Adding an ADU to a property has become super easy in CA, yet it seems that the adoption rate of adding units isn't quite where it could be.
This is most surprising amongst investment property owners. Why is that? The math makes a TON of sense, units can be installed in as little as 2-4 weeks to coincide with tenant turnovers, home equity seems to be at an all-time high -- what's missing in the equation?
I used to bid a lot of these before I left Cali. In almost every case, people were all hot-to-trot until they got the bid back with prices and schedules. Then they cooled off, even if they had the money. There are too many people pushing the ADU concept as cheap, quick and easy. It is none of those. It's just like building another house except smaller. And who is building an ADU start to finish in 2-4 weeks.....?
I used to bid a lot of these before I left Cali. In almost every case, people were all hot-to-trot until they got the bid back with prices and schedules. Then they cooled off, even if they had the money. There are too many people pushing the ADU concept as cheap, quick and easy. It is none of those. It's just like building another house except smaller. And who is building an ADU start to finish in 2-4 weeks.....?
I think those pre-fab ADUs could be installed and hooked up in 2-4wks. however any new build or even garage conversion can take months, and most of that is due to permits and inspection lead times.
2-4 weeks might sound right in theory (or in the marketing materials for the pre-fab guys), but is nowhere near accurate in the real world (at least in any market I’ve looked in). Yes, the state mandated a quick response on permits from municipalities, but there are many ways around that. I haven’t heard of anywhere turning permits around all that quickly. And even once you get permits, even the pre-fab guys need site prep, plumbing, electrical, sewer hookups…start to finish you’re looking at 6 months in most places. And I wish I had $250/ft built costs. I’m Santa Barbara it’s closer to $650/ft right now.
yea, was going to say, $250/sqft is what I'm getting on my 650sqft detached garage/office with no plumbing. When I was looking to build a new ADU, was getting quotes of like $650/sqft and up.
So I ended up doing a garage -> ADU conversion, that only cost me $125/sqft.
So $125+$250 = $375/sqft I now have a 450sqft ADU (bed, bath, kitchen, laundry, walk-in closet) and we just broke ground on the new 650sqft garage/office :)
All my numbers are based on 30 day furnished rentals (because I can't STR an ADU). I could probably get $6000-8000 a month for a 2bd ADU. If I was doing an unfurnished long term rental it would probably be $4000-$5000 for the same
We're CA investors and we love ADUs! That said, we live in one of the least expensive areas of the state so both our construction costs are lower and so are the rents. Still, we find it pencils when there is an existing structure that can be converted to an ADU, like a shop, garage or even an existing detached dwelling. The reason for this is that it will already have power, water and sewer and probably will either have been permitted or built prior to permits in which case lot lines and setbacks will be grandfathered in. The ADU laws in CA are relatively recent and they're continuing to evolve. However, city by city and county by county adoption and adaptation takes some time. Some of the jurisdictions we work with are super easy and accommodating. Others, not so much. Generally speaking, it still takes at least 3-6 weeks to turn around a permit, 4-8 weeks to get engineered drawings, and construction can be months out because we're still suffering from building contractor and trade shortages as contractors are booked out rebuilding from all the wildfires over the last 6 years. We generally expect an ADU to take 6 months start to finish for all these reasons. In our case, we can get them built for about $65-$75k depending on sq footage, what is already on site to work with and how much work we want to do ourselves (usually demo and finish work). Rents are about $900 for a 1/1, $1100 for a 2/1. Additional costs include landscaping - we always provide a good fence so the properties each feel like they have their own space and privacy, and meeting any local parking requirements which may or may not include covered parking, and we always split out the meters so each tenant pays their own utilities. We haven't quite figured out water sub-metering yet but it's on our to do list. As other people have said, costs can be MUCH higher elsewhere, but so are the rents. In my opinion it's a very important piece in the affordable housing puzzle and it makes sense for our business model. But it's not for everyone.
