ADU Worth the Investment?
Investor · Los Angeles CA, USA · Member since 2020 · 28 posts · 0 votes
Hey there BP Community,
I'm in the early stages of constructing an ADU and I've just been offered an opportunity for a job in AZ. (I'm currently in CA)
If I continue with the construction of the ADU, will I get the investment back if say I have it for at most 12 months?
Will the resale recoup the investment?
I'm constructing a 1 Bedroom/1 Bath 360 Sq Ft Garage Conversion in San Fernando Valley.
Thanks everyone!
Hey there BP Community,
I'm in the early stages of constructing an ADU and I've just been offered an opportunity for a job in AZ. (I'm currently in CA)
If I continue with the construction of the ADU, will I get the investment back if say I have it for at most 12 months?
Will the resale recoup the investment?
I'm constructing a 1 Bedroom/1 Bath 360 Sq Ft Garage Conversion in San Fernando Valley.
Thanks everyone!
Ray,
The ADU will make sense if you hold the property as a rental, but not if you sell the property in the near term.
ADU's aren't valued as traditional additions because they don't add square footage to the original house. Instead, they're valued as an amenity, like a swimming pool or wooden porch. Most appraisers these days are valuing ADUs at $40K-$50K, which is less than you're paying to build it, I'm sure. So don't expect to recoup your costs in a sale.
However, if you keep the home and rent out the ADU separately from the main house, you'll be getting an excellent ROI. What's a 1/1 rent for in your area? $1500/month? If you building an ADU for $100K and it generates gross rent of $18K/year, you're probably looking at a net return of $15K/year or 15%. That's AMAZING in LA!
So if you're planning to sell in the next year, stop construction. If you're planning to hold for a couple of years, keep building.
Good luck!
Best,
Jon
Jon
I like the idea of renting out, but I believe there's a restriction in the City of San Fernando about utilizing both the main dwelling and ADU as investment properties. Either one needs to be owner occupied.
I agree with the potential ROI. Perhaps I'll find value in a Rental Property purchase instead.
CA state law prohibits a jurisdiction from requiring owner occupancy (OO) on a traditional ADU or the primary dwelling associated with it.
CA state law does allow requiring OO on a Junior ADU (JADU). Every jurisdiction that I am aware of does require OO for properties with a JADU.
As long as it is a traditional ADU (not a JADU), then there is no issue renting both the ADU and primary structure.
Good luck
@Ray Martinez Every situation is different, but if I had to bet on it I would say no. Building an ADU has not proven to be a very good forced appreciation strategy.
Hey there BP Community,
I'm in the early stages of constructing an ADU and I've just been offered an opportunity for a job in AZ. (I'm currently in CA)
If I continue with the construction of the ADU, will I get the investment back if say I have it for at most 12 months?
Will the resale recoup the investment?
I'm constructing a 1 Bedroom/1 Bath 360 Sq Ft Garage Conversion in San Fernando Valley.
Thanks everyone!
Ray,
The ADU will make sense if you hold the property as a rental, but not if you sell the property in the near term.
ADU's aren't valued as traditional additions because they don't add square footage to the original house. Instead, they're valued as an amenity, like a swimming pool or wooden porch. Most appraisers these days are valuing ADUs at $40K-$50K, which is less than you're paying to build it, I'm sure. So don't expect to recoup your costs in a sale.
However, if you keep the home and rent out the ADU separately from the main house, you'll be getting an excellent ROI. What's a 1/1 rent for in your area? $1500/month? If you building an ADU for $100K and it generates gross rent of $18K/year, you're probably looking at a net return of $15K/year or 15%. That's AMAZING in LA!
So if you're planning to sell in the next year, stop construction. If you're planning to hold for a couple of years, keep building.
Good luck!
Best,
Jon
@Ray Martinez Every situation is different, but if I had to bet on it I would say no. Building an ADU has not proven to be a very good forced appreciation strategy.
Thanks for the feedback!
Hey there BP Community,
I'm in the early stages of constructing an ADU and I've just been offered an opportunity for a job in AZ. (I'm currently in CA)
If I continue with the construction of the ADU, will I get the investment back if say I have it for at most 12 months?
Will the resale recoup the investment?
I'm constructing a 1 Bedroom/1 Bath 360 Sq Ft Garage Conversion in San Fernando Valley.
Thanks everyone!
Ray,
The ADU will make sense if you hold the property as a rental, but not if you sell the property in the near term.
ADU's aren't valued as traditional additions because they don't add square footage to the original house. Instead, they're valued as an amenity, like a swimming pool or wooden porch. Most appraisers these days are valuing ADUs at $40K-$50K, which is less than you're paying to build it, I'm sure. So don't expect to recoup your costs in a sale.
However, if you keep the home and rent out the ADU separately from the main house, you'll be getting an excellent ROI. What's a 1/1 rent for in your area? $1500/month? If you building an ADU for $100K and it generates gross rent of $18K/year, you're probably looking at a net return of $15K/year or 15%. That's AMAZING in LA!
