ADU San Francisco Bay Area (San Jose)

22 Replies

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

    @Sayantan Satpati . There are many modular/pre-fab home companies servicing CA now and many are newer having popped up since the laws changed in CA. That has introduced competition and options. I believe finding the right ADU is key and i searched a long time going back and forth between modular and custom build ultimately going back to modular when I found a 3/2 in 1000 sq/ft that didn't feel small. The price is reasonable and less than what you're quoting.

    Custom will cost more but add more principle potentially in appraisal although that's still an area being figured out since there isn't much precedence for appraisers to evaluate ADUs right now but that could change in the next few years. Modular could cost a lot less and be of equal quality but return higher ROI and cash on cash return.

    PM me and I can share as I'm not sure if I'll violate any policies on here by posting in the public forums.

    @Sayantan Satpati We build our ADU at our backyard in Santa Clara last year and cost us 350/sq.m including utilities. A friend is building an ADU in San Jose with the same contractor and charging the same including utilities.

    PM me and i can send tge contractors number.

    Good luck.

    Originally posted by @Deepak Bhosale :

    @Collin Chan There are also other innovative financing options like hometap where they lend the money by taking some stake in the house. https://www.hometap.com/how-it-works/

    Hello Deepak - Are you able to pay off hometap after completing a BRRRR? Could you elaborate more about hometap? Thank you!

     

    For all you guys hoping to BRRR-R*, one major hurdle is that (unfortunately) appraisers are giving laughable value's to ADU's. They see it as a "bonus", like a second garage, pool, or extra large yard. So that will effect your ability to carry out the last refi *R, as you're not gaining a lot of after rehab value, yet spending significant $$ on the ADU.

    If you're able to buy duplexes or triplexes, you may have an easier time having the ADU count as a full extra unit, a duplex > triplex, etc. This will allow you to leverage the added value for your cash out refi. You may need to have your city update the property records to reflect the added unit. Although I haven't pursued this fully yet, I believe the way San Francisco building dept records work, once you update the records (usually for a new sale, but you can do it without selling too), the added unit is reflected in the unit count for multi family properties.

    Food for thought...

    Originally posted by @Amit M. :

    For all you guys hoping to BRRR-R*, one major hurdle is that (unfortunately) appraisers are giving laughable value's to ADU's. They see it as a "bonus", like a second garage, pool, or extra large yard. So that will effect your ability to carry out the last refi *R, as you're not gaining a lot of after rehab value, yet spending significant $$ on the ADU.

    If you're able to buy duplexes or triplexes, you may have an easier time having the ADU count as a full extra unit, a duplex > triplex, etc. This will allow you to leverage the added value for your cash out refi. You may need to have your city update the property records to reflect the added unit. Although I haven't pursued this fully yet, I believe the way San Francisco building dept records work, once you update the records (usually for a new sale, but you can do it without selling too), the added unit is reflected in the unit count for multi family properties.

    Food for thought...

    Thanks for this insight. I too am planning on building an ADU in 2021, and reside on an R-2 (Duplex) lot with only one SFH, so perhaps the ADU can be considered the second unit on the lot.

    However, the ADU I am planning on building is atypical, so I expect that the cost to build will be substantially higher. I plan to build a 2-story building with garage on the bottom, and ADU on top. How much should I expect to pay for such a unit (750 sq ft garage + 750 sq ft ADU)?

    - In San Jose, if the main house only has one story, you can't build two-story ADU.
    - Mid 300 sqft is about right but if you build a large size I think Habitat ADU has a fixed cost ADU about 250sqft including permitting cost. You better check Habitat ADU.
    - Don't worry too much about the OO JADU/ADU requirement as the regulation is hard to be enforced.
    - I myself disbanded adu plan but re-invest to duplex/triplex nationwide including the bay area. Got one last month for 9% cap rate. Amazing some duplexes is much cheaper than building ADU :)
    - Last week there's duplex with unpermitted ADU in SJC selling for $900k. Now that's something to consider :)

    have any of you considered getting a manufactured home (like the ones from backyard estates or adore homes) as an adu? as i have been told, once the manufactured home is installed on the property propertly with proper foundation, its difficult to call out any difference 

    Hi everyone, 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...

    Hi Sayantan, 

    380k is average for new construction. If you are interested in going the prefab/manufactured route let me know and I would love to give you a bid for your project! It will definitely be less than 380k.