California ADU business

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California ADU business

David Maldonado
Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes

What's up guys,

I just finished building a permitted ADU (accessory dwelling unit) on my sfh. Converted my garage into a 488 sq ft 1cbed 1 bath apartment. final cost with permits was about 37k. I built most of it with my old man and only had to outsouce a few things. The cash flow is great from this unit alone and I plan on building another unit on the right side of my house. Ca just passed SB 13 along with 2 accessory bills effective Jan 1st 2020 that no longer require owner occupancy, city's can't charge impact fees, and can add up to 2 units per lot (not including the home itself). From what I read the bill allows 1 jr adu (under 500 sq ft) and 1 adu (above 500 sq ft, max 1200). Luckily where I live there is rarely ever any need for AC or heater use). Does this seem like a good market to hit in y'alls opinion? From my research, there is way more money in this at least for my area. A typical duplex goes for about 400k in my area and doesn't bring you cashflow nowhere near close to what an ADU brings. I'm just curious to see how much value the units will add to a home since this is fairly new (from a legal perspective anyway). The only drawback from this I see besides needing the cash to fund it, is for an investor who prefers to get all their cash invested back from a deal will more than likely not get everything back at the end especially if they contract everything out ( the lowest quote I got for the ADU was about 60-70k but that was just an estimate and could have been more).

Average rent for ADUs in my area:

1 bed 1 bath- $1000-$1300

2bed 1 bath- $1300-$1600

Something tells me they can go for a little bit more because I had tenants bidding for my unit within the first week of construction.

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
6y
Originally posted by @David Maldonado:

What's up guys,

The cash flow is great from this unit alone and I plan on building another unit on the right side of my house. C

Danger Will Robinson, Danger!

A single family home with multiple ADUs cannot be financed using Fannie, Freddie, FHA, VA, or USDA. Basically, there went good 30YF financing, both for you (should you ever want to refinance) and for your pool of buyers (should you ever want to sell).

A house that can't be institutionally financed with good 30yf rates is going to lose a LOT of resale value. Your buyer pool is essentially reduced to cash buyers, and a savvy cash buyer will figure out why they are the only offer on the table, and reduce what they are willing to offer in turn (since they know they can't refi to pull the liquidity back out of the house for redeployment elsewhere).

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    6y

    Probably need to add at least heat for the ADU to be considered livable space but that isn't a huge deal, if you can make it work great. I see potential hurdles when it comes to resale but who knows what the future holds for these type of properties.

    0Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y

    Yes it is required and my unit has a heater. They also require a separate water heater, electrical sub panel and water lines.

    Yeah I'm curious how these will sell and how it will play out in the future.

    0Reply
  • Seth Borman
    Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
    6y

    The Jr. ADU is interesting.It has to be built in existing space (which I think includes garages) and only gets a kitchenette. Still, a one bed with a small kitchen will be worth more than a studio and much easier to permit and build than an apartment unit.

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    6y
    Originally posted by @David Maldonado:

    What's up guys,

    The cash flow is great from this unit alone and I plan on building another unit on the right side of my house. C

    Danger Will Robinson, Danger!

    A single family home with multiple ADUs cannot be financed using Fannie, Freddie, FHA, VA, or USDA. Basically, there went good 30YF financing, both for you (should you ever want to refinance) and for your pool of buyers (should you ever want to sell).

    A house that can't be institutionally financed with good 30yf rates is going to lose a LOT of resale value. Your buyer pool is essentially reduced to cash buyers, and a savvy cash buyer will figure out why they are the only offer on the table, and reduce what they are willing to offer in turn (since they know they can't refi to pull the liquidity back out of the house for redeployment elsewhere).

    16Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y

    @chrismason thanks for the information, I wasn't aware of that. Now I'm going to rethink my plan. Maybe just stick to 1 adu per sfh

    1Reply
  • Jimmy Yu
    los angeles, CA · Member since 2017 · 31 posts · 5 votes
    6y

    @David Maldonadoalfaro

    The bill has not been signed yet, I think it only

    Passed assembly but has not clear senate.

