ADU Appraisal California
Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes
ADU Appraisal California
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Rental Property Investor · Santa Clara, CA · Member since 2019 · 160 posts · 156 votes
5yWanted to share with you a great way to tap into the equity built from your ADU.
The problem today: most appraisers used by traditional lenders would give ADU square footage a second-class treatment than the main house (as some of your mentioned above) since there aren't that many comps and they're trying to be conservative.
However, you can consider taking out a HELOC/doing cash-out refi through Figure.com (HELOC up to $250k, Cash-out refi up to $1M). I just took out a 30-year fixed-rate HELOC through Figure from my San Jose property that has an ADU on it. Unlike the other lenders, Figure.com does automatic appraisal (without a human involved) based on public data and they treat ADU square footage the same as the main house square footage. Because their generous appraisal value, I was able to take out all the cash I invested into the ADU (plus some more). The whole process only took 2 weeks and I'm really happy about it. In fact, you can check your property's appraised value by simply filing out the questions on their website. If you have an ADU on your property, it's super easy to find out approximately how much you can take out through just a few clicks with only a soft credit pull...
A side note: the founder of Figure.com Mike Cagney also founded Sofi and they got pretty some impressive investors. I think they really did a great job simplifying the process and removing all the inefficiencies in mortgage industry today...
39 Replies
- Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes6y
@David Maldonado - I think all of your comments and scenarios are spot on. Appraisers are still generally valuing properties with ADUs as additional sqft for the home. I think this is wrong.
I hope they come up with a standard ADU valuation process soon. I am curious to see if anyone else has any updated info on this topic too.
- Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes6y
Originally posted by @Brian Larson:
@David Maldonado - I think all of your comments and scenarios are spot on. Appraisers are still generally valuing properties with ADUs as additional sqft for the home. I think this is wrong.
I hope they come up with a standard ADU valuation process soon. I am curious to see if anyone else has any updated info on this topic too.
Thanks for the response Brian,
Do you think it would also depend on the area where ADUs are popular? I heard in Fresno CA a garage conversion to ADU actually devalues the property because people prefer to have a garage. But in my area of Santa Maira, people prefer the extra income.
- 6yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
My protégé sold a property in San Diego county shortly before the Corona lock downs. It had a 3/1 standard SFH in pretty good shape and a 1 BR garage ADU conversion with an added small laundry/storage room. The ADU was in near new shape. The SFR value would have been ~$480K (working class area (i.e. cheaper area of San Diego)). The ADU was nice except the entry was less than ideal (It entered through the BR instead of into the living room area). Granite counters, solid wood cabinets, nice flooring. I would think the hands off cost at ~$110K. He placed it on the market at $545K and got a full price offer. Appraisal came back at $530K. The ADU value per the appraisal was at most $50K. The appraised value was based on 4/2 SFH with deltas for differences. No delta for having an extra kitchen (which is the most costly room in a home).
I think the fact that people are paying for hands off ADU conversions should place the price near the hands off ADU conversion price. $480K + $90K (near $110K) = $570K would have seemed more legit of an appraisal.
I know he sold, but I do not know any of the details on how they handled the lower appraisal.
The moral is that it is cheaper to buy a property with an existing ADU than to buy a property and add an ADU.
Good luck
- Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes6y
@Dan H. - I think your bottom line is generally true.
I usually tell my real estate clients not to add an ADU unless they are planning to hold the property for more than 30 years because the real value is the cash flow over time.
- 6yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brian Larson:
@Dan H. - I think your bottom line is generally true.
I usually tell my real estate clients not to add an ADU unless they are planning to hold the property for more than 30 years because the real value is the cash flow over time.
30 years???? That seems real conservative. I would think that 10 years typically would suffice to have made a decent profit between the additional cash flow and the additional appreciation associated with the ADU. It would be rare to be able to build the ADU and sell it immediately realizing a profit.
If you do not already own the property, I see no reason to purchase an RE and build the ADU over purchasing an RE with an existing ADU. The selling price currently seems to under value the ADU so you would get more for your investment purchasing the existing ADU.
- Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes6y
@Dan H. - You are right. It is probably conservative. Essentially, I just want folks to know that it is not a short term investment.
- Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes6y
Interesting, @Brian Larson. I'm flipping a property right that had an unpermitted studio ADU (meaning, the additional square footage on the house was unpermitted as well as the ADU). I had to decide, for resale purposes, whether to permit it as an ADU or permit the space as a nice master bedroom. Ultimately we went with permitting as a master bedroom, but leaving the plumbing in the walls and the layout to support a future ADU. We'll see how the buyers react when it hits the market. Planning to list it as an SFR and make it clear that it's ADU-ready with a $5000 cost for the kitchen if the buyer wishes to do so.
- Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes6y
@Justin R. - Let me know how it turns out for you. I am not familiar with the San Diego Market but I am still interested in hearing about your experience during sale.
- Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes6y
@David Maldonadoalfaro so we own a 2-unit property in CA with a 2 bd/1 bth front house built in 1948 that is 976 sq ft and a back house that is a detached ADU or Mother in Law unit built in 2007 that is a 1 bd/1bth unit with 640 sq feet. The front unit rents for $1200 and the back unit rents for $900. We had a site visit appraisal done for a Heloc and the appraiser valued the front house at $249k which was in line with 2bd/1bth values and the back house he only gave an additional value of $20k. Wait, what? How can a property that commands 75% of the rent of the front property and is 2/3 the size of the front property be valued at less than 10% of the front unit? You can't even get permits for $20k to build that property. This makes absolutely no sense. Head scratcher.
- 6yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brian G.:
@David Maldonadoalfaro so we own a 2-unit property in CA with a 2 bd/1 bth front house built in 1948 that is 976 sq ft and a back house that is a detached ADU or Mother in Law unit built in 2007 that is a 1 bd/1bth unit with 640 sq feet. The front unit rents for $1200 and the back unit rents for $900. We had a site visit appraisal done for a Heloc and the appraiser valued the front house at $249k which was in line with 2bd/1bth values and the back house he only gave an additional value of $20k. Wait, what? How can a property that commands 75% of the rent of the front property and is 2/3 the size of the front property be valued at less than 10% of the front unit? You can't even get permits for $20k to build that property. This makes absolutely no sense. Head scratcher.
A couple of items 1) ADUs are not appraising at anywhere close to the hands off construction cost. There are quite a few posts in this thread that state this. 2) Property with less than 5 units are not valued by income. They are valued by comps. The fact that the ADU has rent of $900 has no bearing on the value. If you desire the NOI to be the basis of value then you need to purchase properties with 5+ units. 3) in many markets, including my market, refi and HELOC appraisals are conservative. In my BRRRR pro forma, I forecast appraisals 10% below the value that I believe would be established by selling the property.
Still $20k for an 640' ADU does seem low. My protege's ADU was probably closer to 800' and was valued at less than $50k by the appraisal. My estimate of hands off construction costs of his 1 BR ADU is $110k. So the appraised value was less than half of the hands off construction cost.
- Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes6y
@Dan Heuschele pretty sure it cost $75k+ to build the ADU back in 2007. I do realize residential is valued on comps and not NOI like commercial but even on a multi unit residential appraisal they do a value analysis based on rents and a cost to build analysis. You would think these would impact the appraisal/value in some way.
- 6yJames CarlsonPro MemberReal Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
I have had a similar experience as @Brian G.. I just had a client under contract on a home in Aurora, CO (connected to Denver). It had a 450sf carriage house out back. The appraiser valued it at $25,000, or $55/sf. That's only about $250-$300/sf less than the main-house $/sf values we'd see in that area.
I hear you about the income generated as well, but they don't do an income valuation. It's all based on market, and right now, the market just doesn't know what to do with these units. It's ridiculous as they bring a ton of value in terms of mortgage reduction and even cash flow. But while I think our Denver appraiser's value was nuts, it's probably also true. I see most SFH with carriage houses where were work in Denver and in Colorado Springs go for not that much more than SFH in the area without the carriage house.
That will surely change as more and more people recognize the value of an ADU/mother-in-law suite.
