ADU's Coming to Reno, NV?

Question

The City of Reno is in the final stages of the Accessory Dwelling Unit (ADU) ordinance. Staff drafted an ordinance early this year and gathered feedback from the public through Neighborhood Advisory Board meetings (NAB's), 3 virtual stakeholder meetings, Planning Commission, and City Council.

Additionally, Assembly Bill 396 (AB 396) was signed into law. AB396 requires jurisdictions to pass an ordinance to allow ADU's on residential property.

If a local ordinance compliant with the provisions of AB396 is not adopted by July 1st, 2026, ADU's will be authorized on any parcel zoned for single-family residential use.

Key Changes that have been incorporated include:

- ADU height is limited to smaller than the primary structure.

- ADU's are only allowed on parcels with a minimum lot size of 5,000 square feet.

- ADU's must have one parking space that is located ON the parcel (not on the street).

- ADU's are prohibited from being rented out less than 28 consecutive days.

- Additional design standards have been added for both attached and detached ADU's.

This ordinance will be brought to the Planning Commission on August 6th for a formal recommendation to City Council. The ordinance will then go to the City Council for a final decision.

Final dates for the City Council meetings are anticipated in the August/September timeframe.

What're your thoughts? How have ADU's impacted your area, if allowed?

Dan H. · Answer

San Diego city went crazy into ADUs with the bonus density ADU program that allowed as many ADUs to be added as desired provided one less than half were deed restricted as lower income units.   For example you could add 17 ADU by deed restricting 8 to lower income housing.  There was big backlash and last month the city modified the rules to more reasonable.  You can internet search if you want more details.

However, the addition of single ADUs in San Diego area in SFH zoned areas is and has been getting crazy low valuations.  NAR Data from Nov 2021 shows homes with ADUs in San Diego only sold for $13k on average more than homes without ADUs.   This implies a huge initial negative equity position when adding an ADU.  Like most current residential RE holds, cash flow is initially modest or negative, so this large initial negative equity position will take many years to recover.

Here is a list of why adding a single ADU in single family zoned areas in my CA market is typically a poor RE investment (some of these will not apply in Reno, but is does appear Reno is NOT allowing STR of ADUs):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 by the ADU (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?9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.This study released by NAR is slightly dated (from Nov 2021) but has a table of property values with an ADU and value of properties without an ADU for many of the larger cities (look at the table at the bottom) .   If you subtract the value of homes without an ADU from the value with an ADU you obtain an average valuation of ADUs for your city.  Compare this with the cost to add the ADU subtracting off any loss of garage for garage conversions and you have the average value added by ADUs.   In my San Diego market, an ADU added $13k of value on average, but a hands off, quality garage conversion is ~$150k.   Ground up addition is obviously more.  In addition before the summer of 2025 there was not a cap on number of ADUs that could be added.   I question if the multiple ADU additions were eliminated if San Diego would have lost value when adding an ADU.   I wish the study indicated what percent of the ADUs in each city was a garage or other existing space conversion.   I also wish it noted how many ADUs were added to the property.  In virtually all southern CA cities, the cost added is less than hands off grounds up ADU addition.  In most of the So Cal cities the average cost added is below the cost of a nice garage conversion.  Note in some markets in the US including some in So Cal (Torrance), adding an ADU lowers the value of the property (property was worth more prior to the ADU addition).https://www.nar.realtor/magazine/real-estate-news/study-adus-can-add-35-to-home-s-value.

Bradley Buxton · Answer

The ADUs in Reno, NV also include building out a walkout basement, basement, home addition, not just a garage conversion or separate structure. There are many good homes that have a value-add opportunity that can be converted less than the cost of building a separate structure. We look for these opportunities all the time and analyze the cash flow with the cap-ex it takes to convert a space.

Jake Andronico · Answer

@Dan H.

Great insights Dan, thank you very much!

I'm curious to see how it plays out. There is 0 rent control here (and I hope that continues).

Development is the most difficult way to do RE (in my opinion), and I think a lot of people are going to get caught in lengthy timelines, hurdles, and unexpected costs.

But, at least from existing inventory, 2 SFR's on 1 APN definitely adds value. Only time will tell!