    1Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y

    Yes it has been signed by the Governor already as of 09 oct 2019

    3Reply
  • Ronnie S.Pro Member
    Investor · Coeur d Alene, ID · Member since 2013 · 109 posts · 29 votes
    6y

    I have bookmarked this thread...interesting topic!!

    3Reply
  • Damaso Bautista
    Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes
    6y

    @David Maldonadoalfaro

    Thanks David! Congratulations on your ADU.

    I need to do more research about this myself. It seems like local jurisdictions are placing more restrictive rules in place to discourage ADU's from being built. Congrats again!!

    1Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y

    @damaso Bautista 

    Look at the new bill that just passed sb 13 along with 2 assembly bills. No more owner occupancy requirments, local jurisdictions cannot charge impact fees anymore (if the unit is 750 sq ft or less) they also only have 60 days to pass or deny the adu permit or (not 100 on this) it will be considered as approved if exceeding 60 days just to name a few. This bill pretty much prevents local jurisdicitons from bullying people who want to build an Adu. They will take into effect Jan 1st 2020.

    4Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    Due to SB 13 I will be saving $4,600 in impact fees for my 380 sf garage conversion (not yet permitted but close to being ready to submit).

    The other big thing going into effect on 1/1/20 is the new California Title 24 2019 energy standards; specifically the solar requirement. While I was considering solar anyways soon it will be mandatory. Additionally, my house and detached garage(future ADU) both need new roofing, so do I put the solar panels on the house only to supply both units, or just panels on the ADU-to supply the ADU only-for now? Wherever the panels go I will need to reroof below them.

    I don't want to have a separate main panel for the ADU so like David M. I will submeter the electric and water (no gas) to the ADU.

    Or do I see if I could get a discount on the impact fees(prob fat chance) and get permitted in 2019? I bet the city would squeeze it in this year to get some $. Realistically I will get permitted in 2020 and be subject to the 2019 energy standards(solar).

    One door opens and one door closes. Decisions decisions.

    1Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @John A Murray:

    Due to SB 13 I will be saving $4,600 in impact fees for my 380 sf garage conversion (not yet permitted but close to being ready to submit).

    The other big thing going into effect on 1/1/20 is the new California Title 24 2019 energy standards; specifically the solar requirement. While I was considering solar anyways soon it will be mandatory. Additionally, my house and detached garage(future ADU) both need new roofing, so do I put the solar panels on the house only to supply both units, or just panels on the ADU-to supply the ADU only-for now? Wherever the panels go I will need to reroof below them.

    I don't want to have a separate main panel for the ADU so like David M. I will submeter the electric and water (no gas) to the ADU.

    Or do I see if I could get a discount on the impact fees(prob fat chance) and get permitted in 2019? I bet the city would squeeze it in this year to get some $. Realistically I will get permitted in 2020 and be subject to the 2019 energy standards(solar).

    One door opens and one door closes. Decisions decisions.

    There is a solar requirement coming for adus? The only energy requirements that applied to my attached unit were the types of windows and attic vents. My units utilites are still tied in with the main house's meters. The only requirement were separate shutoff valves for the water and gas and a separate sub panel box for the electrical. The county did not require separate meters. Besides the impact fees, how much are they charging you for the permit itself? (Price per sq foot) 

    0Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    6y

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    2Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Tanner Marsey:

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    It all depends on the area and your goals. There are homes that sold in my area with converted garages into "master bedrooms with a sink" (that's what people here did before the legalization of ADUs) that sold for about 40k more due to the added square footage in the home. This is more for people who don't plan on selling that home (probably ever) bc of the significant cash flow the unit brings along with the main house. And your view on dealing with tenants is just like owning any other rental or living in a multifamily home.

    0Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    It all depends on the area and your goals. There are homes that sold in my area with converted garages into "master bedrooms with a sink" (that's what people here did before the legalization of ADUs) that sold for about 40k more due to the added square footage in the home. This is more for people who don't plan on selling that home (probably ever) bc of the significant cash flow the unit brings along with the main house. And your view on dealing with tenants is just like owning any other rental or living in a multifamily home.

