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

    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

     Only 3500 in fees?? How many sq feet will the unit be? Man I paid 6700 for the permit and about 4000 in school fees. So a total of 10700 in permit and fees. That number is surpising bc I heard of people paying 20k and even up to 50k just in permit and fees alone. But yeah you can beat my number I just highly reccomend doing what you can yourself or be the acting contractor. I created a team of sub contractors that were looking for extra work. Luckily my best friends dad was in construction and introduced me to a lot of his contacts. I saved a lot of money this way. The cheapest quote I got from a contractor was 60k and I'm pretty sure that was a low estimate because of the city's requirements for certain things. Hey man I'm staying near Cal state LA not to far from Long beach. We should network sometime and further discuss this.

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

    Lucky timing for me. Yes some cities are really hammering people; that's what brought on SB 13. I believe we are making the right choice by doing legal/fully permitted ADU's. Bootleg additions etc do not get any value by appraisers and could be a major problem. My only thought about the QT was for a JADU since FNMA apparently won't buy loans with a JADU and an ADU on the property.

    It's a 2 car detached garage conversion 18 x 20 = 360sf. $1,500 of the $3,500 is a refundable recycling deposit so total should be $2,000. My architect said the fees would be $3,000; we'll see. Long Beach is pretty pro-housing, but I will get this going asap, depending on my full understanding of the 2019 energy requirements. Not gonna see what new $ the city comes up with.

    Do you have a breakdown of your costs? Sure would like to see figures, even ballpark ones. What are the main things you are glad you did, and what are things you did that you wish you hadn't?

    Thank you.

    0Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @David Maldonado:
    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.

    I’m in a similar situation but plan to meter water and power with my own units that can be read. It’s not hard on a new construction to set those up as long as you don’t need meters from your utility or water company. 

    My first project is currently a 2/1 660sqft home and that will be considered the ADU and a new 3/2 unit will be built.

    I’m still reading the fine print of this bill to see how costs are affected. Since the new unit will be larger than 750sqft I’m not sure I’ll see the same level of fee savings.  

    0Reply
  • Bryan S.
    Rental Property Investor · CA · Member since 2018 · 225 posts · 180 votes
    6y

    @David Maldonadoalfaro thanks for the information, I have considered putting ADU on a house locally and was told both cannot be rented out. Looks like that goes away.

    2Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    Tim if your 2/1 660sf is the ADU then you will not have developer impact fees charged(<750sf). ADU's over 750sf receive reduced impact fees (25% of SFR charge). SB 13 only addresses ADU's not SFR's.

    1Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    Bryan SB 13 removes the owner/occ requirement for 5 years; both can be rentals until then.

    2Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y

    @John A Murray

    Can you please clarify what you’re referring to with QT? I’m not familiar with the acronym.

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

    Lucky timing for me. Yes some cities are really hammering people; that's what brought on SB 13. I believe we are making the right choice by doing legal/fully permitted ADU's. Bootleg additions etc do not get any value by appraisers and could be a major problem. My only thought about the QT was for a JADU since FNMA apparently won't buy loans with a JADU and an ADU on the property.

    It's a 2 car detached garage conversion 18 x 20 = 360sf. $1,500 of the $3,500 is a refundable recycling deposit so total should be $2,000. My architect said the fees would be $3,000; we'll see. Long Beach is pretty pro-housing, but I will get this going asap, depending on my full understanding of the 2019 energy requirements. Not gonna see what new $ the city comes up with.

    Do you have a breakdown of your costs? Sure would like to see figures, even ballpark ones. What are the main things you are glad you did, and what are things you did that you wish you hadn't?

    Thank you.

    So here's the breakdown of the cost:

    Permit and fees (including plans)- 12,500

    Tools parts and materials- about 17k

    Labor- 7-8k (plumbing, partial framing ,electrical, stucco, drywall install and mudding)

    0Reply
  • Thomas Jackson
    Specialist · San Diego, CA · Member since 2019 · 86 posts · 56 votes
    6y

    @David Maldonadoalfaro or anyone in the thread know anything about "lot splits" if you have enough space for ADU's, what about splitting the lot and then being able to sell the "property" or Formerly ADU....separately from your primary dwelling? I have experience with this in Ohio, but usually much larger parcels of land to split. Not sure how that may or may not work here.

    Secondly I think eventually a bill would be passed that would allow standard financing for these types of properties if it indeed becomes some what of a norm...

    Great thread nonetheless, good info to know moving forward.

    0Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Thomas Jackson:

    @David Maldonadoalfaro or anyone in the thread know anything about "lot splits" if you have enough space for ADU's, what about splitting the lot and then being able to sell the "property" or Formerly ADU....separately from your primary dwelling? I have experience with this in Ohio, but usually much larger parcels of land to split. Not sure how that may or may not work here.

    Secondly I think eventually a bill would be passed that would allow standard financing for these types of properties if it indeed becomes some what of a norm...

