most part, under 45. They’re young. The homeless conversation is really big out here. But you just never know what everybody’s response will be to accessory dwelling units. But that’s why the state had to react as the NIMBYs. It doesn’t matter how liberal your town is. It’s the people with the squeakiest wheels that complain to the council members, and they say no to projects. This was the state’s way of saying enough.
Aaron asked Kristi if moving forward she was still going to do ADUs on flips or holds or if she is taking a wait and see approach in 2020?
She said one strategy she really likes is a part of her plan to help her construction guys get into homeownership, which they never seem to be able to save up any money to do is to do. To do this, she wants to do these wraps. So if she can buy a house and get an ADU or Junior ADU built, these guys can live in one unit and rent out the other two. She can make a cash flow off the spread, and they can be getting into homeownership. They would split the equity down the road. She doesn’t have to necessarily be a property owner and deal with toilets and all that. That’s their job, which they know how to do. She would collect the cash flow, and she knows how to structure it so that it does cash flow, and she can get these ADUs built for extra income for them. This could be a win-win all the way around.
Aaron asked her if she pursues Subject 2 deals at all. She said she would take them down with cash or private money and then build the ADUs and refinance. She can get normal loans, principal and interest 30-year fixed type thing. She would keep the loan in place and just do a wrap. She would pay the lender, then the renters pay her. It’s an all-inclusive deed of trust. She wants to keep flipping and then picking and choosing the ones that make sense to keep as rentals. She can’t wait to get two more units on a single family’s own lot and be able to give an update next year.
Aaron said he can see why people like Kristi. She is already talking about being concerned that her contractors aren’t into homeownership, and that’s clearly important for her. They probably realize that, which is neat. She did it with one this year, and it’s just going amazing. She learned that at a Gary Johnson seminar that she attended this past year. She learned a lot here that she wished she had known earlier. It’s just somebody giving you an idea and then that’s all it takes. She asked herself why she should stop at one and instead do it for whoever wants the opportunity.
Aaron asked what the response was from the person she brought this up to, which she said they were both trying to find the flaw in it. They realized it was a win-win all the way around He’s literally in a property that’s worth $750,000 for no money down. She gets a cashflow every month, and he maintains a property. Tt the end of 30 years, they will have a very nice asset between us. He’s thrilled, and he’s actually living there for free because he gets enough rent off the main house to cover what he has to pay her. Even if he wants another rental property, they could structure it the same way. Now that he doesn’t have to live in one, they could do this for any other properties. You’d have to find certain areas that would make sense; but now that they’re allowing two more units, essentially it’s going to make sense somewhere.
Aaron asked if she is looking at opportunity zones as a layered approach to this at all? She said she did look into it. You need the capital coming from an existing project to dump into that. She is very interested in that in some way, she just doesn’t know how yet. She doesn’t know how that’s going to play out for her personally. Aaron said he doesn’t like being tied to anybody for 10 years. He can go by himself, but creating a fund with other people doesn’t sound exciting to him. it could be possible as an alternative to 1031 exchanging, but he is still marinating on it a little bit.
Kristi said she already had some consultation from a tax attorney last week. They’re just trying to figure out if it makes sense to just take the nice five properties she has right now ADUs and just chunk those down and get those paid off and have that nice cash flow coming in that she can live off. The other question is if she should be looking at the opportunity zones where, 10 years down the road, she can sell those assets with a lot of tax benefits. There are so many things to consider.
It’s a bit of a moving target. Aaron has been having a lot more estate planning conversations with people of late, and he can throw out some general ideas, but you’re really going to have to sit down with them and walk through it because it depends on where people are at in their career. This is where Aaron and Kristi are on a similar page. They just want passive and less exciting. Kristi wants boring stuff that she don’t want to be worried about in the middle of the night. She wants it performing, and ultimately you still have to manage your stuff. You can’t just ignore it. But she wants stuff that is less labor-intensive.
Aaron ended by asking Kristi if she had to start all the way over and had zero money, where would she start? She said she wouldn’t change anything because when she came here, it was in 2007. This was right when everything was crashing, and she didn’t know what was going on. Come 2008, she was shocked that everything was suddenly 40 percent. In hindsight, it would have been nice to know a little bit more going into that market when she started because she would have just been ahead of the game by now. She would have bought had held more. With some of the houses she flipped, she bought one for $180 and flipped it for $300, and they’re worth around $700 now. She tracks some of these that end up getting resold.
Aaron asked if she still plans on staying in California and sees opportunity here. She said until she can decide on something better, she does see opportunity here. The Norris Group is stil lending out here and have not sold all their assets. He would never be able to replace some of the assets for what he bought them. At the end of the day, every market has its opportunities. The strategies might shift, but everybody will find a way.
Aaron ended by asking her the best way to get in contact with her. She said Facebook is a place that she posts super interesting stuff that she comes across in her business, so you can connect with her there. Her email is email@example.com
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.