How to estimate rent for ADU? (Garage conversion)

Question

Hi BiggerPockets!

I'm both new here, and new to the RE investing game. I had a question about how to estimate rents for a home with a garage ADU conversion.

I'm using Rentometer to plug in rents for my area and using the median rent to estimate revenue for properties I'm looking at.

It seemed slightly implausible to assume renters would pay the same for a 3/2 SFH without a garage (as it's been converted to an ADU) as they would for a 3/2 with a garage. Similarly, for the garage-ADU dweller, I'm not sure they would value a garage 1/1 the same as a more traditional 1/1 apartment. In your experience, is there a significant discount factor for ADUs and homes with garage ADUs, or do they rent for roughly rentometer rates all things being equal?

I don't want to over-estimate rents and end up on the wrong side of the cashflow math, and figured you experts would have a ton of experience here and know whether homes with garage ADUs rent for close to median rates, or if there's a big discount do to the loss of garage space and having to share the house with another tenant.

I'm looking to buy in San Diego, in case that's relevant.

Thanks in advance for the help!

Matt Devincenzo · Answer

I think a misconception here is that ADUs, as it relates to rent rates only, are different that other units. They really aren't. The distinction is in what type of unit amenities they provide meaning; private yard, private garage, no shared drive etc. But you can find traditional older duplex properties with these same amenities (or lack of in this case) to establish either rent rates directly, or a reasonable level of adjustment for your rents. Meaning if you look for a 3/2 without a garage and with an attached 1/1 in your area (say 92117) you may not find it. But 1 zip code over in 92111 you can find something similar, and see that 3/2 homes go for $3400/mo but the subject went for $3100/mo. Then your analysis is that your attached 3/2 will likely take a 7-10% rent rate hit by converting the garage.

Rent estimates are always a bit of an art, but if you look at enough posted rentals and watch how quickly they do or don't rent you'll start to get a feel for where you need to be.

Steve Meyers · Answer

@Josh Yame I agree with what Matt said.  I also use https://www.zillow.com/rental-... which helps give an idea of what the property can rent for based on comparable rental comps in your neighborhood.

Dan H. · Answer

I also agree with what @Matt Devincenzo indicted.

I will say any rent estimator tool whether it is Zillow, Rentometer, Bigger Pockets rent estimator, etc. is based on the typical unitin that area.  If your unit is substantially different than the typical unit, these rent estimators will not be accurate.

For your property, I recommend you perform a manual rent comparison.  This is done by looking at the active rental listings on various sites.  If the unit is a comp to either of your units, add it to the comps for that property.  The more good rental comps you have, the more accurate your rent estimate that is derived from these comps.  This will likely take an hour or two.

I do rent surveys in my markets a couple/few times a year.

Good luck

Zeona McIntyre · Answer

@Josh Yame I recently interviewed "That ADU guy" on our podcast and was blown away by the creative things he is doing with land hacking and adding ADUs to all kinds of properties. I think he would be an excellent resource. Check out his youtube channel.

Kenny Simpson · Answer

Hi Josh,

Everyone has great comments on here and feedback.  I work with ton of real estate investors that have done every type of ADU conversion or new built.  The rents have NOT been an issue and also keep in mind you are building/bringing a new unit to the market.  Make it nice, clean, put all the amenities you can and getting rents close to a NON- ADU unit have not really been an issue.  Maybe this unit is smaller than the normal but there is a lot of ADU's that are small and getting great rents.  Looking at comps, maybe even driving competition that is listed on the market so you can understand the type of finishes, quality and what type of product you need bring to the market will help you understand what you need to do to maximize rents.  If you want to chat let me know, I am local here in SD 619 302 2020 :)

Leo R. · Answer

@Josh Yame the rent for the garage 1/1 ADU will often be a bit lower than a comparably-sized 1/1 apartment--but that's partly because apartments often offer additional amenities (like a pool, a gym, etc.)....and the house will be lower rent than a comparably sized house without an ADU (because tenants renting a house would rather have the property to themselves rather than have to share the property with someone living in the garage ADU).

...in a lot of ways, a house with a garage ADU is similar to a duplex--in terms of functionality, rents, tenant pool, etc.

...So, if the garage is 1/1 and the house is 3/2, I'd try to comp the rents to a duplexes with one 1/1 unit and one 3/2 unit--that will get you in the ballpark.

Regardless of the type of property, I like to be very conservative with my numbers; I'll often assume 15-20% lower rent than the market, and I factor in lots of vacancy. I'd much rather estimate too low and be pleasantly surprised than estimate too high and get hit with a nasty reality check...

Regarding the logistics of converting your garage: In some scenarios, garage conversions can be pretty easy and a great CoC return, in other scenarios they can be a real pain...  ...first, check with the city to see if they allow garage conversions, and if so, what their requirements are for the permitting & approval process.  Assuming the city allows it, here are a few things to consider:

-How easy is it to get the necessary electrical into the garage?

-How easy is it to plumb the garage? (e.g.; does the garage share a wet wall with the house? does the sewer main run under the garage or nearby?)

-How will the garage ADU be heated/cooled?

-How will getting rid of the garage affect the functionality and value of the property? (in some neighborhoods, a garage is a must-have for resale...in other neighborhoods, not so much)

-Once the garage is gone, where will tenants park?

-Is there an existing entryway that can be used for the ADU, or will you have to create a new one? What's the plan for the garage door? (will you just frame a new wall, will it be a huge sliding glass door, etc.?).

-If you're financing the ADU conversion, don't forget to factor that new debt service into your financial model...seems obvious, but a lot of folks forget to do this.   ...regardless of how you're paying for the ADU, calculate your CoC return based on several rent projections (including "worst-case-scenario" rents).

Good luck out there!

Christian Ballow · Answer

Hi @Josh Yame, both @Matt Devincenzo & @Dan Heuschele had some great feedback. I do believe that a manual rent survey of the area should be done in order be more precise in your rent estimates.

In my experience a converted garage ADU will rent very close to the median rents for the area. The only discount factor would come from the size. Typical garage ADUs are about 480-500 square feet, which can easily be a small 1 bed 1 bath.

As for the attached home, there would be a slight discount for not having the garage but there’s such a high demand for rental homes in San Diego that I don’t believe you’ll feel the effects as much.

@Josh Yame Are you looking to buy with a garage conversion in place or complete the conversion yourself?

Robert Comstock · Answer

san diego mtr I'm seeing about 1.5x normal ltr rates.  I have one that's been rented the last 9 months and a new one renting monday for three months.

I would guess a small adu would rent like a studio in your area.  remember if it's a jdu in San diego you have to live on-site to rent it out.

Josh Yame · Answer

Thanks @Christian Ballow! I'm looking to complete the garage conversion myself.

Josh Yame · Answer

Fantastic. Thank you all for the advice. This was very helpful.

How to estimate rent for ADU? (Garage conversion)

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