What is your thought on ADUs? Or efficiencies?

Question

Hello everyone, what is your thought on ADUs? or efficiencies? I was thinking of turning my garage into an ADU for variation of a house hack but Im uncertain of it since its kind of a newer area for me. Has anyone done it or know someone that has? Is it profitable? I was thinking of either doing MTR or STR with.

Thank you.

Carlos Ptriawan · Answer

To be extremely honest, I would say the approach of gov. to allow more ADU is going to the WRONG place.Rebuilding or converting garage to ADU is actually an easy job, this can be done in 45 days with cost lower than 40k. But there're just so many red tag / permit and also difficult part to obtain finance, not to mention the third party that built ADU is also creating extravagant price level where people scared to invest into ADU.Most people will not build ADU if the cost is prohibitely 300k. But they may build for 40-60k and for conversion it's possible.The ADU itself can be rented out only for $1500-$2000/mo, this is like every Joe budget's expense on renting. So while the idea is good, in execution the gov. does not do a good job.They should make it ADU like McDonald business if they want to adopt ADU.1. create pre-approved plan owned by the city2. Say this can be built for $50-$100k, select our contractor or your contractor.3. you can use your own builder, city builder or owners builder4. guaranteed permit by seven days.

Just saying....

Carlos Ptriawan · Answer

I am into ADU, but my strategy is bit different than the others. I sell my primary to buy another primary that has ADU so I could get the cashflow asap after a bit of repair. I am still hunting for house with (broken) ADU. This strategy has been proven to be extremely successful.Like you said there're too many inefficiences if I have to build ADU, converting garage is okay, technically it's only 30-40K job.

Alecia Loveless · Answer

@Elionay Imbert In searching for a primary residence I’m only interested in a property with some sort of ADU for additional income. My last property had a carriage house and my current residence is a duplex.

I’ve got a property with a garage I’m thinking of converting into an ADU but my contractor said it would be pricey because we will have to raise the roof on it and add 3 dormers. The current estimate is $70K and for that amount I can be into a 3-6 unit building. I’m thinking of tackling it step by step and starting with the roof project when I have the money come springtime. Then I’ll just go piece by piece as money comes available instead of shelling out $70,000 all at once.

Travis Biziorek · Answer

We're currently in the middle of the ADU process here on the Central Coast.

We're doing it a big different though. Our entire garage is coming down and the footprint is being expanded to 1,030 sq ft.

We'll keep a garage but build a mudroom and 1/1 behind it (for guests) and a 2/1 unit above the garage as the rental unit.

It's definitely a process doing it this way but we figured it we were going to do it we were GOING to do it. We also wanted to still have a garage space.

Dan H. · Answer

In CA adding an ADU can be one of the worse RE investments because they typically appraise with a value less than the cost to add the ADU.  @Carlos Ptriawan is correct that it is virtually always better to purchase an existing ADU than add one.

Here are some reasons that adding an ADU is often a non-optimal RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU.  Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position.  This negative position can consume years of cash flow to recover.  Make sure you know the value the ADU will add to the property before building the ADU.  2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc).  Leverage magnifies return.  3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR.  However if I do a BRRRR I can achieve infinite return by extracting all of my investment.  Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).4) Adding an ADU is a slow process.  It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU.  This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.  5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space. 6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties.  This may affect value or time required to sell.7) Adding an ADU does not make the property a duplex.  For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units.  Duplex can always add additional units via the ADU laws.  8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU.  Why add an ADU if it can be purchased cheaper?

Good luck

Elionay Imbert · Answer

Thank you very much Jason for the information. I will definitely take note of this.

Justin Brin · Answer

Hi @Elionay Imbert, Here in Los Angeles they are very popular. Some will rent the main house to one party and the ADU to a second party and get x1.5 or x2 the rent. I never did it but I know is very popular here. This way you can increase your cashflow and make sure you are cashflow positive. For areas with high demand if you make a nice ADU you can easily rent the main house in the ADU.

Jason Wray · Answer

There are mostly pro's when converting a garage into a carriage home or mother in law suit.  Usually not referred to as an ADU but the term gets used a lot now a days.  Usually the ADU is an added independent dwelling not attached to the primary property.  If you are in an area where that conversion will add value it will help with sqft/GLA and equity.

I have seen situations where the garage was converted but the appraiser did a negative gross adjustment because all of the other comparable sales had a 1-2 car garage.  The value the home owner thought they were going to get was actually a lot less.

Good news is both Fannie Mae and FHA will now use ADU income.

What is your thought on ADUs? Or efficiencies?

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