Hi,

I wan't to build a detached ADU in our backyard. This would be my first home building/addition project. I was looking for suggestions on:

1. Total Cost & Cost per sq / ft 
2. Project timeline
3. Suggestions on contractors
4. Can I have tenants in the house when we build the ADU?
5. Can I additionally convert my garage in to junior ADU?
6. Can I expect comparable rent from ADU (per sqft) as from the main home?
7. Any other tips/suggestions? 

My objective is to rent out the home and ADU separately

Hello,

I am originally from the bay area (Milpitas) and know San Jose has lots of properties with large lots.

I just purchased a property in Lake Forest with the intent of adding a 1000 sq ft 2 bed / 2 bath with den ADU in the backyard. The company I'm using actually showed me an ADU they were building in Long Beach and are highly knowledgeable. The company does both modular homes built in a factory or build from the ground up. There are a few ADU companies in the bay area as well. Timelines are the same for both modular homes vs ground up - 1 month for plans, 2 months for city approval, and 3-4 months to build depending on weather conditions. The modular home for 1000 sq ft is about 220k vs 275k from the ground up. Ground up requires solar panels and usually appraise better, but modular homes are cheaper, require less on-site construction (usually 2-3 weeks only), don't appraise as high, and tenants cannot tell the difference. Since modular homes must be craned into your backyard, you need a nice rectangular backyard. Keep in mind, just because you spend 275k on an ADU, doesn't mean the house will appraise 275k higher. Since my backyard is L shaped, I have to do from the ground up.

For financing an ADU, best options are HELOC from primary/secondary home or cash-out refinance. Construction loans are an option but interest rates run from 5-7%. Could do a construction loan then refinance the property to pay off the construction loans.

Junior ADUs must be attached to the primary residence (i.e - attached garage can be converted to a jADU, but detached garages do not qualify) and require owner occupancy which is a huge downside if you are trying to buy a new property every year for owner use to get away with <20% down payment.

For some numbers, my main house is 4bed/2bath renting for $3500/month and ADU 2 bed/ 2 bath + Den used as 3rd bedroom will rent for around $3000/month. Main house 10% down with 2.625% interest rate and ADU financed with a HELOC with around 4% interest rate. I am anticipating about $1,400 cash flow after expenses.  I currently have tenants in the main house as I am constructing the backyard ADU, but made it clear upfront that there would be 3-4 months of construction.  With modular homes, it would be less on-site construction.

I specifically target properties with large lots to build ADUs as duplexes/triplexes/4plexes seem to be extremely competitive in CA.

I hope this helps!

@Steven Nguyen Great information! Thank you for sharing! Just want to make sure I got it right, the 4% HELOC is not on the same house, correct?

@Sayantan Satpati I did an ADU in San Jose in 2019 and agree largely with Steven's points above. Although for San Jose, building cost might be even higher than what he listed above, esp. lumber cost shot through the roof recently. in San Jose, you need to budget at least 6 months for construction, esp. during COVID. Similar to what Steven said above, you also need to be aware that the immediate appraisal value post-ADU construction might not fully reflect the investment that you put in. Will PM you with contractor recommendation.

@Steven Nguyen Great comprehensive post!

I also am building an ADU but taking the pre-fab route. Our lot allows a trailer to pull into our backyard which allows us more flexibility to do so.

One item to add is if you have a sizable stock portfolio, you can use that as a portfolio equity line of credit much like a HELOC but instead of a property, you can use a different investment asset which might be a path for some without equity to borrow against their home. 401ks and stock investments especially if you consolidated with a major bank (Morgan Stanely, Schwab, Fidelity, etc). Interest rates are fairly low and you can do interest only until your property is completed to pay off construction costs.

It's another great tool I'm just learning about but for many, it might be a great way to be making money for real estate or hard money lending if you can get 8-10% but only pay 2.5% interest.

Search "margin portfolio line of credit".