My wife and I purchased a property in Santa Barbara with a permitted 520 sq ft "detached bedroom" in June 2020 and immediately started the process of converting it to an ADU. It took us 5 months just to get the ADU permit. We busted the renovation out in one month and had someone in there by mid-December. Even with an existing wet bar and 1/2 bath, the conversation still cost us about ~$40k with us doing much of the work. Our planners said it was the cheapest and fastest ADU conversion they had seen. So yeah, not a speedy or cheap process. It worked out well for us though! If a property comes with a partially finished, detached unit, I would say it is worthwhile. Building from scratch or converting an unfinished garage could be great options, but you better really know what you are doing and be prepared for a long, expensive endeavor.
Thanks for the replies everyone! Prefab these days seems to be as fast as 2-4 weeks in the backyard for final install and 4-6 months for the process all-in from our experience. From my perspective, this kind of timeline should unlock property investors. If this isn't quick enough, what kind of timeline would be of interest to property investors?
Thanks for the replies everyone! Prefab these days seems to be as fast as 2-4 weeks in the backyard for final install and 4-6 months for the process all-in from our experience. From my perspective, this kind of timeline should unlock property investors. If this isn't quick enough, what kind of timeline would be of interest to property investors?
What is the cost for a prefab? How many have you done? And what's your interest?
Thanks for the replies everyone! Prefab these days seems to be as fast as 2-4 weeks in the backyard for final install and 4-6 months for the process all-in from our experience. From my perspective, this kind of timeline should unlock property investors. If this isn't quick enough, what kind of timeline would be of interest to property investors?
The major issue is the permit process, and sometimes variations between various cities and jurisdictions on their particular requirement. Permit process takes a long time, with many unexpected unpleasant surprises. That is why CA is expansive.
Ideally, city can adopt a few standard Plans, or preapprove some free fab models. But most cities do not have that. They intentionally make the process lengthy and difficult, maybe to justify the head counts in the city departments.
It will not be a surprise when one planner approves a design, but next day another planner says no. Or some trees need to be preserved.
Two years ago, I built an ADU in San Mateo. The city fire department wanted a fire sprinkler system whereas the state law clearly exempted it. Remember a fire sprinkler oftentimes requires a larger size water supply line and can get pretty expansive.
When I presented the state ADU law to the fire department, they still insisted on it and said that we can only resolve this in a lawsuit. I did not want to delay any longer so went ahead with fire sprinkler.
However, when the permit was issued, the building department stamped on the plan that fire sprinkler is exempt. I guess people in city departments do not talk to each other. So I got away without the fire sprinkler.
Thanks for the replies everyone! Prefab these days seems to be as fast as 2-4 weeks in the backyard for final install and 4-6 months for the process all-in from our experience. From my perspective, this kind of timeline should unlock property investors. If this isn't quick enough, what kind of timeline would be of interest to property investors?
ADUs are part of my investment strategy but these timelines are unrealistic and I have yet to see any pre-fab option cost less than a traditional stick built detached unit. Of all the pre-fab companies I’ve spoke to no one had successfully permitted / built one in LA county.
@Brian Bakerman building an ADU is not a good investment from a balance sheet perspective. The last time my CA 2 unit property was appraised the ADU only added an additional $20k to the property value even though it would cost about $100k today to build. It's much more efficient to buy a property with an existing ADU already built. My $.02
This is true, although I think it will begin to change in a few years as more properties with ADUs sell and establish a comp set. Appraisers are coming in very low, but the market is valuing ADUs much higher. Problem is appraisers in most scenarios now don’t have comparable sales with ADUs to base higher values on. Whether or not they ever get to the valuation to make the investment pencil out is a big question.
So if we are back to a stick-build, the average ADU I spec'ed was 800SF.
800 x $250 sf = $200,000
Assuming a rent of $1800 mo, that's a 9+ yr ROI (not even counting any other typical costs)
If that works for your financial plan, you should absolutely go for it.
Even though it means doubling or tripling the density in these areas, with no new parking accommodations...