    Great thread nonetheless, good info to know moving forward.

    The splitting and selling of an ADU is strictly prohibited and the wording of ADU laws are setup specifically to make sure this does not happen. The goal is not to subdivide neighborhoods and sell these homes.

    2Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @John A Murray:

    Tim if your 2/1 660sf is the ADU then you will not have developer impact fees charged(<750sf). ADU's over 750sf receive reduced impact fees (25% of SFR charge). SB 13 only addresses ADU's not SFR's.

    In Oceanside where I live, if your existing home is under 1200 sqft it can be redesignated as the ADU then the new property you build will be the SFR "main house". So I'm not building a 660 sqft ADU just turning the existing property into the "adu" and then building a new home on the lot. This works out well in instances where a very small home underutilizing a very large lot.

    But... what I need to review is how this is achieved as I would benefit from building the new unit as an ADU. There seems to be a large grey area in this.

    I am also curious how folks are dealing with appraisals as appraisers don't view these properties as duplexes and I've heard of investors having issues with cash out refinances not hitting their target values where had the home been designated a duplex (lets say in a two detached property scenario) it would have easily appraised in their target value. 

    With ADU's being so new and in most cases it being done for an owner who has no intention of selling, there are few data points for appraisers to currently use when determining the value of a home with a detached new construction ADU.

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

    Tim you are out of luck it appears. I don't see any way you could shift things around to get the results you want.

    There are no multi-unit rentals in my neighborhood only SFR's. I asked an appraiser how he would determine value of SFU with an ADU and he said that not having comps is the problem. He said something like 20k to 50k for a basic ADU but that's nuts. Having a small unit that would pay half of your mortgage payment is worth way more than 20-50k.

    This happens when people overbuild for the neighborhood. A buyer would have to come in with a fair amount of cash. Most already do as they are trading up and have equity in the home they are selling. I think the only immediate problem is if one were to get carried away and put too much money into their ADU and plan on selling soon.

    David thanks. Now would you be interested in putting up a few pictures?

    My wife will be in heaven as I'll make sure she comes along when we buy everything. Shopping and spending!

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

    Matthew QT as in quiet say nothing. How could anyone determine that you are not just renting out a room? An efficiency kitchen would be easy to put in as well as a door leading outside. And if you have a bathroom adjacent to the bedroom you could close it off for exclusive use by JADU tenant.  I personally would have a hard time renting out a room, but if I had an "isolated" JADU I could do that.

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

    Tim you are out of luck it appears. I don't see any way you could shift things around to get the results you want.

    There are no multi-unit rentals in my neighborhood only SFR's. I asked an appraiser how he would determine value of SFU with an ADU and he said that not having comps is the problem. He said something like 20k to 50k for a basic ADU but that's nuts. Having a small unit that would pay half of your mortgage payment is worth way more than 20-50k.

    This happens when people overbuild for the neighborhood. A buyer would have to come in with a fair amount of cash. Most already do as they are trading up and have equity in the home they are selling. I think the only immediate problem is if one were to get carried away and put too much money into their ADU and plan on selling soon.

    David thanks. Now would you be interested in putting up a few pictures?

    My wife will be in heaven as I'll make sure she comes along when we buy everything. Shopping and spending!

     I got ya! Here are some pictures of my adu!

    2Reply
  • Payton Chung
    Developer · DC & NC · Member since 2019 · 113 posts · 95 votes
    6y

    Could easily thread the needle between what California calls a "junior ADU" and what Fannie calls an "ADU". For Fannie, a "fully functioning kitchen" defines an ADU: https://www.fanniemae.com/content/guide/selling/b4/1.3/05.html#Accessory.20Units

    For California, a "junior ADU" has 120V electric, and only maybe a separate bath (!): https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB2406

    So a master suite with a wet bar (no stove) can be rented out separately as a "junior ADU", but does not count as a full-fledged ADU for Fannie's purposes. It could be for a family member, or a young renter who doesn't care much about cooking, or an AirBNB guest.

    Or, if push comes to shove, 2-4 unit Fannie/Freddie financing exists -- and this could be the push for originators to actually start paying attention to that market.

    1Reply
  • John A Murray
    Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y

    That's what I'm talking about David. I mean, I see all these really beautiful interiors, these $200k ADU's, but what you've got is all most people need. There are so many inexpensive ways of doing things. I plan to have some cool space saving things such as a "Murphy" kitchen table, desk and bed. Additionally I will have multiple skylights, lot's of window area and one maybe two French/sliding doors. I'd like to have a cathedral ceiling (drywall right under the roof rafter) and a big ceiling fan. There are cool things you can do with a concrete floor,concrete counter tops and concrete shower. I will be the contractor and do some work by myself, no hurry, and I hope to keep it around $30k.

    David what did you learn that you feel is important/not important?

