Worth building an ADU in California in this market?
Member since 2025 · 1 post · 0 votes
Hello, new home owner here! Just purchased my first house w my wife a little over a year ago and we bought it with the intentions of building an ADU in the backyard. It's spacious and a corner lot as well for easy access. However, because we just purchased the house there's not much equity built yet. My county offers free ADU pre-approved plans and a rebate for building an ADU so there are some incentives but I might need to take out a construction loan and idk if the ROÍ would make sense right now. Maybe it's the fear of being new to this. Would appreciate your advice or feedback! Thank you, Ilse
Hello, new home owner here! Just purchased my first house w my wife a little over a year ago and we bought it with the intentions of building an ADU in the backyard. It's spacious and a corner lot as well for easy access. However, because we just purchased the house there's not much equity built yet. My county offers free ADU pre-approved plans and a rebate for building an ADU so there are some incentives but I might need to take out a construction loan and idk if the ROÍ would make sense right now. Maybe it's the fear of being new to this. Would appreciate your advice or feedback! Thank you, Ilse
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:
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. In my San Diego market per NAR (Nov 2021 - but last data I am aware of) the average home with ADU sold for less than $20k more than the average home without an 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 existing residential 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. In virtually all southern CA cities, the cost added is significantly 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....
good luck
Hey Ilse, congrats on the new home! Sounds like you've got a perfect spot for an ADU, corner lot and spacious backyard is ideal.
I work with a lot of homeowners in CA on ADU loans, and it's pretty common to worry about equity and ROI, especially if you're new to homeownership. Even if you don't have much built-up equity yet, there are some construction loan options that can help cover the costs of building an ADU without needing a huge down payment. Some lenders even offer programs tailored specifically for ADUs with competitive rates and flexible terms.
The incentives your county offers, pre-approved plans and rebates, can definitely help offset costs and improve ROI, so it's worth factoring those in. The ROI on an ADU often looks really solid over time, especially if you plan to rent it out, but it does depend on your local rental market.
Hello, new home owner here! Just purchased my first house w my wife a little over a year ago and we bought it with the intentions of building an ADU in the backyard. It's spacious and a corner lot as well for easy access. However, because we just purchased the house there's not much equity built yet. My county offers free ADU pre-approved plans and a rebate for building an ADU so there are some incentives but I might need to take out a construction loan and idk if the ROÍ would make sense right now. Maybe it's the fear of being new to this. Would appreciate your advice or feedback! Thank you, Ilse
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:
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. In my San Diego market per NAR (Nov 2021 - but last data I am aware of) the average home with ADU sold for less than $20k more than the average home without an 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 existing residential 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. In virtually all southern CA cities, the cost added is significantly 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....
good luck
@Dan H. As usual, a helpful take & valid list of considerations. You may be interested in some fresh data we came across.
A 2025 study by the Federal Housing Finance Agency (FHFA) found that properties with ADUs appreciated 22% more than properties without them. Covering data from 2013 to 2023, the analysis (Trends in Median Appraised Value for Properties With Accessory Dwelling Units in California) offers one of the first long-term looks at how ADUs influence property values over time.
According to the same FHFA study, about 3% of appraisals included an ADU – up 100% from just 7 years earlier. New appraisal guidelines are also making it possible for appraisers to include ADUs as part of their assessment of a property, which should start leading to more consistent valuations for ADUs. That said, resale performance of course depends on the type of ADU, location on the lot, parking, privacy, and myriad other factors.
@Dan H. As usual, a helpful take & valid list of considerations. You may be interested in some fresh data we came across.
A 2025 study by the Federal Housing Finance Agency (FHFA) found that properties with ADUs appreciated 22% more than properties without them. Covering data from 2013 to 2023, the analysis (Trends in Median Appraised Value for Properties With Accessory Dwelling Units in California) offers one of the first long-term looks at how ADUs influence property values over time.
According to the same FHFA study, about 3% of appraisals included an ADU – up 100% from just 7 years earlier. New appraisal guidelines are also making it possible for appraisers to include ADUs as part of their assessment of a property, which should start leading to more consistent valuations for ADUs. That said, resale performance of course depends on the type of ADU, location on the lot, parking, privacy, and myriad other factors.
More analysis here: Drawbacks of ADUs? Concerns & Answers
I recognize the NAR data is slightly old, but it clearly shows most communities the ADUs the properties do not appreciate more with an ADU.
I am not a fed study skeptic, but if it comes down to believing data from a government that is pushing ADUs or believing the NAR data, I know which I would choose.
in addition, search BP for comments regarding ADU appraisals. You will see that a vast majority state the ADUs appraiser below hands off costs to add the ADU. These comments come from home owners that chose to add the ADU, lenders that deal with the appraisals, and in a few cases from appraisers speaking in general terms.
Even if the ADU was valued at close to the hands off construction costs (which in most areas they are not), there is still the other issues. building a single small unit is the most expensive residential development. In ca if the main home is over 15 years old, it now is rent controlled (I have every confidence this was not the intent of the 15 years exclusion but it is reality).
It comes down to is adding an ADU your best investment opportunity? I doubt it is for most investors that are willing to educate themselves on the various opportunities. I look at ADU underwriting slightly regularly (unfortunately some when the ADU is already built). It is a lot of work for what often has no return for years.
If you desire an ADU for friends and family, that is great as you are not adding it primarily as an investment. If you are adding it primarily as an investment make sure to understand the value that will be added by the ADU, the effort involved, the full costs including its land use and detraction from existing unit (rent controlled being one detraction)
Also if you add an ADU, I would go 100% separate utilities. The lot split options are constantly increasing. I believe by the end of this decade there may be no zoning restricting to less than 4 units in CA and there will be more lot split options. Note you can add 3 units to a SFH for much less than 3x the cost of adding one ADU. Also note if zoning restricting units to less than 4 units is removed in CA, it is likely the conventional loan limiting to a single ADU likely will be eliminated.
Good luck