Better to Buy with an Adu Built or to Build
I've recently been working with a lot of clients from the BP community here in LA and everyone wants to buy a home with an adu or the potential to have an adu. So it's made me think a lot about the benefits of buying one done already and buying one with the potential of adding one. For example, would it be better to buy one with an ADU done and ready to go for $900k or buy a house for $800k and convert the garage for $60-80k.
My personal conclusion is that it’s better to buy with one already done. Here are some of the benefits I see:
1. At $900k, 20% down you are paying $180k (about $195k after closing costs) cash out of pocket. At $800k, you are at $160k (about $175k) cash out of pocket. But still need another $60-$80k cash to build the ADU. So $195k cash out of pocket vs $235k-$255k cash out of pocket.
2. It will take about a year to go through planning, permitting and building and if built already you can rent from Day 1.
Please let me know your thoughts.
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Real Estate Agent California (#02166235)
- The David Greene Team
- 310-720-1057
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Hi @Robert Reynolds! This is a great question that I get alot out here in Los Angeles county. Typically, it all depends on the clients needs and use of the ADU(s). Here are a few pro's and con's about purchasing one with or building it yourself...
1. No headache of hiring a contractor, spending on expensive material, and waiting anywhere from 4 months to a year for the build to be done. Since cost of material and labor went up you are looking at anywhere on average of $200-$300/sqft of ground up construction costs.
2. Typically depending on how you acquire the property, alot of lenders will not include the ADU unit as part of gross rental income when trying to refinance out into a normal loan. So it may become an issue when refinancing out of your build once you are done. ( My bank does accepts ADU units as part of gross rental income when using a DSCR Program)
3. When building, you have more control of the design, layout, materials, and overall use of the ADU.
4. Lastly,If you find big lots and would like to maximize your space, you can build a JADU, ADU, on the property essentially making it a three unit property. (if lot size permits)
PS. SB9/SB10 is a new CA Bill that was recently passed in January of this year. Great option to talk about with your investors!
Hope this helps your clients and let me know if you have any further questions!
Quote from @Robert Reynolds:
I've recently been working with a lot of clients from the BP community here in LA and everyone wants to buy a home with an adu or the potential to have an adu. So it's made me think a lot about the benefits of buying one done already and buying one with the potential of adding one. For example, would it be better to buy one with an ADU done and ready to go for $900k or buy a house for $800k and convert the garage for $60-80k.
My personal conclusion is that it’s better to buy with one already done. Here are some of the benefits I see:
1. At $900k, 20% down you are paying $180k (about $195k after closing costs) cash out of pocket. At $800k, you are at $160k (about $175k) cash out of pocket. But still need another $60-$80k cash to build the ADU. So $195k cash out of pocket vs $235k-$255k cash out of pocket.
2. It will take about a year to go through planning, permitting and building and if built already you can rent from Day 1.Please let me know your thoughts.
I will add the following to your list: 1) Adding an ADU takes effort. 2) slightly related to one of your items but the financing on an ADU construction is typically worse that financing on a property acquisition or it is borrowed on an asset (Heloc, margin loan, etc.) which is limited in use 3) ADUs typically appraise below the hands off cost of the ADU addition. When you purchase a property with the ADU, you are typically getting it cheaper than you can build it.
The primary advantage to adding the ADU is you can get exactly what you desire. It will typically cost you more money and time/effort.
Great question. I think it all comes down to the numbers….expected ROI based on time and personal preference, experience. If the expected rise in monthly NOI and equity is better then build. Buying with the ADU, yes, pay more….If the ROI is still what you're looking for… great. Some people don't want to deal with construction. Other people have the team and see the benefits. I'm currently in process of building one on my property. Costs vary depending on the construction and your team, financing, etc. Huge benefit to building ADU is you don't have to pay for the land. In LA that is a huge benefit. If you can get good rent compared to the build cost and expenses it's a win in my opinion. I guess I don't have a preference it depends on the person, their expectations, their team and preferences.