- Rental Property Investor · Santa Maria, CA · Member since 2019 · 158 posts · 81 votes6y
Originally posted by @Brian G.:
@David Maldonadoalfaro so we own a 2-unit property in CA with a 2 bd/1 bth front house built in 1948 that is 976 sq ft and a back house that is a detached ADU or Mother in Law unit built in 2007 that is a 1 bd/1bth unit with 640 sq feet. The front unit rents for $1200 and the back unit rents for $900. We had a site visit appraisal done for a Heloc and the appraiser valued the front house at $249k which was in line with 2bd/1bth values and the back house he only gave an additional value of $20k. Wait, what? How can a property that commands 75% of the rent of the front property and is 2/3 the size of the front property be valued at less than 10% of the front unit? You can't even get permits for $20k to build that property. This makes absolutely no sense. Head scratcher.
I can only imagine the frustration. In my hometown there was a tiny 1 bed 1 bath home about 500 sq ft that sold for 200k and thats close to the same size as my JADU. Hopefully new appraisal guidelines for adus come out soon.
- Member since 2019 · 2 posts · 4 votes5y
I'm coming in late on this thread but wanted to share what I've found. The best resources for this question are going to be in regions where the ADU has been embraced as an innovative way to create more places for people to live: the Pacific Northwest, specifically Portland, are the key players here.
California is not too far behind because the state has made it much easier to permit an ADU through laws, including the latest in early 2020.
The basic answer to the question is a permitted ADU should add 20-30% to the value of your property. I emphasized "should add" because of all the problems everyone has mentioned so far. I won't rehash those, but will include links to several resources that will help you sort this out and should allow you, with some effort, to get the right value (20-30% value added to property) out of your ADU.
This one's short and sweet with some good suggestions under "Tips for Homeowners" at the end.
At 13 pages long, you have to be an ADU wonk to get through this one, but it's got lots of great info including quite a few examples of properties with ADUs in PDX.
Maybe you're already familiar with this resource. It's the best site for ADU info I've found.
Finally, my own real world example:
I bought a house in Lakewood, CA for $550,000 and could have flipped it, but decided to turn it into a duplex by adding a permitted ADU, which I will be, hopefully, building in 2021.
The main house is a 3/2 at 1,600 sq. ft, I did a full renovation on (new stucco, floors, paint, remodeled kitchen, master suite, etc.) for $63k, and it rents for $2,750 month.
After I finished the renovation, the house was appraised at $670k at the beginning of 2020, although with the current crazy market, Dec. 2020 comps place it at around $700-725k if I were to sell it now.
I'm going to add a detached ADU garage conversion that is 550-700 (still working on designs and budget, but I intend to hold at $100k max). Based on extensive research for rents in the neighborhood, I will be able to get $1,500-1,700 for it initially.
Since the property will no longer have a garage, I will go with only 20% value added for the ADU. I will also go with the bottom of the comp range at $700k for the property now (although in a year, it's safe to say that will be more): this places the added value of the ADU at $140,000 and the total value of the property at $840,000.
And I'll be making $4,250 mo. in rent.
For me, the only way I would buy a house in SoCal is if I intend to build a permitted ADU on the property.
Have a good one!
- Member since 2019 · 2 posts · 4 votes5y
I'm coming in late on this thread but wanted to share what I've found. The best resources for this question are going to be in regions where the ADU has been embraced as an innovative way to create more places for people to live: the Pacific Northwest, specifically Portland, are the key players here.
California is not too far behind because the state has made it much easier to permit an ADU through laws, including the latest in early 2020.
The basic answer to the question is a permitted ADU should add 20-30% to the value of your property. I emphasized "should add" because of all the problems everyone has mentioned so far. I won't rehash those, but will include links to several resources that will help you sort this out and should allow you, with some effort, to get the right value (20-30% value added to property) out of your ADU.
This one's short and sweet with some good suggestions under "Tips for Homeowners" at the end.
At 13 pages long, you have to be an ADU wonk to get through this one, but it's got lots of great info including quite a few examples of properties with ADUs in PDX.
Maybe you're already familiar with this resource. It's the best site for ADU info I've found.
Finally, my own real world example:
I bought a house in Lakewood, CA for $550,000 and could have flipped it, but decided to turn it into a duplex by adding a permitted ADU, which I will be, hopefully, building in 2021.
The main house is a 3/2 at 1,600 sq. ft, I did a full renovation on (new stucco, floors, paint, remodeled kitchen, master suite, etc.) for $63k, and it rents for $2,750 month.
