Adding an ADU to a West LA 4 plex

[Alfred Moon]

Researching adding an ADU to a 4 plex in West LA and have a few questions about the process:

1. Anyone have a recommendation on ADU contractors who can take care of feasibility/permitting, design, construction, etc?

2. Was planning on financing with an existing HELOC, but the HELOC is on my primary residence. For legal purposes, should I get a HELOC on the investment property itself? Spoke to a few lenders already and it is possible, but with a higher rate. I'd like to know if it's necessary or strongly recommended.

3. When we first purchased the property two years ago, we had the tenants sign annual leases which stated they'd have garage parking. The ADU will replace the garage but the leases have expired and the tenants are all month-to-month. I'm assuming we will need to offer some sort of concession to the tenants? Or not?

Thanks in advance!

[Shaun Weekes]

Quote from @Alfred Moon:

Researching adding an ADU to a 4 plex in West LA and have a few questions about the process:

1. Anyone have a recommendation on ADU contractors who can take care of feasibility/permitting, design, construction, etc?

2. Was planning on financing with an existing HELOC, but the HELOC is on my primary residence. For legal purposes, should I get a HELOC on the investment property itself? Spoke to a few lenders already and it is possible, but with a higher rate. I'd like to know if it's necessary or strongly recommended.

3. When we first purchased the property two years ago, we had the tenants sign annual leases which stated they'd have garage parking. The ADU will replace the garage but the leases have expired and the tenants are all month-to-month. I'm assuming we will need to offer some sort of concession to the tenants? Or not?

Thanks in advance!

If you turn your 4 unit into a 4 unit with an ADU, this will disqualify you from Fannie and Freddie financing. So, if you ever want to sell or refinance, it will make it more difficult for the buyer and yourself to finance. Commercial loans typically require more money down and will be for investment only. You'll have to use commercial financing, dcsr or private money. It can be done but just make sure you understand what this will do to your property lending wise, moving forward. The potential buyer pool will shrink. However, if the ADU can make a significant amount of income, the idea needs to be considered. If the numbers work and it's a long term hold it might make a lot of sense. It's just good to know all potential scenarios and options.

Take care and I hope this helps.

[Alfred Moon]

Thanks for your input. That's an important issue that I totally overlooked! We have a residential loan since it's 4 unit only in the low 2s. Need to be aware what an ADU addition means when it comes time to refinance or sell. Thanks again!

[Dan H.]

as was mentioned, the more than 4 units would change to commercial financing. Commercial loans are valued on NOI and cap rates and could result in the property being worth significantly less than as a residential property based on comps. Also commercial loans have worse terms (shorter term, higher rate, often lower LTV, etc) than residential Loans.

As you are likely aware, your units are rent controlled. AB1482 prohibits substantial change to lease terms. Your area can have more stringent rent control requirements. However, AB1482 has a rehab/upgrade criteria. I suspect adding an ADU may qualify. IMO this is a gray area because tenants could occupy units for this upgrade, but it is substantially changing the lease terms. The AB1482 clause for no fault lease termination for rehabs/upgrades is 1 month rent. I would suspect this is worse case scenario.

I would start by negotiating a rent reduction for loss of garage.  If they are unwilling to negotiate a reduced rent for loss of their garage, I would resort to the no-fault payment.  

Good luck

[Rick Albert]

A couple of things:

1. Yes, you would have to lower your rent for the other units since they no longer have a garage. 

2. If you convert it into an ADU, where does everyone park? This can hurt you in the long run when looking for tenants (unless you price accordingly).

3. How are your tenants? Do you think there will be liability with doing construction while they are living there?

4. Once the HELOC is issued, you can use it as you will (read loan docs for restrictions). People use HELOCs from their primary residences to buy investment properties all the time, even though lenders are very clear you aren't allowed to do it.

5. On a practical basis, I've never heard of a lender pushing back because of how you used it once the loan funds. It is more of a protection in place should you stop paying. Of course anything is possible.

6. I'm not a loan officer, but I would double check on the financing end. Even though on a practical basis it is five units, lenders tend to go off of the zoning, in which case this would be four units. Otherwise lenders would consider SFRs with ADUs as duplexes, which they don't.

[Paul Dashevsky]

@Alfred Moon I can recommend a good ADU contractor in West LA...if you want to DM me.

[Shaun Weekes]

Quote from @Alfred Moon:

Researching adding an ADU to a 4 plex in West LA and have a few questions about the process:

1. Anyone have a recommendation on ADU contractors who can take care of feasibility/permitting, design, construction, etc?

2. Was planning on financing with an existing HELOC, but the HELOC is on my primary residence. For legal purposes, should I get a HELOC on the investment property itself? Spoke to a few lenders already and it is possible, but with a higher rate. I'd like to know if it's necessary or strongly recommended.

3. When we first purchased the property two years ago, we had the tenants sign annual leases which stated they'd have garage parking. The ADU will replace the garage but the leases have expired and the tenants are all month-to-month. I'm assuming we will need to offer some sort of concession to the tenants? Or not?

Thanks in advance!

I wanted to make sure everyone had this information from the source.  Also, Fannie doesn't allow this at all and Freddie does for 1, 2 and 3 units but not on 4 units properties.

https://guide.freddiemac.com/a...

I hope this helps and have a good one

[Alex Otto]

@Alfred Moon Lots of great advice in this thread, so I'll just add that our company designs, permits, and construction manages ADUs across LA -- we've done about 40 in the last 2-3 years at this point. We'd be happy to take a look at your property and give you a better sense of what you can do on it, how you might maintain parking spots (per @Rick Albert's comment), etc.

Send me a DM and I can give you our contact information, or you can look us up yourself -- we're Otto ADU.

[Roberto Ramirez]

Hello Alfred, I'm an L.A. architect and partner with local contractors on ADU's. I'd be glad to help, feel free to reach out with any questions.