So if you're planning to sell in the next year, stop construction. If you're planning to hold for a couple of years, keep building.
Good luck!
Best,
Jon
Jon
I like the idea of renting out, but I believe there's a restriction in the City of San Fernando about utilizing both the main dwelling and ADU as investment properties. Either one needs to be owner occupied.
I agree with the potential ROI. Perhaps I'll find value in a Rental Property purchase instead.
Hey there BP Community,
I'm in the early stages of constructing an ADU and I've just been offered an opportunity for a job in AZ. (I'm currently in CA)
If I continue with the construction of the ADU, will I get the investment back if say I have it for at most 12 months?
Will the resale recoup the investment?
I'm constructing a 1 Bedroom/1 Bath 360 Sq Ft Garage Conversion in San Fernando Valley.
Thanks everyone!
Ray,
The ADU will make sense if you hold the property as a rental, but not if you sell the property in the near term.
ADU's aren't valued as traditional additions because they don't add square footage to the original house. Instead, they're valued as an amenity, like a swimming pool or wooden porch. Most appraisers these days are valuing ADUs at $40K-$50K, which is less than you're paying to build it, I'm sure. So don't expect to recoup your costs in a sale.
However, if you keep the home and rent out the ADU separately from the main house, you'll be getting an excellent ROI. What's a 1/1 rent for in your area? $1500/month? If you building an ADU for $100K and it generates gross rent of $18K/year, you're probably looking at a net return of $15K/year or 15%. That's AMAZING in LA!
So if you're planning to sell in the next year, stop construction. If you're planning to hold for a couple of years, keep building.
Good luck!
Best,
Jon
Jon
I like the idea of renting out, but I believe there's a restriction in the City of San Fernando about utilizing both the main dwelling and ADU as investment properties. Either one needs to be owner occupied.
I agree with the potential ROI. Perhaps I'll find value in a Rental Property purchase instead.
CA state law prohibits a jurisdiction from requiring owner occupancy (OO) on a traditional ADU or the primary dwelling associated with it.
CA state law does allow requiring OO on a Junior ADU (JADU). Every jurisdiction that I am aware of does require OO for properties with a JADU.
As long as it is a traditional ADU (not a JADU), then there is no issue renting both the ADU and primary structure.
Good luck
Hey @Ray Martinez. I'm curious if you ever decided to push forward with the ADU a couple years back. If so, how did it end up? Thanks.
@Paul Dario Jr - I built an ADU in San Jose, CA. I found it to be an excellent long-term investment but as they stated above, if you try to sell in the short term, it does not work out very well. FYI - I used a HELCO and cash to pay for the project and then did a cash-out refinance to restructure our loan and eliminate the HELCO at the end of the project. We hit some pretty incredible timing for the market when we did this over the past few years.
Hey @Brian Larson. Thanks for the input. Glad to hear your happy with the project. I plan to hold on to the property long term as well. And for now, we'll still be living in the primary until I can work out financing for the next house.
I was also thinking of refinancing out of the HELOC after I rented the ADU. My dilemma is that we have such a good interest rate on the primary home.
@Paul Dario Jr - Yeah. The interest rates are a different world than they were 12 months ago. Good luck.
Hey @Ray Martinez. I'm curious if you ever decided to push forward with the ADU a couple years back. If so, how did it end up? Thanks.
Paul, Thank you for following up. The ADU project was completed and was an excellent decision. I got my final inspection completed in late March 2021 and a tenant placed by late-April. I was able to realize the appreciation ($50,000) for a Cash-Out Refi and utilize the income to help fianance a 2nd property that I've been Airbnb-ing since June of this year.
Thanks @Ray Martinez.
@Brian Larson, I never asked you how the refi went after you constructed and rented your ADU. I'm specifically wondering how the appraiser valued your ADU. I've heard from others that ADU's were not appraising well. And sometimes appraisers giving value well under what even the cost to build was. Any thoughts? What was your experience with that? Thanks so much!
@Ray Martinez why did you start building if you don't know if it's worth the investment???
@Ray Martinez why did you start building if you don't know if it's worth the investment???
The nature of the question was really considering the circumstance of a job opportunity in AZ a couple years back. I see this thread has pass through much time.
Thanks @Ray Martinez.
@Brian Larson, I never asked you how the refi went after you constructed and rented your ADU. I'm specifically wondering how the appraiser valued your ADU. I've heard from others that ADU's were not appraising well. And sometimes appraisers giving value well under what even the cost to build was. Any thoughts? What was your experience with that? Thanks so much!
@Ray Martinez why did you start building if you don't know if it's worth the investment???
Jon - Easier said than done sometimes. Do you invest in California?
ADU's are great for cash flowing properties. I'm sure it brings value to resale but that depends on current market