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Jerry Akop
  • Rental Property Investor
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ADU construction help

Jerry Akop
  • Rental Property Investor
Posted Jan 14 2022, 10:47

I have the opportunity to build am Adu in sun valley, ca on my 4 unit property. I have a 4 car garage in the back with alley access. Plans to do do a 2 story above garage 1080sqf 3 bedroom 2 bath unit.

Projected rent Aprox 3500-3800 a month

1. Is it worth it? Aprox cost around 300k ish

2. I dont want to hire a contractor. I have all the contacts. Can i get my own insurence to cover me during construction. Workers comp and all other aspects.

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Dan Heuschele
  • Investor
  • Poway, CA
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Dan Heuschele
  • Investor
  • Poway, CA
Replied Jan 14 2022, 13:01

>is it worth it.

Fannie/Freddie financing excludes mutifamily with ADU. If you cannot get F/F financing for a refinance or a buyer cannot get it on your exit, this needs to be accounted for. Typically a RE that cannot get F/F financing sells at a significant discount.

Next concern is appraisals. Appraisals for RE with ADU are all over the place. There are investors getting pathetically low appraisals and investors getting surprisingly high appraisals. The key here is make sure you there are comps that can justify a decent appraisal for your costs and effort.

ADU financing is often either secured debt (HELOC, margin loan, some other form of equity loan) or at worse than F/F terms.

If you just look at the cash flow, it is over 1% of cost which in most CA is great. However, if the addition of the ADU results in a value less than current value and cost of the ADU addition, then the initial cash flow is recovery lost value.

Basically educate yourself on your financing options/restrictions and the likely value being added by the ADU (likely adding value less than the ADU costs). Once you know these consequences, you can determine if the cash flow is sufficient to overcome these negatives.

In general, I can typically find investments that project a far better return than adding an ADU.

Good luck

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Gil Vaisman
  • Contractor
  • Los Angeles, CA
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Gil Vaisman
  • Contractor
  • Los Angeles, CA
Replied Jan 21 2022, 19:47

1. I would do it. I don't know where you can get 3500+/month in LA county for a 300k investment. That's an amazing ROI. Personally I'm in escrow on a property in the same market (got the last of the 3% mortgages out there) and hoping I can be cash flow neutral. I would switch places in a heartbeat.

2. If you can manage the construction as an owner builder, go for it! PM me if you want to discuss the worker's comp and insurance. I have my opinions on the matter, that I'd be happy to express privately.