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
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).

See this reply in the discussion

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

    Hi David thanks for the update. I wonder if the city of Long Beach will require solar on my detached garage conversion. I've heard that some cities do and some don't. In any event my plans are in plan check and I'll find out soon enough.

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

    Hi David thanks for the update. I wonder if the city of Long Beach will require solar on my detached garage conversion. I've heard that some cities do and some don't. In any event my plans are in plan check and I'll find out soon enough.

    If the garage is an existing structure, then no you would be exempt. It only applies to new construction that does not share a wall with the house. Yeah I reccomend you get in touch with the county's inspectors and request them to send you their ordinances.

  • Rental Property Investor · Lancaster, CA · Member since 2015 · 103 posts · 55 votes
    6y

    I'm confused at to why some folks on here are saying that adding an ADU will lower my property value. It's definitely the contrary. You now basically have a duplex for sale and that's an investment property. Always worth more than an SFR. I converted an attached 1 car garage into an ADU and the property already had a 2 car garage behind the home and ADU. Maybe it's an issue if there is no longer a garage but I still don't see that being a problem for a rental property investment.

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

    @Steve Graves

    I think you're absolutely right from an investors point of view. I believe the issue with the property value is that appraisers (and therefore lenders) aren't including the square footage of the ADU with the price per sf of the property. I would've hoped that they would comp the property more with a multi-unit vs a SFR, but I have heard otherwise from other investors. Appraisers haven't set a standard for it yet and as such, appraisals and lending need to catch up to the recent ADU laws. I'm hoping that very soon they will come up with an answer because to your point, it's basically an SFR that's been converted to a multi-unit property.

  • Rental Property Investor · Long Beach, CA · Member since 2019 · 145 posts · 49 votes
    6y
    Originally posted by @Leah Anderson:

     

    Hi Leah

    We are just getting started, and are waiting on the city to plan check our ADU; our architect submitted it on January 29. Don't foresee any problems but keep hearing conflicting info about solar panel requirement. That's my only question/concern at this point.

    Very good that you had it built to code. Is the contractor who converted the garage still around? He might have info that would assist you in permitting the ADU, and would be the best guy to deal with the city on your behalf. In any event you'll find out soon enough what needs to be done. 

    We are going to update here as we progress and it would be good to follow your progress.

  • Member since 2019 · 1 post · 0 votes
    6y

    @Steve Graves some local restrictions could be placed when permit is approved for ADU/JADU that will reduce the pool of home buyers. Sunnyvale in Bay Area for example, places a owner occupied deed restriction when approving JADU permit (not for regular ADU though).

    “ Owner Occupancy Required/Deed Restriction (JADU Only): The property owner must live in either the JADU or the primary dwelling. Prior to issuance of the building permit, the property owner shall sign and record a deed restriction that states that the property shall be owner-occupied from the date of recordation as long as the JADU remains on the property. The deed restriction forms and recordation instructions will be provided by the Planning Division.” From https://sunnyvale.ca.gov/civicax/filebank/blobdload.aspx?BlobID=23584

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

    @Steve Graves some local restrictions could be placed when permit is approved for ADU/JADU that will reduce the pool of home buyers. Sunnyvale in Bay Area for example, places a owner occupied deed restriction when approving JADU permit (not for regular ADU though).

    “ Owner Occupancy Required/Deed Restriction (JADU Only): The property owner must live in either the JADU or the primary dwelling. Prior to issuance of the building permit, the property owner shall sign and record a deed restriction that states that the property shall be owner-occupied from the date of recordation as long as the JADU remains on the property. The deed restriction forms and recordation instructions will be provided by the Planning Division.” From https://sunnyvale.ca.gov/civicax/filebank/blobdload.aspx?BlobID=23584

     The new sb 13 does not allow local jurisdictions to enforce an owner occupancy restriction on jadu or adus until 2025 but when 2025 passes, I doubt they will enforce the deed restriction for anyone who built jadus or adus prior to that because how would they enfore that on people who own mulitple homes with Jadus or adus?

  • Specialist · Redwood City, CA · Member since 2019 · 16 posts · 18 votes
    6y

    Hi everyone, I just want to clarify that while owner occupancy is not required for ADUs built within the next 5 years, JADUs are the exception (with a few exceptions) per Section 65852.22:

    “(2) [JADUs] Require owner-occupancy in the single-family residence in which the junior accessory dwelling unit will be permitted. The owner may reside in either the remaining portion of the structure or the newly created junior accessory dwelling unit. Owner-occupancy shall not be required if the owner is another governmental agency, land trust, or housing organization.”

    This applies statewide

  • Rental Property Investor · Los Angeles, CA · Member since 2019 · 49 posts · 17 votes
    6y

    @Account Closed

    Yikes! That spoils some of the fun. Great catch!