Yep, sound good.......
Your numbers are not taking into account that in most areas the ADU has a value far less than the hands off construction costs. Then there is the financing challenges. Many investors adding ADUs are using secured debt. As an experienced investor I seek at least 20% immediate return for my secured debt. When not using secured debt, the ADU loan terms are often poor. These issues make ADUs one of the worse, if not the worse, return on investment for RE investments.
In addition $250 ft has become a challenge. I think pre Covid it was more likely than today. In large coastal cities $250 ft is significantly low (maybe fresno or imperial county it may still be possible).
There are so many opportunities in RE investing that produce better returns than hands off ADU investors. I think almost all hands off ADU investors are RE investor neophytes.
I've thought a lot about adding an ADU. But it keeps boiling down to: if I had $280k to spend, would I rather have an ADU or another property (or two).
For new properties, I can leverage at 25% down. For ADU, it's a gamble getting a chunk of that money back with refinance. Like others have said, best option is finding an ADU that's already built and permitted (usually separate address and electrical meter) second best option, a non permitted adu, or third an easily convertible garage would make a lot more sense than building from scratch.
@Brian Bakerman ADUs are for investors who are not looking to scale. The return is low, opportunity cost is high, and execution risk also unattractive. It may be a fun way to tackle a single project, but it’s not the easiest way to “invest”.
Your numbers are not taking into account that in most areas the ADU has a value far less than the hands off construction costs. Then there is the financing challenges. Many investors adding ADUs are using secured debt. As an experienced investor I seek at least 20% immediate return for my secured debt. When not using secured debt, the ADU loan terms are often poor. These issues make ADUs one of the worse, if not the worse, return on investment for RE investments.
I know, I was just showing that even with the basic numbers they were not a good return.
Others have commented on the costs of building an ADU, so I won't beat that dead horse. The other factor you have is that and ADU can kill appreciation. You lose the family that wants the extra outdoor space, and doesn't want to be a landlord.
This isn't so cut and dry. In the right local markets with high rents and low supply ADUs are an excellent way to get to highest and best use of your existing property if well suited to go from single family to multi family. In my market the amount of cash needed to build an ADU or put 25% down on a new property is the same so if there's nothing to buy, I build and vice versa. Just another tool to deploy capital. My plan is to add ADUs to each of my rentals that can accommodate them because the returns are there, however, any sales / marketing claims that they are quick and easy are simply false. Even with a team of architects, engineers and contractors it's a lot of work, financing options suck and there's a lot more risk involved if you don't know what you are doing.
This isn't so cut and dry. In the right local markets with high rents and low supply ADUs are an excellent way to get to highest and best use of your existing property if well suited to go from single family to multi family. In my market the amount of cash needed to build an ADU or put 25% down on a new property is the same so if there's nothing to buy, I build and vice versa. Just another tool to deploy capital. My plan is to add ADUs to each of my rentals that can accommodate them because the returns are there, however, any sales / marketing claims that they are quick and easy are simply false. Even with a team of architects, engineers and contractors it's a lot of work, financing options suck and there's a lot more risk involved if you don't know what you are doing.
I would choose the 25% for new property every time with the rare exception being that adding the hands off ADU is significant value add.
The reasons for choosing the 2nd property over an ADU addition include
The appreciation opportunity with the 2nd property
We virtually always buy value add properties. In general, ADUs are a value subtract (meaning hands off costs typically exceed the value added). if hands off ADUs ever become good value adds or other zoning rules such as SB9 make it more attractive than current regulations, I have the properties accumulated that I can leverage the rule changes.
ADUs, in general, are not going to produce the return of other RE investment opportunities. They have financing challenges. In general, appraisers are valuing them as value subtract. They may limit exit options as you eliminate buyers who do not want to be landlords (and this is being reflected in the appraisals). Even hands off they are a lot of work. I would place the effort above a rehab associated with BRRRR. The BRRRR is likely to produce a far better return.