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

    First time home buyer here looking for tips. I want to utilize this strategy in the Orange County market, but I am running into difficulty in getting the numbers to work. I am targeting a SFR in the high 400s/low 500s - 3bd with a detached garage.

    Since I have no experience, I can't be hands on with the conversion. I'm estimated around 80k all in. For now I am assuming total financing at 605k ($525k SFR + $80k conversion) w/ 3.5% down to have an all in monthly cost of $3600 (vacancy & R&M included) vs monthly rents of $3400 ($2200 for the 3bd 1000s sq ft SFR and $1200 for the 1bd 400 sq ft ADU).

    I still need to figure out the financing part on the conversion.  I could finance it myself with cash, but if I leave that money in the property then it will reduce my monthly costs to $3300 w/ only a $100 monthly cash flow and 1.2% cash on cash return.  

    Ideally I'd like to live at the property for 1-2 years. I'd live in the SFR until the ADU is ready, then eventually rent out both units. What holes do you see in my strategy and do you have any recommendations for this first time home buyer? Looking to take my first step towards financial freedom, like all of you vets out there! Thanks and happy holidays!!

    2Reply
  • Rob Moran
    Investor · Riverside, CA · Member since 2016 · 129 posts · 67 votes
    6y

    My only suggestion regarding Junior ADU's is to make sure you understand the law and what constitutes a "Junior" ADU. There are specific requirements such as what size drain line you can have in the kitchen and how much electrical power you can supply, no gas or propane. If you plan on pulling permits for this work, your jurisdiction will watch this closely.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    6y

    I've been corresponding with a non profit in CA that is doing work on ADU regulations, etc. I will send a link to this thread, and maybe after the holidays he can weigh in.

    1Reply
  • Brandon Carlson
    Real Estate Consultant · Glendora, CA · Member since 2019 · 314 posts · 95 votes
    6y

    @Chris Mason @David Maldonado

    Need a little clarification on the refinancing statement. I currently have a sfh with a detached garage that I plan on converting into an ADU. My lot is over 13,000 sqft and I have the space to build an additional unit. My goal is to have 3 rentals on the property.

    My question is: After I build the units, can I do a cash-out refi and use the equity to purchase another home?

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

    @Chris Mason @David Maldonado

    Need a little clarification on the refinancing statement. I currently have a sfh with a detached garage that I plan on converting into an ADU. My lot is over 13,000 sqft and I have the space to build an additional unit. My goal is to have 3 rentals on the property.

    My question is: After I build the units, can I do a cash-out refi and use the equity to purchase another home?

     Legally and fully convert it to a three unit property, permits and zoning and the whole nine yards, and yup you certainly can.

    1Reply
  • Alex Kim
    Lender · Irvine, CA · Member since 2018 · 71 posts · 15 votes
    6y

    @Tim G.

    No subdivision will be ever granted by counties/cities for properties with ADUs. However, nothing prevents two parties from owning % of that lot and living in each building (one in main and other in ADU), creating tenants in common.

    We may soon see the first individually financed (30 yr mortgage) ADU in LA this year and it will be very interesting. Talk about affordable housing.

    0Reply
  • Alex Kim
    Lender · Irvine, CA · Member since 2018 · 71 posts · 15 votes
    6y

    @Brandon Carlson As @Chris Mason mentioned, if you can legally convert it to 3 unit property, and do it cheap, you can def refi and pull money out. The best case scenario. Check with city/county first.

    If you are thinking of 3 units consisting of SFR, ADU, JADU, you may not get your money back since ADUs don't appraise well.

    1Reply
  • Alex Kim
    Lender · Irvine, CA · Member since 2018 · 71 posts · 15 votes
    6y

    @Peter Mai @Drew Leo mentioned in another post it was Walnut, CA. Per new guidelines, cities cannot have the minimum lot size requirement.

    1Reply
  • Peter Mai
    Member since 2019 · 21 posts · 4 votes
    6y

    @Alex Kim thanks for the reply.  

    My current strategy is SFR+ADU+JADU as you mentioned above to maximize cash flows. Do you have any tips on how the construction of the ADU+JADU could be financed? Or is this not possible?

    When do you anticipate a favorable shift in appraisals for ADUs, if ever?  