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

    Hi everyone, I just want to clarify that while owner occupancy is not required for ADUs built within the next 5 years, JADUs are the exception (with a few exceptions) per Section 65852.22:

    “(2) [JADUs] Require owner-occupancy in the single-family residence in which the junior accessory dwelling unit will be permitted. The owner may reside in either the remaining portion of the structure or the newly created junior accessory dwelling unit. Owner-occupancy shall not be required if the owner is another governmental agency, land trust, or housing organization.”

    This applies statewide

     Good information! I wasn't aware of that for JADU. So how would it work if someone with 2 units decides they want to purchase another owner occupied home and keep the their current home with a jadu and adu as a rental?

  • Real Estate Agent · FRESNO, CA · Member since 2016 · 60 posts · 42 votes
    6y



    For what it's worth, I found this on the HCD site under 

    Accessory Dwelling Unit Technical Assistance memo

    dated Jan 10, 2020. It seems to say ADUs can incorporate garages. When I went to the Fresno planning department, they confirmed they would consider an attached garage conversion a JADU and anything detached as an ADU. I'm sure every municipality will interpret the laws differently.

    65852.2

    (D)
    (iii) The accessory dwelling unit is either attached to, or located within the living area of the within,

    the proposed or existing primary dwelling or dwelling, including attached garages, storage areas or

    similar uses, or an accessory structure or detached from the proposed or existing primary dwelling

    and located on the same lot as the proposed or existing primary dwelling

  • Los Angeles, CA · Member since 2017 · 8 posts · 7 votes
    6y
    Originally posted by @Account Closed:

    Hi everyone, I just want to clarify that while owner occupancy is not required for ADUs built within the next 5 years, JADUs are the exception (with a few exceptions) per Section 65852.22:

    “(2) [JADUs] Require owner-occupancy in the single-family residence in which the junior accessory dwelling unit will be permitted. The owner may reside in either the remaining portion of the structure or the newly created junior accessory dwelling unit. Owner-occupancy shall not be required if the owner is another governmental agency, land trust, or housing organization.”

    This applies statewide

    Watch out for jurisdictions that sneak in language for an owner-occupancy covenant even for ADUs (not just JADUs). Here is language from the City of West Covina:

  • Real Estate Agent · FRESNO, CA · Member since 2016 · 60 posts · 42 votes
    6y

    The above memo also seems to settle the question of what happens after 5 years regarding the owner-occupancy:


    a local agency shall not impose an owner-occupant requirement on an accessory dwelling unit permitted between January 1, 2020, to January 1, 2025, during which time the local agency was prohibited from imposing an owner-occupant requirement

  • Investor · San Mateo, CA · Member since 2015 · 62 posts · 52 votes
    6y

    I'm also very curious about @David Maldonado's question and how they enforce owner occupancy if the owner decides to move and keep the property as a rental. 

    @Marinelle Tan as far as whether an existing property can be partitioned into multiple units, feels like that may also depend on how the municipality interprets the language. An attached ADU in the city I'm working with, based on my impression, is a new build with a shared wall to the existing property, and any conversion of existing space is JADU. Seems like every city does it differently.

  • Los Angeles, CA · Member since 2017 · 8 posts · 7 votes
    6y
    Originally posted by @Barbie Steele:

    The above memo also seems to settle the question of what happens after 5 years regarding the owner-occupancy:


    a local agency shall not impose an owner-occupant requirement on an accessory dwelling unit permitted between January 1, 2020, to January 1, 2025, during which time the local agency was prohibited from imposing an owner-occupant requirement


    It seems like the City of West Covina is misinterpreting the State language. The State memo seems clear that owner-occupancy is not required (even after Jan 1st 2025) as long as the permit was issued between Jan 1st 2020 and Jan 1st 2025. 

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

    Hi Team,

    My ADU was permitted in 2017 and did not break ground until 2018.

    As of today, it still has not bee signed off by the city...contractor abandoned the project.

    Question - would this be considered part of the 2020-2025 ruling on not being able to rent both units? 

    Thank you,

    Ronnie

  • Specialist · Redwood City, CA · Member since 2019 · 16 posts · 18 votes
    6y
    Originally posted by @David Maldonado:
    Originally posted by @Account Closed:

    Hi everyone, I just want to clarify that while owner occupancy is not required for ADUs built within the next 5 years, JADUs are the exception (with a few exceptions) per Section 65852.22:

    “(2) [JADUs] Require owner-occupancy in the single-family residence in which the junior accessory dwelling unit will be permitted. The owner may reside in either the remaining portion of the structure or the newly created junior accessory dwelling unit. Owner-occupancy shall not be required if the owner is another governmental agency, land trust, or housing organization.”

