California ADU business

California ADU business

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
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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).

See this reply in the discussion

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

    I would want to make sure that the anticipated rental income increase would justify all the expense to add 300 sf. When you say adding a JADU what exactly do you mean?

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 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 was told it is a trial period to prove that property investors won't turn SFR neighborhoods into multi unit. The claim is that it didn't expand in Portland so they feel there will be no problem and they will extend it indefinitely. But no guarantee that it won't change to require own/occ.

  • Rental Property Investor · San Marcos, CA · Member since 2019 · 6 posts · 2 votes
    6y

    @David Maldonado Thanks for sharing this new update in ADU rules!

    I have started working with architect on my LA southbay rental to convert a detached garage.  Since you have 488 sqft, I'm assuming that you have extended the existing (typically 400 sf) garage?  Does entire foundation needs to be replaced on these conversions or is the existing garage foundation enough?  If it does need replacing, will it be cheaper to build on top and have a raised foundation instead?  Thanks for any input..

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

    I would want to make sure that the anticipated rental income increase would justify all the expense to add 300 sf. When you say adding a JADU what exactly do you mean?

    A JADU is usually an existing space (the garage) converted into a separate living unit but is 500 sq feet or less) the bill allows a JADU and an ADU (above 500 sq ft)

  • Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Ben Aragon:

    @David Maldonado Thanks for sharing this new update in ADU rules!

    I have started working with architect on my LA southbay rental to convert a detached garage.  Since you have 488 sqft, I'm assuming that you have extended the existing (typically 400 sf) garage?  Does entire foundation needs to be replaced on these conversions or is the existing garage foundation enough?  If it does need replacing, will it be cheaper to build on top and have a raised foundation instead?  Thanks for any input..

    No I didn't have to extend. It was a 2 car garage. A little bigger than normal I guess lol. The foundation did not have to be replaced. I didn't replace it. I didn't think the cost to level it with the house was worth it. Plus the ceilings look like their about 8in higher from the house!

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @John A Murray:
    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

    I would want to make sure that the anticipated rental income increase would justify all the expense to add 300 sf. When you say adding a JADU what exactly do you mean?

    A JADU is usually an existing space (the garage) converted into a separate living unit but is 500 sq feet or less) the bill allows a JADU and an ADU (above 500 sq ft)

    Hobie when you say adding a JADU do you mean converting a bedroom in the main house? Also, demo'ing a pool is pretty expensive. You can't just fill it in. A neighbor paid a bit over $13,000 to have his pool broken up and concrete/gunite/plaster hauled away. Maybe best to just convert a room to a JADU and leave the ADU as-is?

    David I think you have it backwards; garages are typically converted into ADU's and bedrooms in the main house are used for JADU's.

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Ben Aragon:

    @David Maldonado Thanks for sharing this new update in ADU rules!

    I have started working with architect on my LA southbay rental to convert a detached garage.  Since you have 488 sqft, I'm assuming that you have extended the existing (typically 400 sf) garage?  Does entire foundation needs to be replaced on these conversions or is the existing garage foundation enough?  If it does need replacing, will it be cheaper to build on top and have a raised foundation instead?  Thanks for any input..

    No I didn't have to extend. It was a 2 car garage. A little bigger than normal I guess lol. The foundation did not have to be replaced. I didn't replace it. I didn't think the cost to level it with the house was worth it. Plus the ceilings look like their about 8in higher from the house!

    David what did you do with the foundation where the big garage door sat? Cut out enough of the old floor, dig and pour a raised foundation?

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

    @David Maldonado Thanks for sharing this new update in ADU rules!

    I have started working with architect on my LA southbay rental to convert a detached garage.  Since you have 488 sqft, I'm assuming that you have extended the existing (typically 400 sf) garage?  Does entire foundation needs to be replaced on these conversions or is the existing garage foundation enough?  If it does need replacing, will it be cheaper to build on top and have a raised foundation instead?  Thanks for any input..

    No I didn't have to extend. It was a 2 car garage. A little bigger than normal I guess lol. The foundation did not have to be replaced. I didn't replace it. I didn't think the cost to level it with the house was worth it. Plus the ceilings look like their about 8in higher from the house!

    David what did you do with the foundation where the big garage door sat? Cut out enough of the old floor, dig and pour a raised foundation?

    I had to add a section of concrete that connected both ends where the concrete stop by the garage door. Pretty much the end product is a square of concrete all around the garage.

  • Real Estate Agent · Diamond Bar, CA · Member since 2016 · 112 posts · 29 votes
    6y

    @Chris Mason 

    thanks for the info regarding the loan options for ADUs. Hypothetical, you buy a property, you add the ADU, you refinance after certain time period, how does that process differ from purchasing a property with an existing ADU? Thanks

  • Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Orlando Perez:

    @Chris Mason 

    thanks for the info regarding the loan options for ADUs. Hypothetical, you buy a property, you add the ADU, you refinance after certain time period, how does that process differ from purchasing a property with an existing ADU? Thanks

    That's what I'm going to find out soon when I order an appraisal. This is still fairly new (at least legally) and then won't be much comps well at least in my area. What I could say is that people that converted their garage into a "master room with a sink and a bathroom" had much higher appraisals and sells prices due to the added room and square footage. All depends on the area. In my area conveted garages are highly desirable by buyers because they know it can pay for more than half their mortgage.