After I finished the renovation, the house was appraised at $670k at the beginning of 2020, although with the current crazy market, Dec. 2020 comps place it at around $700-725k if I were to sell it now.
I'm going to add a detached ADU garage conversion that is 550-700 (still working on designs and budget, but I intend to hold at $100k max). Based on extensive research for rents in the neighborhood, I will be able to get $1,500-1,700 for it initially.
Since the property will no longer have a garage, I will go with only 20% value added for the ADU. I will also go with the bottom of the comp range at $700k for the property now (although in a year, it's safe to say that will be more): this places the added value of the ADU at $140,000 and the total value of the property at $840,000.
And I'll be making $4,250 mo. in rent.
For me, the only way I would buy a house in SoCal is if I intend to build a permitted ADU on the property.
Have a good one!
- Appraiser · Rosemary Beach, FL · Member since 2009 · 29 posts · 28 votes5y
It counts ang GLA for the main house if it is attached and accessible from within the main improvements. Appraiser looks at what did someone else pay for a similar Det Apt. Appraiser will only give value to what is legally permissible. Is it zoned for multi family. Don't fall into the trap that it is a mother in law quarter therefore it is legal. It might be legal for a family member non renter, but not for joe blow. What does this mean. It means you can't legally rent it to the general public and you say no one will ever know who is in there. Well I as appraiser is not going to give much value to it because it is non rentable by law. If the county or city decides to crack down on these properties there goes your renter. I have seen this happen because the noisy neighbor turns you in for it and raises hell until they do something about it. All that being said I appraise in a resort area where these are legally permissible rental units and for short term. This is important for you ARNB guys. Are there any deed restrictions to short term rentals? Some say min 6 months. Read the paperwork. So back to the vacation homes that allow it. In my area these carriage houses, detached apartments, Detached Accessory Units, are sold and marketed including these units. They are considered by the market as part of the overall GLA because it is useable in that fashion. Typical homeowner does not as they are not going to put the new born baby in the garage apartment. Not going to put the 12 year old kid out there either. So it's a different market. So the way these units are handled on a appraisal is by using a separate line item for it. I label it MIL or Carriage House. And adjust separately for it. Now for the value of this unit. If you are in the resort area where they are utilized and the market sees equal value in the unit as part of the overall GLA I give the same value to it as additional GLA to the main improvements. In other words if I am adjusting $100 a sqft for differences in GLA I give it $100 a sqft in value as a separate line item. Now if it is in a general neighborhood that is not zoned for a accessory building that is rentable to the general public what is it's usefulness to a buyer. Not much. Like a detached workshop, storage, auto shop, crafts, a She Shed, whatever you call it has very limited use to the general public. Like a pool not everyone wants one. Some see it as a liability. Who buys a house with a small house in the back yard you can't legally rent to anyone. You can let Grand ma live in it for free. How many of you want your in laws in the back yard thats right there are only 2 of you out there the rest of us don't want a place for her at all. Don't want even thinking she can come here. Joking. Most of these structure's are originally built because of a ailing relative that can no longer take care of themselves. So after they pass there is no use for the building and it just sits. So unless it is legal and rentable to the public you are not going to get anymore value for the structure than a unfinished detached garage. Also if you enclose a garage you loose that feature that has value. I highly recommend you spend time reading a appraisal. Not just the numbers. Read every damn line. You should be able to understand the reasoning and rational that the appraiser is employing if not call him/her and ask. Why did you put all your weight on that sale and not this one. Why no comps with a ADU. How did you come to the additional value of the ADU. It's not just about the number at the bottom of the page. I did a appraisal on a house where a investor renovated a oversize 4 car garage into a 2 bedroom rental unit. Well after he spent around 100k on this thing he got 5k in value for a accessory building. It was not legally rentable. He could let family members live in it for free. You can't even charge family members in the city of PCB rent to live in it. So does it have income value, No. Buyer buying this property ran when he found out he couldn't legally rent it. Owner wanted to shoot me until I told him the law which he never bother to read and how guide lines will only allow me to give value to what is legally permissible. Spend a hour with a appraiser. You need to understand what the guidelines are. They are not the same as the hard money lender. Understand what is a comp to your house. Ask the realtor to show you one that recently sold for, that they are saying the one you are looking, is going to be worth when you rehab it not just what he/she thinks it will sell for. They have pictures of the inside, look at them.
