Sharing my ADU BBRRR Investment results

19 Replies | Los Angeles County, California

Finding a profitable rental property in So Cal can be hard these days. With prices rising and people bidding 20-50k over asking, one could never cover their mortgage and expenses with a single rental property. Luckily in California we have the option to build an ADU (accessory dwelling unit). Since the state mandated the ADU laws in 2020 and made them way more flexible and feasible for investors, I've been on a mission to successfully complete a BBRRR by building an ADU. Buy, Build an ADU, Rent all units, Refi, Repeat. I bought an investment house last year from the MLS and I just finished my cash out refinance today. Here are my numbers…

Purchased: $600,000

Home type: SFH, 3b2b with detached garage and already rehabbed by a flipper

Built an ADU and JADU: $165,000 (740 sf ADU and 400sf JADU)

All in=$765,000

ARV=$908,000

CO refi @80% LTV= $720,000

$$ Left in the investment= $45,000

Rents:

Front unit=$2500

ADU=$2000

JADU=$1400

Total=$5900

Expenses:

mortgage =$3650 MIPI

Vacancy (5%)=$295

Maintenance (3%)=$177

Cap Ex (2%)=$118

Total expenses=$4190

Cash Flow=$1710/mo

NOI=$20,520

COC ROI= 45%

Approx numbers but you get the picture. Unfortunately I couldn’t pull out all my investment but having a 45% ROI that’s CAsh flowing $1710/mo is not too bad.

For those of you thinking about buying an investment property in so cal, building an ADU is the way to go!

In every jurisdiction in CA that I am aware of, the JADU can only be rented if the property is owner occupied.  This would reduce the rent by $1400 to a total $4500.  Rent to value ratio or $4500/$908000 = 0.5%.   this ratio typically results in large negative cash flow.

So why the cash flow discrepancy? $1.4k is the reflection of renting a unit that likely cannot legally be rented. $472 maintenance/cap ex is too low on 3 units in small unit count properties. No pm allocation implies you are not getting paid for your effort. There should be a misc charge estimate for items like accountant/CPA, LLC ($800)), umbrella policy, various office costs (pc, quick books, printer/scanner/copier/fax), etc. some of these costs get spread across multiple properties.

On the positive trapping only $45k in a property worth $908k will magnify all return.  For example a 10% appreciation will result in appreciation return of 200%.  The same type of benefit applies to cash flow. 

Good luck


Originally posted by @Dan Heuschele:

In every jurisdiction in CA that I am aware of, the JADU can only be rented if the property is owner occupied.  This would reduce the rent by $1400 to a total $4500.  Rent to value ratio or $4500/$908000 = 0.5%.   this ratio typically results in large negative cash flow.

So why the cash flow discrepancy? $1.4k is the reflection of renting a unit that likely cannot legally be rented. $472 maintenance/cap ex is too low on 3 units in small unit count properties. No pm allocation implies you are not getting paid for your effort. There should be a misc charge estimate for items like accountant/CPA, LLC ($800)), umbrella policy, various office costs (pc, quick books, printer/scanner/copier/fax), etc. some of these costs get spread across multiple properties.

On the positive trapping only $45k in a property worth $908k will magnify all return.  For example a 10% appreciation will result in appreciation return of 200%.  The same type of benefit applies to cash flow. 

Good luck


Thanks for the comment buddy. Fortunately we were able to rent out our JADU and received those rents. I kept my Maint cost low due it being a new construction with less concerns. I am managing it myself but might offload it to a PM company sometime in the future. These numbers are rough but pretty close to what we’re seeing at the moment. Thanks! 

The version of the statute up here in NorCal requires you to live on the property in order to legally rent out the other two units.  Different down there?

@Matt Devincenzo

Here’s what I did…

I built a ground up ADU in the back yard plus I extended my existing house 450 SF. The JADU ordinance states that you can only convert an existing part of your dwelling into a jadu, so the extension I'm building will be converted into an jadu later. I'm not sure if my city will allow me to rent it out if I'm not owner occupying.

Regardless, I’ve rented my front unit 3b2b and the large new extension as a master bed with a separate entrance and a private backyard as it is. I had plans to convert it to an jadu but I might not follow through with that if I have to owner occupy. I rather just continue renting it as a separate room. Either way my numbers are what I’m actually getting for rent. Maybe I can fine tune my expenses a little more but this strategy is working great for me.

I currently have a large master bedroom that I’m renting that I have plans to

Thanks Cesar, that makes sense. A 'lock-off' room mate style JADU so it doesn't technically trigger the actual JADU provisions. It's a creative solution to the issue, but still complies with the rules which is great.

Originally posted by @Cesar Perini :

@Matt Devincenzo

Here’s what I did…

I built a ground up ADU in the back yard plus I extended my existing house 450 SF. The JADU ordinance states that you can only convert an existing part of your dwelling into a jadu, so the extension I'm building will be converted into an jadu later. I'm not sure if my city will allow me to rent it out if I'm not owner occupying.