  • Investor · Riverside, CA · Member since 2016 · 129 posts · 67 votes
    6y

    Not sure if it’s already been discussed in this thread but have those that built ADUs experienced a significant increase in property taxes? That will likely be one of the side effects of improving your property and should be accounted for in your analysis. The potential rents should more than offset an increase in property taxes but something to consider particularly if you have a low basis on your property. 

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

    An Appraiser recently told me that he would value a "builder quality" $50k garage conversion ADU at maybe around $20k, due to the requirements they have to follow. I believe a similar situation is when there is an overbuilt structure; the buyer has to come in with more cash. As David M. stated above, having something that would pay one-half of your mortgage payment is quite valuable. May be better to find a property with an existing ADU than developing one on your existing property?

  • Rental Property Investor · Los Angeles · Member since 2018 · 25 posts · 11 votes
    6y

    I'm hoping to build a system to do a few of these a year in the same market for the next few years. My intention was to rent all three units (main house and two ADU's), but now I'm thinking it might sense to develop the first two properties and then sell them. Most likely hold for one year for capital gains treatment or 1031. But, then those two sold properties can be used for comps making the BRRR method more viable on subsequent properties. There will be other investors building these for sale as well, so eventually, there will be comps for this product type. I'm extremely confident that buyers will pay WAY MORE than $40k over similar SFR prices for a property with two units that offsets their mortgage substantially.

  • Real Estate Agent · Diamond Bar, CA · Member since 2016 · 112 posts · 29 votes
    6y

    @Mike Akerly in what county do you have the main property and 2 ADU units? It is my understanding that in LA County you may only have 1 attached or detached ADU per parcel. Is that correct? Is this similar in your market?

  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y
    Originally posted by @Orlando Perez:

    @Mike Akerly in what county do you have the main property and 2 ADU units? It is my understanding that in LA County you may only have 1 attached or detached ADU per parcel. Is that correct? Is this similar in your market?

    Read SB68. It allows ADU and JADU and lessened some other constraints.

    Current rules ADU, JADU, SFH. No longer allowed to require owner occupancy. Some Other restrictions have been removed.

    Wait a few more years and I would not be surprised if every SFH can be converted to a quad.

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Yes big difference between ADU and JADU. I
    have a back bedroom with bath that would make a perfect JADU; just set up a kitchenette and put in an outside door and an inside door. Don't know if I want to have someone living that close but I believe it would add value when I sold. Buyer would have the option to rent or not The ADU and the JADU would make their mortgage payment. That's worth something, no?
  • Investor · Walnut, CA · Member since 2017 · 72 posts · 37 votes
    6y

    I funded a ADU project on a property, the city found a loophole to restrict ADU to lots of 17K or more and huge set backs (property line to housing wall). Lost $3k in the initial cost. Another BP post had a guy struggling to get his house appraised to include the additional ADU sqft. Guy was attempting to sell his house. Our only what is to have an attached addition but we don't want to.

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Orlando Perez:

    @Chris Mason 

    That's what I'm going to find out soon when I order an appraisal. 

    Hi David was the appraisal performed? If so then what was the value?

  • los angeles, CA · Member since 2017 · 31 posts · 5 votes
    6y

    From my understanding

    You can build an ADU of max 1200 and then convert current space in your main house as JADU

    Few things that has not been clarified

    Does the 1200 Adu space limited to total space between ADU and JADu? If not, it's consider 1200 + 500 = 1700 allowable ADU space

    Second, the bill stated exist space of the dwelling unit for JADu, which might suggest a garage can also be used as JADu, however the bill didn’t suggest 2 detached unit were allowed (not clarified yet),

    Third

    Separation space was not addressed.

    Anyone has thought on this?

  • Architect · San Jose, CA · Member since 2014 · 90 posts · 57 votes
    6y

    All depends on how the jurisdiction has allowed to interoperate the state bills @Jimmy Yu

  • los angeles, CA · Member since 2017 · 31 posts · 5 votes
    6y

    @Adam Mayberry

    Correct

    My interpretation is that, you can do 1200 and 500, as long as it’s legal dwelling/structure already in the lot

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Orlando Perez:

    Hi David did you get your place appraised? If so then what was the value? Thanks!

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

    Hi David did you get your place appraised? If so then what was the value? Thanks!

     Hey John,

    No I haven't had the chance yet unfortunately. 

  • Member since 2019 · 21 posts · 4 votes
    6y

    @Drew Leo

    Care to share which city this was? Also, will their loophole be voided once new state laws go into effect 1/1/20?

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