- Rental Property Investor · Santa Clara, CA · Member since 2019 · 160 posts · 156 votes5y
Wanted to share with you a great way to tap into the equity built from your ADU.
The problem today: most appraisers used by traditional lenders would give ADU square footage a second-class treatment than the main house (as some of your mentioned above) since there aren't that many comps and they're trying to be conservative.
However, you can consider taking out a HELOC/doing cash-out refi through Figure.com (HELOC up to $250k, Cash-out refi up to $1M). I just took out a 30-year fixed-rate HELOC through Figure from my San Jose property that has an ADU on it. Unlike the other lenders, Figure.com does automatic appraisal (without a human involved) based on public data and they treat ADU square footage the same as the main house square footage. Because their generous appraisal value, I was able to take out all the cash I invested into the ADU (plus some more). The whole process only took 2 weeks and I'm really happy about it. In fact, you can check your property's appraised value by simply filing out the questions on their website. If you have an ADU on your property, it's super easy to find out approximately how much you can take out through just a few clicks with only a soft credit pull...
A side note: the founder of Figure.com Mike Cagney also founded Sofi and they got pretty some impressive investors. I think they really did a great job simplifying the process and removing all the inefficiencies in mortgage industry today... - 5yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
@Chen Zhou thank you! This is great information, currently doing an ADU on a rental I bought back in November 2020, and looking for another one as we speak. The concern as with anyone on this thread is to get the right value out of the property that was put into it, or more if possible to really pull that BRRRR strategy out of it.
We are submitting plans for the back ADU this week, so I'll keep you updated once done to get a good feel for what we are looking at the refi/cashout situation will be for us on the property.
The McKernan Group4.957 Reviews - Appraiser · Rosemary Beach, FL · Member since 2009 · 29 posts · 28 votes5y
Let me explain something here in regard to the value. It must be legally permissible. So can you in Calif rent to the general public the DAU or is it restricted to family members. In my area of Florida for the most part you can not. Unless it is in a resort area. This is not about the appraisers. We work under guidelines set by a variety of Govt and Bank instructions. They dictate what is and what is not GLA and valuation methods for Govt backed loans. If you use a hard lender they can use anything they want. It is there money hence a higher interest rate (more risk). A investor does not set the market typically as the predominant buyer is owner occupied. So they are the market and make the market. The general buyer doesn't value these units like you do regardless of how you feel about it. This will never change. They are the big dogs in the market so to speak. So you will never get the valuations you think they should be. The general market, by listening to all the complaints here, is telling you they don't think there is much intrinsic value in a mother in law suite. Who on here wants there mother/father in law in the back yard. You will put up with it until she drops dead which is what the Dr. keep saying is any day now and to only reason you let her move in. It's humor. But it is reality. Most of these structures today outside of the investors are built to house a family member for a temporary time period not 30 years. Once they are gone its storage. And how do I know. I appraise them, see all the time. This is the same as back in the 40-60's a detached workshop garage was the thing. Who wants one now. People don't even want yards anymore because they don't want to take care of them. Look at new subdivisions. Now quit belly aching about the value and start hunting every house in town that has one and buy it. You get your second rental for pennies on the dollar. No it will not ever go up any more in relation to a similar house without one. If it is weird and cheap when you buy it it will be weird and cheap when you sell it unless you can miraculously transform it. These are killer buys for you not just good for loans. These apparently are gold mines for the investor because where can you get a discount like this on a rental. I would not be building these. You want to buy existing to get the discount. Spend 150 to build it and you can buy it for 25k. I would never build one as you are not going to be able to pull any of your equity out. Go to property appraisers web sites and bring up aerials of areas of town with properties built in the 30-60's and you will find them. But back in WWII around military towns there tons of these properties because they rented to military cadets there for training. Also I would think this would reduce the rents from the main house. If I rent a house and have to put up with strangers in my back yard while I BBQ I am not paying as much as I would for a typical detached SFR. Just saying. But this is Florida and not California. Rental are going to sky rocket there I would think with the new immigration plans. You are 1st stop and they are going to need a place to stay.