Regardless, I’ve rented my front unit 3b2b and the large new extension as a master bed with a separate entrance and a private backyard as it is. I had plans to convert it to an jadu but I might not follow through with that if I have to owner occupy. I rather just continue renting it as a separate room. Either way my numbers are what I’m actually getting for rent. Maybe I can fine tune my expenses a little more but this strategy is working great for me.

I currently have a large master bedroom that I’m renting that I have plans to

Yet it appears you took offense at my post about the JADU not being rentable as a JADU without OO.

It is up to you if you do not want to be paid to PM, but it is work and therefore reduces the passivity of the investment.  PM should be included in pro forma because either you pay someone to PM or you deserve to be compensated to do the PM duties.  As you scale, it gets more difficult to self manage all units.

You indicate the expenses are maintenance/cap ex expenses are accurate to what you are experiencing.  I believe that because the major cap ex is years down the road.  The issue is that if you do not level cost the cap ex items then you do not have a true indicator of the cash flow.  So using actuals for the pro forma will look good in the initial years and horrendous when the large cap ex items start to hit end of life.  I will state that most pro forma I see under estimate the maintenance/cap ex.  When you ask how the investor came up with the estimate they usually used no process, metrics, etc.  They literally could have used a random number generator for as much effort at they put into deriving the cap ex number. 

A pro forma is only as good as the numbers used in the pro forma.  Any number that is basically a guess decreases the reliability of the pro forma.  I want my pro forma to be accurate and error on the side of conservative.  My usual maintenance/cap ex starts at $250/month for a small 2 BR attached unit and goes up from there.  The cap ex numbers were derived from a spreadsheet that I had on each property until I hit maybe dozen or so units that had expected cost divided by expected life span of each cap ex item.  BTW a kitchen in my market has cap ex of starting at $40/month and a hot water heater of $10/month.  This level of effort at calculating the cap ex gives me good confidence of my pro forma.  Your less than $300/month maintenance/cap ex is likely less than I would use for the primary unit (depends on many factors).  My maintenance/cap ex for the 3 units would likely be at least 2.5 times what you have used.

Good luck

Good luck

@Cesar Perini thanks for sharing! This is awesome, I'm in Huntington Beach ca and considered a similar strategy one day. I think this post was less about details and more about the proof of concept! Did you have a hard time getting an appraiser to value the ADU? That's something I've been hesitant on! Thanks so much.

@Jenna Stark your absolutely right and thank you! Just sharing proof of concept. Your question about ADU appraisals is a great one. That's a code I've been trying to crack and my approach is this…

1. always buy in a area where you can find ADU comps. Even if the comp is in a city near by, appraisers will use it. As long as the city is similar. A couple local examples… Norwalk and bellflower have great comps on ADUs, but most ppl are keeping their homes/ADUs VS selling due to the great CF.

2. Deal with a banker that has a great relationship with their appraisers. I would even ask if that appraiser is familiar with ADUs.

3. Do your our research/gather your own comps. I track every ADU sold in the last 2 years in the areas I invest (it's not many), but it helps. I sent my appraiser an email of all the ADU comps he can use and I handed him a print out of all my comps when we met. This helped a lot.

Hope this helps. If your local we should meet up if your considering investing in ADUs.

@Cesar Perini

Hello,

This is what we are similarly doing.

We are in huntington beach.

Current house we live in is 3bed2.5bath and have an 1bed 1bath ADU in the back.

We have another SFR rental here in HB that im in the process of adding an adu as well.

Do you have contractors you can recommend?

Thanks

@Cesar Perini

I know people will nitpick the numbers a bit , but as you said it’s hard to find a cash flowing property in Southern California, but you found a way to do it. Not to mention the small amount of money you end up in the deal.

That is the big takeaway here that others can learn from and possibly use a similar strategy.

This is a good opportunity for adding value in High cost areas.

Thanks for sharing.

Great work @Cesar Perini Having 3 units instead of 1 does great wonders for Cash Flow in CA! I'm seeing the same thing in my market. Have found some creative ways to put 2 ADUs on properties and love what you have done. 

@Pavan Sandhu thank you! I'm actually working on some new plans for my next ADU build and the city of Fullerton has allowed me to build two full size ADUs in my backyard! Obviously you always want to consult with your local planning department but different cities have different ADU ordinances. So much opportunity out there just need to do some homework and take action. 🤙thanks for your comment

@Cesar Perini thanks for sharing man. I am in the design and plan stage to do the same thing.  

8500 sq ft corner lot 


Remodeled 3/2 main house- currently OO

converting 1 car tandem garage- 1/1 JADU separate enterance 

New 3/2 1100 sq ft ADU in the back. Separate entrance.

What has me nervous, we are currently OO. But once we get the ADU and JADu rented, we plan to rent the main house and move.

What issue will I run into if I continue to rent JADU? How are you working around the OO requirement? Thanks




Thanks for sharing man and that’s awesome! 

I built a 400sf extension to my front house with a separate entrance that can easily be transformed into a JADU later. But because of the OO mandate for building a JADU and knowing that calling it an official JADU won't add anymore value to my structure I just kept the extension as is. I got the value I wanted for my project and still rented the extension separately as a room with a separate entrance. Hope this makes sense.