    Here's my two car garage:

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

    That's what I'm talking about David. I mean, I see all these really beautiful interiors, these $200k ADU's, but what you've got is all most people need. There are so many inexpensive ways of doing things. I plan to have some cool space saving things such as a "Murphy" kitchen table, desk and bed. Additionally I will have multiple skylights, lot's of window area and one maybe two French/sliding doors. I'd like to have a cathedral ceiling (drywall right under the roof rafter) and a big ceiling fan. There are cool things you can do with a concrete floor,concrete counter tops and concrete shower. I will be the contractor and do some work by myself, no hurry, and I hope to keep it around $30k.

    David what did you learn that you feel is important/not important?

    Here's my two car garage:

    Nice layout. It looks similar to mine. When I researched and saw that an ADU can cost up to 6 figures I was shocked. It all depends on the area. For my area it isn't worth going the extra mile or spending extra money for something big and luxurious. What area are you planning to build the adu?

    What I learned what is most important is to know your market and the types of tenants these units will attract. What I mean by this is: do people look for luxurious apartments? Affordability? College students looking for a place? For my town tenants look at affordability and prefer the residential area over apartment structures. 

    Another thing that's important is to not go all out and spend money that you don't have too (for the purposes of a rental). The only time its worth spending extra money on materials that will be durable aka tenant resistant. It's good that your are going as owner builder because that's how you learn about the codes, estimating costs for future projects, and much more.

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

    @David Maldonadoalfaro

    Thanks! I printed out SB13 and read it. The provision that my city government was using to stop whole neighborhoods from adding adu’s was addressed.

    Now I am able to build an adu on my properties.

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

    @David Maldonadoalfaro

    Thanks! I printed out SB13 and read it. The provision that my city government was using to stop whole neighborhoods from adding adu’s was addressed.

    Now I am able to build an adu on my properties.

    Glad to hear that! 

    0Reply
  • Nick Hu
    Member since 2019 · 12 posts · 5 votes
    6y

    In SB-13, it states: "this bill, until January 1, 2025, would instead prohibit a local agency from imposing an owner-occupant requirement as described above". So for ADU developed between 1/1/20 to 1/1/25, does it mean it will not require owner-occupancy even after 1/1/25 (which means these properties are exempt from owner-occupancy completely), or they are exempt from owner-occupancy before 1/1/25, but might still require owner-occupancy after 1/1/25?

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

    In SB-13, it states: "this bill, until January 1, 2025, would instead prohibit a local agency from imposing an owner-occupant requirement as described above". So for ADU developed between 1/1/20 to 1/1/25, does it mean it will not require owner-occupancy even after 1/1/25 (which means these properties are exempt from owner-occupancy completely), or they are exempt from owner-occupancy before 1/1/25, but might still require owner-occupancy after 1/1/25?

    I would like to know that as well but I'm sure it's more for Units built after that time (if it isn't renewed) because how would someone with multiple ADUs be able to occupy all of them?

    0Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y

    @David Maldonadoalfaro

    This may just be me, but I haven't seen anything stating that the owner needs to live on the property to rent the units. My city has a provision that I needed to live on the property to developed the ADU (this will be going away), but again I never saw anything that said anything about owner occupied requirements for renting.

    If anyone knows any areas that have a requirement like this, I’d like to hear more about it.

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

    @David Maldonadoalfaro

    This may just be me, but I haven't seen anything stating that the owner needs to live on the property to rent the units. My city has a provision that I needed to live on the property to developed the ADU (this will be going away), but again I never saw anything that said anything about owner occupied requirements for renting.

    If anyone knows any areas that have a requirement like this, I’d like to hear more about it.

    I think that's just based by county. My county made me sign an owner occupancy covenant before I even built the unit but starting January 1st, that will be voided.

    0Reply
  • Hobie Day
    Realtor · Lodi, CA · Member since 2019 · 33 posts · 23 votes
    6y

    @David Maldonado very informative thread you started, thanks!! I just got into my first house hack, it's a SFR with a separate 886 sq ft ADU (2 bed, 3 bath) that was converted from a pool house prior to my purchase. I am now considering filling the pool that's next to the ADU and either extending the ADU 314 sq ft (max 1200 sq ft) or adding a JADU (didn't consider this option until reading this post) but I'm wondering if you, or anyone on this thread, has any experience filling and building on top of pools? I have a GC coming out next week to provide estimates but am looking to get multiple opinions/advice

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

    @David Maldonado very informative thread you started, thanks!! I just got into my first house hack, it's a SFR with a separate 886 sq ft ADU (2 bed, 3 bath) that was converted from a pool house prior to my purchase. I am now considering filling the pool that's next to the ADU and either extending the ADU 314 sq ft (max 1200 sq ft) or adding a JADU (didn't consider this option until reading this post) but I'm wondering if you, or anyone on this thread, has any experience filling and building on top of pools? I have a GC coming out next week to provide estimates but am looking to get multiple opinions/advice

    Hey thanks! But no I do not have experience building on top of pools but let me know what the gc says!

    0Reply
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