Every property in CA should have at least 1 ADU
Developer · Sacramento, CA · Member since 2016 · 464 posts · 143 votes
Every SFR in CA should have at least 1 ADU. I'd even go as far as to say you are losing money every month by not having an ADU on your property. These new laws are only in effect till 2024. What's stopping you from adding an Accessory Dwelling Unit to your property?
I disagree if you are advocating a hands off ADU addition (use of GC, contractors, designer, etc). Doing the effort yourself likely only makes sense if you already have the skills or plan on doing more than one ADU addition (can leverage the learning on future ADU additions).
The appraisals in most markets are coming in greater than $50K below hands off construction costs. The financing typically does not present terms that are as favorable as purchase financing. The level of effort hands off is about the same as a rehab (BRRRR) with far more money required for the ADU addition. The ADU subtracts value from the existing unit by reducing either the yard or by consuming a garage (assuming not in current living space which would even more significantly reduce the cash flow). The under value as set by the appraisal implies that the investment capital is trapped until appreciation can surpass the negative position by at least 33% of the total value (assuming 75% LTV REFI). The initial cash flow goes to recover the negative position as set by the current value of the ADU. It is often years before there is any cash flow in excess of the negative position.
In most markets, the ADU addition is one of the worse RE investments. I can do a BRRRR, trap very little into my asset and have added value in excess of the costs (versus a hands off ADU typically adds value far less than the costs). I can do a turnkey investment and start far less negative than an ADU addition.
However, if you are referring to purchasing a unit with an existing ADU, this could provide a good value. The purchase would be at market based value of the ADU which in most markets if over $50K less than the hands off costs. The financing would be at purchase financing (typically superior to ADU addition financing). The cash flow would be similar to adding the ADU, but the costs would be substantially less.
Note, I also use the term "hands off". If you are a developer, GC, a skilled worker with time to do significant amount of the work then these are different scenarios than the hands off scenario that I reference.
Anyone who wants to do add an ADU should start by understanding how the ADU will be valued for their property/market. If it is going to be valued significantly less than the costs (most markets), this initial negative position has to be factored into the decision. Recognize any negative position implies that the costs are trapped until appreciation provides the opportunity to extract any part of the ADU investment. Then look at the financing terms.
Virtually every COC calculation I have seen for ADU additions do not reflect the negative initial position and therefore are not accurate (or at least not an apples to apples comparison with COC calculations on most other investments).
Hello @Chen Zhou
I've been excited about SB9 but it not very clear. Do you think people like us who just completed detached ADU will be able to do a "lot split" and convert ADU to SFH technically? If it's possible then I don't see any reason why valuations won't be the same as the primary dwelling without doing the lot spot as it has potential. If that's the case I just gained almost $1mil in equity from my 750sqft project ha.
Hello @Chen Zhou
I've been excited about SB9 but it not very clear. Do you think people like us who just completed detached ADU will be able to do a "lot split" and convert ADU to SFH technically? If it's possible then I don't see any reason why valuations won't be the same as the primary dwelling without doing the lot spot as it has potential. If that's the case I just gained almost $1mil in equity from my 750sqft project ha.
@Ralpheal Doe I think very likely you will be able to, since the law allows you to build 800 sqft regardless of local setback rules (4 feet at most, which is the ADU setback requirement) and split the lot later. Details still need to be clarified by the bill author.
Adus are becoming the standard for new builds in the Bay Area to go beyond standard lot coverage ratio and FAR (adu is exempted for 800 sqft in most cities). At the same time, sb9 and sb10 are signed into law. Multi-units are going to be so common on single family lots (in fact there will be no sfh zoning). The debate around Adu is largely over. Let's move on.
Sb9 requires 3 years occupancy which will eliminate it as an option for non house hackers. Sb10 allows local jurisdictions to enforce stricter zoning which will be the case in most jurisdictions.
For the non house hacker, ADUs may still be the best option.
I suspect there are many house hacking investors that added an ADU that wish they had waited. The split lot would result in 2nd lot being value similar to primary lot and if desired they could add 2 units per lot. SB9 does require commitment to reside in property for 3 years from approval. This will eliminate its use for many investors who do not want to house hack.
Sb 9 says you can build a detached structure first and split lot later, which eliminates all the uncertainty around the valuation of a detached structure on a single family lot.
again, sb9 is a game changer, which makes the debate around Adu irrelevant overnight.
Hi Chen,
Thanks for your contributions in this thread. So what exactly is a split lot? I'm living in an SFR with a 6,500 lot. Does that mean I can split this lot up into two parcels, build another SFR or duplex on the the other lot and now be the owner of two separate properties? Or is that interpretation taking it a bit too far? Thanks!
Adus are becoming the standard for new builds in the Bay Area to go beyond standard lot coverage ratio and FAR (adu is exempted for 800 sqft in most cities). At the same time, sb9 and sb10 are signed into law. Multi-units are going to be so common on single family lots (in fact there will be no sfh zoning). The debate around Adu is largely over. Let's move on.
Sb9 requires 3 years occupancy which will eliminate it as an option for non house hackers. Sb10 allows local jurisdictions to enforce stricter zoning which will be the case in most jurisdictions.
For the non house hacker, ADUs may still be the best option.
I suspect there are many house hacking investors that added an ADU that wish they had waited. The split lot would result in 2nd lot being value similar to primary lot and if desired they could add 2 units per lot. SB9 does require commitment to reside in property for 3 years from approval. This will eliminate its use for many investors who do not want to house hack.
Sb 9 says you can build a detached structure first and split lot later, which eliminates all the uncertainty around the valuation of a detached structure on a single family lot.
again, sb9 is a game changer, which makes the debate around Adu irrelevant overnight.
Hi Chen,
Thanks for your contributions in this thread. So what exactly is a split lot? I'm living in an SFR with a 6,500 lot. Does that mean I can split this lot up into two parcels, build another SFR or duplex on the the other lot and now be the owner of two separate properties? Or is that interpretation taking it a bit too far? Thanks!
Under the new law (SB9) going into effect in Jan 2022, your understanding is correct. I'd only add that you don't need to split the lot to build a second detached unit. You can build the unit first and split the lot later (or never split). More details here: https://sites.google.com/view/...
Full text of the bill here: https://leginfo.legislature.ca...
Lots on potential views of ADU vs SB9..
One looming question on SB9 is the the role of your lender as it seems they would have to agree to the lot split by either forcing you to refinance your main property or some yet to be determined legal amendment to your existing contract they may try to put into place