My house in Union City (East Bay) has 3 beds/2 baths of 1340sqf + garage on a land of 6000. Recently I've been thinking about building an in-law unit of around 600-700sqf with private entrance and put it for rent. The last time I asked (around 6 months ago), a constructor told me it's about $100 - $120/sqf to build, so roughly 80K for the unit. With the construction price getting higher and higher, I'm not sure how much it could be now. Anyway, based on my research, I could rent out the unit for at least $1500, quite good rent-to-value ratio. What do you think about the pros and cons of this approach? 

Another question I have is if I just rent out the unit, how depreciation is calculated? What about I buy another house and put my whole current house for rent, do I get depreciation as my house is now considered as a full rental property?

Thanks

Be careful. In my area in NY, not only do I need  a permit, but I also need a zoning board hearing where all neighbors are notified, zoning variances etc. Check with city planning on the requirements, Depends on what your area is zoned for. You also have "as of right" zoning.

In my area, such requests are often shot down at the hearings due to overcrowded schools. The argument goes, if we let one guy do it, then we let another hundred do it, and then pretty soon we'll have to build a new school, and then new taxes for the school.

In my area an in Law unit can only be used for family or a care giver. If you put something out for rent it is a two family conversion and you need a special permit if the area is SF zoned. They also wont let you do anything that changes the footprint for this if you are in are in a single family zone. Check with your town building codes before you get too far along.

The above posts show that this is very area dependent. In the East Bay Area, a lot of jurisdictions are encouraging Accessory Dwelling Units (ADU) and making the permitted process a lot easier. I am building an ADU in Albany and in that city you don't even need to inform the neighbors your are building one. So long as the ADU meets zoning codes, in this case it can only be a max of 600 sqft, you can get it approved. Defenitely go talk with your city permitting office.

That said, $100-120 per square foot to build is not realistic. I'm a contractor and I know. If you get a good price on construction and don't have an expensive design and finishes then it's more like $200-250 per square foot.  Maybe even more. 

I agree with @Ori Skloot . ADU's are very area dependent, but in many areas they are being encouraged. Rooting through the zoning can be cumbersome, but the ADU can tun a non income producing property into a great asset (I have one at my house and it cuts my mortgage costs in half!). Construction costs are way up right now, and I would bank on $250/sf as well as an extended schedule. many contractors aren't taking such small projects on right now.

Thanks all. I am well aware of zoning and I plan to check with the city's building department. However, if the building price is as @Ori Skloot said then I have to reconsider if it's worth it. My whole assumption is based on the estimate that I can build the unit for around 80K.

Chris,

We're an architecture firm that does work all over California and we have been doing a LOT of ADUs recently because of the recent Senate Bill passing that relaxes a lot of the typical restrictions. I would consider keeping your ear to the ground. While construction costs in your area are likely to be where @Ori Skloot states when it comes to conventional construction, there are Creative Construction methods that you could use that take a lot of the bite off the over-all cost. Structural Insulated Panel System (SIP) framed houses can sometimes have large cost savings or Machine Framed walls and rooves can be constructed in-factory and then assembled on-site (and they aren't considered "pre-fabricated").

What I would do is:

1) Break out the phases of the construction 

  Architectural Plans/Construction Documents/Building Permit

  Grading and Drainage

  Foundation

  Framing

  Windows and Doors

  Mechanical (HVAC)

  Electrical 

  Plumbing

  Drywall/Finishes

  Fixtures

  Paint

2) Identify what you can do yourself (best way to save money), remove it from the scope of work

3) Research or solicit bids from several contractors asking each for a price for all of the above (they may need a set of plans, so that'd be the best place to start)

4) Research unique or creative methods of getting each phase of the project done

    i.e. - Maybe you can get pre-made architectural plans that are easy to modify?

          - Maybe you can get your gardener to do the grading and foundation work? Lots of gardeners I know get small landscape jobs like that and have the people/equipment to do that level of work

           - Maybe you can research alternate framing methods (SIP) or Machine Framed (ABI Tech)

           - Maybe you can put in a store bought HVAC system? Do you have extreme climate to deal with? if not, maybe a wall mounted split AC system is all you need for the whole unit if it's small enough. Utilizing Radiant Barrier and high values of insulation (R-Value) will reduce the heating and cooling needs of the building over-all and aren't very expensive. 

           - Maybe you can purchase windows and doors at auction or an outlet center? Local swap meet or flea market? Avoiding the salesman can save you a lot of money, but you need to know what you're looking for. 

5) Award different contractors smaller sections of the total project and be sure to keep the cost within your budget. 

Do all of that, you still might go over the $80K mark, but if you don't have any other real estate deals to look at, you might as well do all of the research and planning that you can and see if you can squeeze it out. Knowledge is power, knowledge is savings. Do your research and let me know if there's anything I can do to help. Good luck out there!

@Alec B Calzada thanks for the reply. I am not very handy and with a full time job plus a toddler I don't feel like I can do much of the work here. Maybe I can get help from my in-law once he retires :). You might know this already, Union City where I currently live in is not as hot as others in the South Bay or Penisula while the construction cost I believe could be roughly the same throughout the Bay Area. Thus the same unit in cities like Sunnyvale or Palo Alto could be rented out for 2500 or 3000 while in Union City it is at most 1800. I really need to analyze the time and effort (and cashflow) spending on building an ADU here vs using the same money investing out of state.

@Chris Penny Hey no worries. My goal was to shed light on the many options or approaches that you can take to get to the same goal. I'm glad you came here to BP to get your thoughts out and make sure that you don't get in over your head. 

Just because you mentioned it, maybe you couldtalk with your in-law to see if he'd be interested in partnering with you financially on the build of the ADU? If he has a home currently or if he has a retirement fund set aside, perhaps it would be to his benefit to invest with you in the construction of the ADU so that he can be closer to you and your wife as your toddler grows? If he's looking to retire in a few years or maybe more, why not set this up now? The money would simply be going into property that's in the family and will increase it's equity. You could let him live in the ADU for a period of months rent-free as a way to get his money back. You're mortgage wouldn't go up, but the equity would and he'd be set up in his retirement living situation well before it becomes a necessity. Not to mention the cost would be significantly less than retiring in a village, or buying a new, smaller home elsewhere.... Sorry, it's just that I know a lot of retirees that are very happy now that they're living in an ADU with their families. They see it as a real win-win.

Good luck with whatever you do Chris!

Chris,

Did you go thru with building inlaw unit for rent? We're interested in your experience. I'm in Hayward and interested in following your path.