    Not saying there isn’t money to be made because their definitely is. Personally, I just don’t know if it’s worth it. 

    0Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Tanner Marsey:
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    It all depends on the area and your goals. There are homes that sold in my area with converted garages into "master bedrooms with a sink" (that's what people here did before the legalization of ADUs) that sold for about 40k more due to the added square footage in the home. This is more for people who don't plan on selling that home (probably ever) bc of the significant cash flow the unit brings along with the main house. And your view on dealing with tenants is just like owning any other rental or living in a multifamily home.

    Not saying there isn’t money to be made because their definitely is. Personally, I just don’t know if it’s worth it.  

     What questions or concerns do you have? I'd like to know just in case if there are areas I have missed. I already got information on a couple things I wasn't aware of about adus just from this post lol 

    1Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    It all depends on the area and your goals. There are homes that sold in my area with converted garages into "master bedrooms with a sink" (that's what people here did before the legalization of ADUs) that sold for about 40k more due to the added square footage in the home. This is more for people who don't plan on selling that home (probably ever) bc of the significant cash flow the unit brings along with the main house. And your view on dealing with tenants is just like owning any other rental or living in a multifamily home.

    Not saying there isn’t money to be made because their definitely is. Personally, I just don’t know if it’s worth it.  

     What questions or concerns do you have? I'd like to know just in case if there are areas I have missed. I already got information on a couple things I wasn't aware of about adus just from this post lol 

    Pretty much the stuff that has been discussed in this thread. Along with personal reasons IE living with tenant. The fact that a dwelling with an ADU wouldn't be eligible for traditional financing is huge. Just a new area that I haven't fully explored and broken down. Like everything else... if the numbers work and all the other factors at play are good in your opinion.... go for it!

    0Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    6y

    This is all great news, we need more housing units in our markets and the local level politics seems so hung up by NIMBY'ism that local leaders won't make decisions for fear of retribution. But.. the state knows the and is helping by clearing things on a statewide level. Bravo. 

    I am planning two ADU's at two separate properties, I'll trade a large yard for additional income all day long. A really nice outdoor patio area seems to be much more desirable than a large space to waste water on if you have grass or landscaping if you're trying to be drought tolerant.

    6Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    Tanner in my neighborhood practically no one parks their car in their garage; they mostly just store-like us-a bunch of unnecessary "stuff".

    David my plan check fees are $850 and building permit fees are $2,650 for a total of $3,500. This includes a $1,500 recycling deposit which is refunded when I present the recycling receipts, leaving the permit/plan cost at $2,000. I hope the city or some other entity won't come up with any surprises.

    I am going to do this conversion as cheaply as possible as I have other plans and not renting it out, at least in the foreseeable future. Hoping to beat your $37k cost. Living close to Cal State Long Beach I envision down the road renting to a student so nothing fancy needed, but I could still produce a very clean and nice bright unit.  

    A guy in the neighborhood converted his garage last year for $57k, with him and his father doing a lot of the finish work. He added on to his garage and did a lot more than I'm going to do, and his developer fee (then only school district assessment) not counting building/planning fees was $2,100. My architect converted his mother's garage in Lakewood 10 years ago for $16k with no kitchen. A friend just built an ADU in their yard for her father and spent $180,000 but they were completely undisciplined and somewhat frivolous

    3Reply
  • Ernesto Hernandez
    Realtor · San Francisco, CA · Member since 2017 · 408 posts · 361 votes
    6y

    Awesome point Chris Mason. 

    Luckily for OP, I can't imagine too many people wanting to add 2 ADU's.

    There is definitely a market for ADU's. Enough to make it a full time business?

    Maybe send out some mailers or get some FB ads and gauge the response in your area.

    0Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    David what did the county assessor assess your ADU at? I have heard that some assessors multiply the monthly rent times 100 and that is the value they apply. Did you save all your $37k of receipts? Could come in handy but I have no knowledge of the appeal process if they jam it to you.

    Maby someone who adds an ADU AND a JADU should just keep the JADU on the QT from the city. Installing an efficiency kitchen can be done very simply; really renting out a room as a JADU is not very different than just renting out a room except having more privacy if you make it that way.