    This applies statewide

     Good information! I wasn't aware of that for JADU. So how would it work if someone with 2 units decides they want to purchase another owner occupied home and keep the their current home with a jadu and adu as a rental?

    Great question! I haven't read anything addressing that yet but it obviously will need to be ironed out at some point. There are still several outstanding issues needed to be resolved by HCD as a result of the new 2020 bills that we're still waiting on (e.g. the discrepancy between the 800 & 850 sq ft min ADU size used in the legislation)

  • Poway (San Diego) · Member since 2018 · 25 posts · 7 votes
    6y

    David, thank you for sharing! Besides the technical aspects how has it

    been knowing there is someone living so close and dealing with any

    potential noise conflicts (loud TV or whatever)? I don't see how its much

    different then how people live in an apartment separated by a wall but I

    am curious as to your thoughts and your wife's. I am considering something similar, the wife is hesitant. 

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

    @Ronnie S.

    I’m no expert, but I think if your permit was pulled in 2017/2018, it does not apply to the 2020-2025 rulings. If your contractor didn’t finish, then it’s technically unpermitted (permit not signed off by the city inspector), which I suppose is only an issue if you want to sell.

  • Los Angeles, CA · Member since 2017 · 8 posts · 7 votes
    6y

    @Ronnie S. @Marinelle Tan

    I wonder what would happen if you let the permit lapse. Typically the construction permit expires if there is no inspection for six months (you may want to confirm this with your building department).

    If you let the ADU become unpermitted and turn around and pull a new permit to legalize it and wrap up the construction, technically it's now a new permit which falls in the 2020-2025 period. It's a loophole, but may be worth a try.

  • Rental Property Investor · Glendale, CA · Member since 2015 · 14 posts · 3 votes
    6y
    @Chris Mason great point.
  • Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
    6y
    Originally posted by @Adam Bileckyj:

    David, thank you for sharing! Besides the technical aspects how has it

    been knowing there is someone living so close and dealing with any

    potential noise conflicts (loud TV or whatever)? I don't see how its much

    different then how people live in an apartment separated by a wall but I

    am curious as to your thoughts and your wife's. I am considering something similar, the wife is hesitant. 

     Hey Adam,

    You're right its not that different than living in a multifamily but on the plus side we get to live in a residential neighborhood. I built a double wall with RC channels and inside that minimize the noise (could barely hear anything coming from the unit. I also have a decent size back yard and added a fence to the unit to separate the yards. My wife doesn't mind it at all because we still have our privacy It's not bad at all especially for some excellent cash flow.

  • Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    6y

    California needed this law, due to the housing shortage. Whenever you add another unit, you essentially have a small apartment building. It will be interesting how they classify these for resale. In my local MLS, they would be listed in the 2-5 unit category. But some of these California properties might be more or a house, rather than a small apartment building.

    For the amount of capital you invested, you will achieve a great return.  

  • Member since 2018 · 89 posts · 67 votes
    6y

    Interesting topic, we purchased a 3/2 SFH in Georgia with traditional financing (fannie) it had an attached garage built on with apartment above it 2/1 ~880 sqft. Separate entrance so I guess it's considered an ADU? It never came up in the purchase. It also has a 2 car garage that was closed in and we will probably close off the door into the main house and finish it into a 1br 1bth. If it became an issue when time to sell I would just blow out the door into the main house and sell it as a 6br 4 bth.

  • Member since 2020 · 2 posts · 0 votes
    6y

    Hi everyone. First ever post on bigger pockets. I live in westside LA and I'm building an 1200 sqft ADU from the ground up in my backyard. I'm using a construction-to-permanent loan. Once my architect produces plans, the bank will have my property and ADU plans appraised. I'm hoping that my property is appraised high enough so that with 80% LTV I don't have to put any cash on hand into the deal to create a bigger equity cushion for the bank.
    So my question is, has anyone had any experience whatsoever in getting a detached ADU appraised? There are no good comps in the area. I'm getting different answers from everyone I talk to. I've heard "they'll take your px/sqft for your primary rez, multiply by ADU sqft, and then cut it in half as an ADU discount" and I've heard others say they've seen an appraiser just added the square footage to the primary home and treat it as if it commanded the same px/sqft as if it were 1 big structure. I've also been told that appraisers are required to use the "highest and best use" which is probably as  a rental property, and try to estimate rent and cap rates and back into a value that way. Really all three methods would give wildly different values of the ADU. I'm about to sink a pretty penny into architecture/engineering fees, and if this appraisal is a total flop I might have to abandon the project and take the hit. Trying to get a better sense of what to expect from appraisal. Thanks!!

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