    0Reply
  • Mike Akerly
    Rental Property Investor · Los Angeles · Member since 2018 · 25 posts · 11 votes
    6y

    @Peter Mai the shift will definitely come. As the starting point, ADU's need to be built in larger quantities, which I think we will begin to see in the coming year. Eventually, properties with ADU's will begin to trade and those sales will set the comps. The problem now is that if you're looking to do a cash out re-fi (e.g. as part of a BRRRR strategy involving the development of ADU's), there typically are no comps for an SFR + ADU + JADU, so an appraiser makes adjustments to SFR comps and gives very little value to the ADU's. However, when the business model of "value add via ADU addition and rehab" gains some traction in a given market, and those properties with begin to trade, there will be comps. I can certainly tell you in SoCal if you had a single family home with an ADU that generates an extra $2k per month in income, end-user buyers will not be thinking "I'd pay an extra $20k for that." Those properties will sell for significantly more than SFR's without ADU's (six figures more), and then appraisers can base their valuations on actual comps that more appropriately reflect the market value.

    In the meantime, BRRRR may be difficult to achieve. I've half-thought about the possibility of doing a couple of flips in the same micro-market by adding ADU's. To the point above, then there would be comps and BRRRR may be viable for the third and subsequent properties in the same market.

    3Reply
  • Alex Kim
    Lender · Irvine, CA · Member since 2018 · 71 posts · 15 votes
    6y

    @Peter Mai Everything @Mike Akerly said as residential appraisals are based on comps, not income. If you're thinking of cashflow thru ADU, think long term. It will take some time for appraisers to catch up to this trend. Until then, your typical buyer can't get their loan approved for your cash flowing property because appraisal will come in low.

    If you have equity, you can use HELOC or cash-out refinance. They currently have the lowest %. Your local ADU specialists will know other lenders who will do construction loans but probably at higher % & points.

    0Reply
  • Drew Leo
    Investor · Walnut, CA · Member since 2017 · 72 posts · 37 votes
    6y
    y @Alex Kim:

    Good to know the new 2020 law will eliminate the lot restrictions. Will be checking out buildings & contractors this year for insights & quotes

    0Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y
    Originally posted by @Mike Akerly:

    @Peter Mai the shift will definitely come. As the starting point, ADU's need to be built in larger quantities, which I think we will begin to see in the coming year. Eventually, properties with ADU's will begin to trade and those sales will set the comps. The problem now is that if you're looking to do a cash out re-fi (e.g. as part of a BRRRR strategy involving the development of ADU's), there typically are no comps for an SFR + ADU + JADU, so an appraiser makes adjustments to SFR comps and gives very little value to the ADU's. However, when the business model of "value add via ADU addition and rehab" gains some traction in a given market, and those properties with begin to trade, there will be comps. I can certainly tell you in SoCal if you had a single family home with an ADU that generates an extra $2k per month in income, end-user buyers will not be thinking "I'd pay an extra $20k for that." Those properties will sell for significantly more than SFR's without ADU's (six figures more), and then appraisers can base their valuations on actual comps that more appropriately reflect the market value.

    In the meantime, BRRRR may be difficult to achieve. I've half-thought about the possibility of doing a couple of flips in the same micro-market by adding ADU's. To the point above, then there would be comps and BRRRR may be viable for the third and subsequent properties in the same market.

     I really like everything you said and for the most part agree. I'm doing exactly what you mentioned about buying, adding ADUs and either waiting or "flipping" them to build comps. Why only the half thought? What's making you hesitate from going for it?

    0Reply
  • Mike Akerly
    Rental Property Investor · Los Angeles · Member since 2018 · 25 posts · 11 votes
    6y

    @Matthew Forrest I just haven't pulled the trigger on making ADU development my priority business plan. That being said, I do think it has a lot of legs. I'm also getting increasingly weary of SoCal purchases for a number of reasons, though I'm still planning to pick something up this year locally.

    1Reply
  • Eric Goldman
    Homeowner · Toluca Lake · Member since 2020 · 4 posts · 3 votes
    6y

    I closed today on a SFH in North Hollywood CA (91601). It's a big 10,400sf corner lot which currently has a 1,614sf 2Bed2bath home. This is an investment property (buy/hold) that I'm planning to develop considering the new 2020 laws. Here's my plan that I have done extensive research on and have already been talking with an expeditor (I recommend using one if your doing one of these ADU/JADU projects right now since the city is backed up and honestly confused).

    1. Add small bedroom to main house in existing space so I now have a 3bed/2bath SFH

    2. JADU 1bed/1bath attached garage (Maxed out at 550sf)

    3. ADU 1,200 SF 3bed , 2bath MANUFACTURED HOME place on permanent foundation.

    This plan allows me to cash flow almost $3,500/month with all 3 rentals. (used bigger pockets calc.) 

    Im funding the project with a 10/1 Arm (3.65% !) and then using a HELOC on my primary and some cash for the JADU/ADU projects.