    0Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Tanner Marsey:
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:
    Originally posted by @David Maldonado:
    Originally posted by @Tanner Marsey:

    I'm not quite sold on the ADU in existing space of SFHs. Conventional buyers of SFHs are usually looking for two things.... a garage and a yard. After financing the build of the ADU, dealing with tenants and everything that comes along with that, sacrificing your own space if you occupy the home and the decreased value of your property due to the fact that there is no longer a garage or a good portion of outdoor space is taken up by this ADU.... I don't know if the juice is worth the squeeze.

    It all depends on the area and your goals. There are homes that sold in my area with converted garages into "master bedrooms with a sink" (that's what people here did before the legalization of ADUs) that sold for about 40k more due to the added square footage in the home. This is more for people who don't plan on selling that home (probably ever) bc of the significant cash flow the unit brings along with the main house. And your view on dealing with tenants is just like owning any other rental or living in a multifamily home.

    Not saying there isn’t money to be made because their definitely is. Personally, I just don’t know if it’s worth it.  

     What questions or concerns do you have? I'd like to know just in case if there are areas I have missed. I already got information on a couple things I wasn't aware of about adus just from this post lol 

    Pretty much the stuff that has been discussed in this thread. Along with personal reasons IE living with tenant. The fact that a dwelling with an ADU wouldn't be eligible for traditional financing is huge. Just a new area that I haven't fully explored and broken down. Like everything else... if the numbers work and all the other factors at play are good in your opinion.... go for it!

    Actually it would be eligible for traditional financing only with 1 unit (new bill allows up to 2 units but then it would not be eligible for financing). Just learned that in this thread lol but yeah bottom line it all depends on your goals. I personally wouldn't mind living in a home with an adu as a rental because my plan is to house hack until I max out on loans. Therefore moving into another place once a year and building a unit for each property.

    1Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Tim G.:

    This is all great news, we need more housing units in our markets and the local level politics seems so hung up by NIMBY'ism that local leaders won't make decisions for fear of retribution. But.. the state knows the and is helping by clearing things on a statewide level. Bravo. 

    I am planning two ADU's at two separate properties, I'll trade a large yard for additional income all day long. A really nice outdoor patio area seems to be much more desirable than a large space to waste water on if you have grass or landscaping if you're trying to be drought tolerant.

    Nice! Keep me posted on your progress if you dont mind. I'm curious to see the costs and roi on building adus in other areas. I just think I have it better than most because there is no need for separate utility meters in my county because it is rare for anyone to use an ac or heater here lol all the city requires is a wall furnace.

    0Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Ernesto Hernandez:

    Awesome point Chris Mason. 

    Luckily for OP, I can't imagine too many people wanting to add 2 ADU's.

    There is definitely a market for ADU's. Enough to make it a full time business?

    Maybe send out some mailers or get some FB ads and gauge the response in your area.

    I can definitely see ADUs becoming a big business here in Cali. This might he the start of a new niche to take advantage of. 

    2Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @John A Murray:

    David what did the county assessor assess your ADU at? I have heard that some assessors multiply the monthly rent times 100 and that is the value they apply. Did you save all your $37k of receipts? Could come in handy but I have no knowledge of the appeal process if they jam it to you.

    Maby someone who adds an ADU AND a JADU should just keep the JADU on the QT from the city. Installing an efficiency kitchen can be done very simply; really renting out a room as a JADU is not very different than just renting out a room except having more privacy if you make it that way.

     I don't think it has even been assessed yet. The final inspection was completed Mid September. Yes I saved every recipet I got for my taxes. 

    I agree with you on keeping on the qt from the city. It would have been much cheaper if I would have went that route. That's what a lot of people did before this became legal in 2017. I would have saved 4k right off the bat from school fees and a few grand from labor and materials because the city wanted a separate 40 gallon water heater, a double wall (to block the door to the house to the garage) and separate sub panel box so maybe about 5-7k. This method would also help dodge the solar panel requirment for 2020.

    0Reply
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