- 5yPaul BirdPro MemberInvestor · Upland, CA · Member since 2020 · 18 posts · 3 votes
Great Stuff! I am building an ADU attached to my garage in Upland, CA. The cost will end up being around $165/ft. for the new construction. It's a 2/1 875 square feet with the use of the garage as it is off the alley and we park in front of the house on the street. We plan on doing a cash out refi when the project is done. I will post in here when we complete the whole process.
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brian G.:
@Dan Heuschele pretty sure it cost $75k+ to build the ADU back in 2007. I do realize residential is valued on comps and not NOI like commercial but even on a multi unit residential appraisal they do a value analysis based on rents and a cost to build analysis. You would think these would impact the appraisal/value in some way.
>multi unit residential appraisal they do a value analysis based on rents and a cost to build analysis. You would think these would impact the appraisal/value in some way.
Most appraisers include a rent based cost approach but it is not used at all in the appraised value determination. I had an appraisal last November that the rent based value was over $50K higher than the value based on the comps the appraiser used which were terrible comps. I appealed and got a token increase in the appraised value even though I pointed out multiple flaws in the appraisal and the comps the appraiser used.
In summary, the rent based value is for information purpose only and is not to have any impact on the comp based valuation. This is what I have seen by policy and, unlike some policy, seems to match what is actually done.
It it a big reason ADUs in most CA markets is a poor RE investment. The ADU value is not based on cash flow. The value as set by the appraisal is typically at least $50K below the hands off cost of the ADU addition. $50K negative value consumes years of cash flow (especially if properly allocating for all expenses and not using cash flow = rent - PITI that some newbies use) to get to an even position. This in effect implies the first positive return is years after the unit is placed into service as a rental. In addition, it implies that there is no short-term extract of the trapped value; no way to re-use that investment in the near term.
- Real Estate Agent · San Diego, CA · Member since 2014 · 205 posts · 123 votes5y
@Dan H. Just want to understand better your view on this for my learning. Is it because you can't refi your money out that you think the ADU play is not worth the squeeze? (can't refi because the ADU value is not there). Is there a play where you would hold onto the ADU purely for the cash flow? (even tho you have $ "stuck" in the deal). Won't ADU values eventually catch up as appraisers have comps in several years?
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @David Frandsen:
@Dan H. Just want to understand better your view on this for my learning. Is it because you can't refi your money out that you think the ADU play is not worth the squeeze? (can't refi because the ADU value is not there). Is there a play where you would hold onto the ADU purely for the cash flow? (even tho you have $ "stuck" in the deal). Won't ADU values eventually catch up as appraisers have comps in several years?
There is no way to know how ADUs will appraise in the future. The current appraisals are coming in significantly less than the hands off ADU addition costs. Furthermore, the properties with ADUs are selling at a value that is less than would recoup the hands off ADU addition costs. The lower value prevents extraction of the ADU costs which means the investment is trapped until appreciation and equity pay down achieves a 33% increase (at 75% LTV). This is different than every other value add. A value add should add more value than it costs.
The cash flow can be OK, but every COC calculation I have ever seen (except the ones I have done) do not reflect the negative initial position. This implies these COC do not accurate reflect the returns.
Then add the financing constraints and the often detraction of value from the existing residence (less privacy, loss of yard or garage, etc) and it results in ADU additions being one of the poorest RE investments in many CA markets.
- Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes5y
@Dan Heuschele imo there should be a change in how ADUs are valued. It makes no sense that a property that was built for $75k is 1bd/1bth and 640 sq ft and commands $1150 in rent would only add $20k in value to a $300k property that is 2bd/1bth and 976 sq ft and rents for $1400. Totally illogical. Anyhow, I got the property at a great deal in 2010 but it is certainly a lesson going forward, ie I would think twice about adding an ADU in CA under current appraisal practices.
- Rental Property Investor · San Jose · Member since 2020 · 44 posts · 22 votes5y
@Brian Larson
You are right. Me and my husband bought our house here in San Jose, CA in 2016. We added an ADU in our backyard. Renting it out for $1500/mo! Our plan in the future is to buy another house, move to that new house and completely rent this whole house with the ADU. I'm imagining that it should cash flow nicely on us!
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