Build an ADU in the backyard or Buy a SFH in another state

6 Replies

Hi BPers! im just curious of your opinion on which would be a better investment assuming both options would cost about 150K? building a 1 bedroom ADU in my backyard in CA or buying a Single family home in another state. Is there a good way to analyze these two choices?

My personal opinion is that it depends on risk vs return. I've chosen to build ADUs on several of my properties in Los Angeles for the following reasons : 1) I understand the local market, 2) I already own the land, so building an ADU is an incremental cost, 3) owning a property locally makes it easier to manage and I don't have to pay for property management, 4) I'm getting really good rents without a major increase in expenses.

@Kim Leduff Aside from comparing your returns based on estimated numbers which I definitely think you need to do, here are a few reasons why I like the ADU build idea. 1) less risk since its literally in your backyard 2) you'll manage the rental yourself to save on expenses instead of paying for an OOS property manager 3) you're increasing the value of your home by building the ADU 4) after the ADU build you can open up a HELOC and use that to invest 5) not sure where you are in CA, but demand in most parts of the state is high and will likely remain high for the foreseeable future because of desirability

Hey, this is a great question. I'm building 2 ADU's right now in LA. The rental market here is so strong it's hard for other states to compete. Your property tax will only go up based on the percentage of your new build. There is a ton of ways to look at this. Life planning, goals, ect. I could formulate arguments for both though depends on how you are financing the ADU's because its not like you can get a residential loan on building an ADU. So it will some other kind of financing, or cash out of pocket to build. Whereas getting residential loan on a place out of state may just be easier, in some cases.

Out of state, can be great, though cat's out of the bag on Bozeman, MT/Asheville, NC/Burlington, VT charming destination places so you would have to be creative there anyway. The Austin's and the Portland's are just as expensive as CA so ADU would be cheaper. Still early to say if other still even cheap far flung places will really appreciate(Jackson, Michigan for example) and become a thing. I do mainly NV/CA that's my out-of-state specialty. Just to keep it simple.

Although CA law favors tenants over landlords, I'd probably still do the ADU. $150k should get that done. Not sure where you're you're going to buy something decent for $150k anymore, anywhere in the US...and then there's the necessity to hire PMs Etc, which will eat into your profits....

This will/should come down to the numbers and remove any and all emotions from the equation. That said, I am quite positive that it would be difficult to find better numbers investing out of state (as far as total return on investment is concerned) than building an ADU. As others stated, you already own the dirt so your only cost is the construction. CA rents are high and in high demand as their is a huge housing shortage that will not be going away anytime in the foreseeable future.

Aside from the numbers, you then need to consider time (which of course time is also money). How much time it takes you to build a team outside your backyard and the efforts to do so. There is a huge advantage to investing in your backyard - logistics!

As a builder of ADU's in So Cal, I can attest to the numbers and the advantages. As an investor out of state, I can attest to the trials and tribulations of managing those assets and keeping a solid team in place - its not easy.

One of the advantages mentioned by others is the ability to manage yourself. I would like to point out that while one can consider that an advantage as you have that option (and having options is always great), managing rentals is a JOB (not investing and managing yourself requires the time to do so. Any savings you think you get is only your hourly pay for doing said tasks. I have seen investors completely take out management costs in their analysis simply because they stated they were going to self manage. This should never be done. You have to realize that another owner (in the event of your sale) may not want to self manage and management is part of operating expenses. You can't ignore it simply because you self manage, it creates a false NOI (net operating income).