Collin

One other point is that margin accounts don't appear as accounts on your credit report which is great when doing simultaneous deals since it's against your portfolio.  Check with your individual banks to confirm but this is consistent with information I've seen both online and from my bank in particular.

Collin

Thx @Steven Nguyen @Chen Zhou @Collin Chan ! Really appreciate all the great info.

I got a rough quote from a contractor this morn. He is asking for $350/sq ft + 30k extra for separate utilities. For a 1000 sq ft (allowed for my plot size), I am looking at 380K. Is this a fair price for San Jose area? 

Few more questions:

• Pros/Cons of modular v/s building from ground up? Will ground up hold more long term value? I understand the modular will save time and cost.  Great to know that tenants cant tell a difference!
• Pros/Cons of building a 1 story v/s 2 story ADU. Apparently 2 story is cheaper due to lesser footprint. Also it allow for more space in the backyard.
• If I convert my attached garage in to a JADU (allowed in San Jose), will it impact the rent of the main house? JADU will only make sense if the combined rents of JADU + main house is significantly more than the rent of main house alone to justify the investment. 

Originally posted by @Sayantan Satpati :

Thx @Steven Nguyen @Chen Zhou @Collin Chan ! Really appreciate all the great info.

I got a rough quote from a contractor this morn. He is asking for $350/sq ft + 30k extra for separate utilities. For a 1000 sq ft (allowed for my plot size), I am looking at 380K. Is this a fair price for San Jose area? 

Few more questions:

• Pros/Cons of modular v/s building from ground up? Will ground up hold more long term value? I understand the modular will save time and cost.  Great to know that tenants cant tell a difference! - I'd personally lean towards modular if it can work with your backyard.  Modular is cheaper, requires less on-site construction, doesn't require solar panels; however, will not appraise as well compared to building from the ground up in the long run.
• Pros/Cons of building a 1 story v/s 2 story ADU. Apparently 2 story is cheaper due to lesser footprint. Also it allow for more space in the backyard. In Orange County, 2 story ADUs are not allowed, but it's best to ask the ADU contractor the cost comparison.
• If I convert my attached garage in to a JADU (allowed in San Jose), will it impact the rent of the main house? JADU will only make sense if the combined rents of JADU + main house is significantly more than the rent of main house alone to justify the investment.  Typically JADU (assuming around 400 sq ft) will rent around $1700/month in San Jose being conservative.  The rent of the main house may decrease by $200-300/month since it has a shared wall with the JADU and has less privacy.

@Sayantan Satpati $350/sqft + utilities sounds high. You should be able to find more affordable options.

Your other questions:

• Pros/Cons of modular v/s building from ground up? Will ground up hold more long term value? I understand the modular will save time and cost. Great to know that tenants cant tell a difference!
• - Modular doesn't necessarily save cost, due to the high shipping fee. Also it's hard to make it consistent with the main house. Timeline also not necessarily faster based on what I heard. In terms of long-term value, definitely ground up would be better. Most important of all, you can customize your home instead of using someone else's cookie cutter template.
• Pros/Cons of building a 1 story v/s 2 story ADU. Apparently 2 story is cheaper due to lesser footprint. Also it allow for more space in the backyard.
• - price/sqft is higher for the 2nd story, so your overall cost for a 2 story ADU might be a lot higher. A well designed smaller 1 story smaller ADU might be able to generate more income for you than a poorly designed 2 story ADU.
• If I convert my attached garage in to a JADU (allowed in San Jose), will it impact the rent of the main house? JADU will only make sense if the combined rents of JADU + main house is significantly more than the rent of main house alone to justify the investment.
• - Agree with Steven

@Chen Zhou Thx a lot! Do you know whether the unit needs to be owner occupied if I build a JADU as well. Or is it ok to rent out the triplex(main,ADU,JADU) completely in San Jose?

@Sayantan Satpati

If JADU, then it needs to be owner occupied. 

If just ADU, then owner occupancy is not required.