    I have confirmation from the city that the manufactured home is permitted and I have been to two factories to see the units in person.  They are an amazing value at almost 40% of stick built cost and are built extremely well these days.  A renter in my area would pay the exact same amount for a brand new manufactured home as they would a stick built (they probably wouldn't know the difference since its put on a proper foundation anyway).  I advise you to research them. I'm not talking modular or prefab.  "manufactured homes" yes previously known as mobile homes, but they have advanced tremendously in the last few years. 

    I'm hoping appraisers start to see the value of these additional units in the next few years so that I can Refi into a traditional 30yr while rates are still low. If anyone has information re: fannie mae freddie mac NOT lending on this type of property structure please post.  I'll continue to update on my progress with this project for anyone interested. Thanks for sharing all the info. -Eric

    1Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y

    @Eric Goldman Awesome! Congrats on the new property. I've seen some presentations on the prefab homes and I have to admit they look pretty great. Especially the ones that use a lot of metal & glass. @Chris Mason has commented on several threads about the potential danger of not being able to get conventional financing on a single family lot that has more than one "additional unit." ADU and JADU would be more than one additional unit. I would also like to add a JADU on my property so I am in the process of exploring all of the financing considerations with my lender.

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

    I closed today on a SFH in North Hollywood CA (91601). It's a big 10,400sf corner lot which currently has a 1,614sf 2Bed2bath home. This is an investment property (buy/hold) that I'm planning to develop considering the new 2020 laws. Here's my plan that I have done extensive research on and have already been talking with an expeditor (I recommend using one if your doing one of these ADU/JADU projects right now since the city is backed up and honestly confused).

    1. Add small bedroom to main house in existing space so I now have a 3bed/2bath SFH

    2. JADU 1bed/1bath attached garage (Maxed out at 550sf)

    3. ADU 1,200 SF 3bed , 2bath MANUFACTURED HOME place on permanent foundation.

    This plan allows me to cash flow almost $3,500/month with all 3 rentals. (used bigger pockets calc.) 

    Im funding the project with a 10/1 Arm (3.65% !) and then using a HELOC on my primary and some cash for the JADU/ADU projects.

    I have confirmation from the city that the manufactured home is permitted and I have been to two factories to see the units in person.  They are an amazing value at almost 40% of stick built cost and are built extremely well these days.  A renter in my area would pay the exact same amount for a brand new manufactured home as they would a stick built (they probably wouldn't know the difference since its put on a proper foundation anyway).  I advise you to research them. I'm not talking modular or prefab.  "manufactured homes" yes previously known as mobile homes, but they have advanced tremendously in the last few years. 

    I'm hoping appraisers start to see the value of these additional units in the next few years so that I can Refi into a traditional 30yr while rates are still low. If anyone has information re: fannie mae freddie mac NOT lending on this type of property structure please post.  I'll continue to update on my progress with this project for anyone interested. Thanks for sharing all the info. -Eric

    Well you can always convert the jadu into a 1 bed 1 bath addition to be part of the house if you ever decide to sell. I'm coming up with a strategy on building a 2nd unit on my property to where I can convert it as part of the house if I ever plan on selling (which I don't plan to). 

    0Reply
  • Eric Goldman
    Homeowner · Toluca Lake · Member since 2020 · 4 posts · 3 votes
    6y

    Thanks David, I actually just had that same thought yesterday. Seems easy enough lol !


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

    Thanks David, I actually just had that same thought yesterday. Seems easy enough lol !


    Yes lol just make sure to go over it wity your architect!
    1Reply
  • Leah Anderson
    Aliso Viejo, CA · Member since 2020 · 3 posts · 0 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.


    Hi John,

    I also own a home in the Los Altos area near CSULB. I converted my detached garage into an unpermitted ADU 10 years ago for my disabled mother. According to new laws/regulations, I can now legally permit my preexisting ADU. Plumbing and electrical are up to code, but I am sure that the city will request other modifications. I plan to start the permitting process thus month. With you being right in my neighborhood, I would love to network with you and your wife and I'd like to possibly take a look at your new ADU.

    Thank you

    0Reply
  • Marinelle Tan
    Rental Property Investor · Fullerton, CA · Member since 2019 · 10 posts · 7 votes
    6y

    I am potentially going to get under contract a 3504sf 6/3 SFR in Long Beach that was previously used illegally as an assisted living facility. It was originally a 3/1 and the previous owner added 3 bds and 2 baths. I spoke with zoning and they would allow for 1 ADU and 1 JADU. I plan to just divide up the 6/3 into a 3/1, 2/1, and a 1/1, if possible. I know I'm getting it at a good price, but I'm concerned about the ability for it to appraise whether I decide to flip it or hold. Seems like that's an issue for everybody on this thread, but cash flow-wise, it seems pretty promising. Would love to get more insight from others in this chat. I'm near the Long Beach area, so would love to meet up and discuss more with whoever is interested to meet.

    0Reply
  • Hai G.
    Investor · San Mateo, CA · Member since 2015 · 62 posts · 52 votes
    6y

    @Marinelle Tan Did the planning department give you green light specifically on partitioning 1 JADU and 1 ADU units out of the main existing house? As far as I know (fairly certain though not 100%) only JADU is allowed to be converted from existing space, the other attached or detached ADU needs to be new build, at least that's what I heard in the Bay Area. Would love to be corrected if that's not the right understanding.

    2Reply
  • David Maldonado
    OP
    Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y

    ADU 2020 UPDATES:

    So for my county (Santa barabra) I spoke with the building department and got an answer about the loophole to avoiding the solar panels I brought up here. First off, JADUs under 500 sq feet (garage conversion usually) are exempt from solar but DETACHED ADUs are not and you can have both for those who didn't know. According to my county's ordinance, a detached ADUs DOESNT NOT share walls with the house (literally detached) but if the ADU shares a wall, it is exempt from solar because it is considered an addition just like the JADU. That being said, now my question is if during an appraisal will it be counted as added square footage? Since the county are the ones who input the information about the property. I'll be finding out soon and ordering an appraisal for an equity loan so I can build a 2nd unit on my property.

    I'll keep everyone posted!

    2Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    6y
    Originally posted by @Eric Goldman:

    I closed today on a SFH in North Hollywood CA (91601). It's a big 10,400sf corner lot which currently has a 1,614sf 2Bed2bath home. This is an investment property (buy/hold) that I'm planning to develop considering the new 2020 laws. Here's my plan that I have done extensive research on and have already been talking with an expeditor (I recommend using one if your doing one of these ADU/JADU projects right now since the city is backed up and honestly confused).

    1. Add small bedroom to main house in existing space so I now have a 3bed/2bath SFH

    2. JADU 1bed/1bath attached garage (Maxed out at 550sf)

    3. ADU 1,200 SF 3bed , 2bath MANUFACTURED HOME place on permanent foundation.

    This plan allows me to cash flow almost $3,500/month with all 3 rentals. (used bigger pockets calc.) 

    Im funding the project with a 10/1 Arm (3.65% !) and then using a HELOC on my primary and some cash for the JADU/ADU projects.

    I have confirmation from the city that the manufactured home is permitted and I have been to two factories to see the units in person.  They are an amazing value at almost 40% of stick built cost and are built extremely well these days.  A renter in my area would pay the exact same amount for a brand new manufactured home as they would a stick built (they probably wouldn't know the difference since its put on a proper foundation anyway).  I advise you to research them. I'm not talking modular or prefab.  "manufactured homes" yes previously known as mobile homes, but they have advanced tremendously in the last few years. 

    I'm hoping appraisers start to see the value of these additional units in the next few years so that I can Refi into a traditional 30yr while rates are still low. If anyone has information re: fannie mae freddie mac NOT lending on this type of property structure please post.  I'll continue to update on my progress with this project for anyone interested. Thanks for sharing all the info. -Eric

    This sounds like a very wise imvestment. Let us know how it goes for sure. Good luck!

    0Reply
  • Marinelle Tan
    Rental Property Investor · Fullerton, CA · Member since 2019 · 10 posts · 7 votes
    6y
    Originally posted by @Hai G.:

    @Marinelle Tan Did the planning department give you green light specifically on partitioning 1 JADU and 1 ADU units out of the main existing house? As far as I know (fairly certain though not 100%) only JADU is allowed to be converted from existing space, the other attached or detached ADU needs to be new build, at least that's what I heard in the Bay Area. Would love to be corrected if that's not the right understanding.

    Ok, so I wanted to make sure I grabbed the paperwork from the planning dept before I responded to you.  

    This paper from the City of Long Beach says, effective Jan 1, 2020, an ADU means "an attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons and is located on a lot with a proposed or existing primary residence. It shall include permanent provisions for living, sleeping, eating, cooking, and sanitation on the same parcel as the SF or MF dwelling is or will be situated." a JADU "means a unit that is no more than 500 sf in size and contained entirely within a SFR. A JADU may include separate sanitation facilities, or may share sanitation facilities with the existing structure. - Note: a JADU can only be created through conversion of a portion of an existing SFD, not a garage or other accessory building."

    0Reply
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