Investing in my own home with an ADU.

37 Replies

I have a SFH in Denver, CO. It is zoned for an ADU (Accessory Dwelling Unit). I can build an 864 sqft or 3 car garage and an ADU 648 sqft (approximately 75% of garage space) on top floor and generate income. Price tag $275K-$325K.

The catch? I took the equity out of my home to buy a duplex in Oklahoma City, which fell through, and I don't have enough to pay for the ADU. I have about 2/3 of the cost. So what now? I have been deliberating on this and I just don't know if I should:

a) Hold on to the cash/equity and make the payments until...

b) Buy a property in Oklahoma City, strong market but easier/less expensive to get into and try to generate enough return to actualize the ADU project.

c) Take out a loan to cover the cost of the ADU, roll the existing loan into it and build the damn ADU! (By the way I am quitting my job in the very near future and doing some freelance work.)

So you see I have lots of options, with a few caveats, but as a new investor I just feel overwhelmed. Any ideas out there?

You are absolutely right. The market in Denver is insane for building and especially ADUs. 1) Zoning and permitting continues to be challenging. Construction companies are carving out their niche for navigating ADU permitting, designs and so on. All services in house.$$$ 2) The expense: Basically it is a house. So the costs are much the same (Denver market construction $232/sqft ish). In fact the ADU would be 1512 sqft total (864 sqft or 3 car garage and 648 sqft living space on 2nd floor.) Actually this ADU is twice the size of my SFH which appraised for $283K in our market. Plus, if I chose to convert one of the garage bays into a single room occupancy (SRO) or dorm (3/4 bath and kitchenette/wet bar) then my income potentially goes up.

So the answer to your question is like an onion, many layers. What I can tell you is the going rate for ADUs is approximately $1200/1400 a month and I am guessing I could get about $750-1000 for the SRO. My projected rental income is between $1950-2400 and that would leave me with about -$288 to $62. Then with rent from my SFH it could generate about $1600...This deal could be done. It would generate income. It's having all the money on the front end.

The other issue is the existing loan I have and wrapping it into another loan.  

Originally posted by @Justin Tahilramani :

What is your projected rental income on the ADU after expenses? $275K is insanely expensive to build an ADU.

You are absolutely right. The market in Denver is insane for building and especially ADUs. 1) Zoning and permitting continues to be challenging. Construction companies are carving out their niche for navigating ADU permitting, designs and so on. All services in house.$$$ 2) The expense: Basically it is a house. So the costs are much the same (Denver market construction $232/sqft ish). In fact the ADU would be 1512 sqft total (864 sqft or 3 car garage and 648 sqft living space on 2nd floor.) Actually this ADU is twice the size of my SFH which appraised for $283K in our market. Plus, if I chose to convert one of the garage bays into a single room occupancy (SRO) or dorm (3/4 bath and kitchenette/wet bar) then my income potentially goes up.

So the answer to your question is like an onion, many layers. What I can tell you is the going rate for ADUs is approximately $1200/1400 a month and I am guessing I could get about $750-1000 for the SRO. My projected rental income is between $1950-2400 and that would leave me with about -$288 to $62. Then with rent from my SFH it could generate about $1600...This deal could be done. It would generate income. It's having all the money on the front end.

The other issue is the existing loan I have and wrapping it into another loan.

Originally posted by @Seth Borman :

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

@Justin Tahilramani is correct. Your costs are too high -over $450 per square foot (based on a 650' ADU) with no expenses for land? Get the costs down to $150,000. You'll have enough available, you'll get it done and you'll turn a profit.

Use an already completed and engineered design that is close to what you want and can be purchased for a few hundred $. Set up a cheap website and get all your drawings on the website, then use Craigslist adds posted in out of state major cities with depressed economies. Your add should seek a builder, with tools, who can build your chosen design, within 6 months. Provide a link to your website so the design can be reviewed from anywhere, offer $2000 per week in cash with $1500 paid weekly and the rest paid in lump sum only upon completion. Also offer strong incentives for early completion (incentive like paying six months labor even if your builder completes it in 5 months). You'll have plenty of people interested, but choose wisely, many will be more interested in being paid, than in completing the ADU.

You could sweeten the deal by offering to let the out of state builder stay in a spare a room in your home. Also use less expensive materials if you are still over budget. Choose fixtures, finishes and appliances that can be upgraded later when the finances are stable. Under this arrangement you get an ADU very close to what you want, limit your labor costs to $50,000 and your materials to $100,000. You already have enough to get it built. You do have to manage the project and the builder, and you just do the permitting yourself.

Originally posted by @Jillian B. :
Originally posted by @Seth Borman:

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

I certainly dont want to dissuade you from building an ADU since it will generate income and likely add quite a bit of value to your home, but consider the opportunity cost. You could look at investing in a lower COLA and build a portfolio of homes with that same $275k.

I recently bought a 4 plex in NC for 189k that brings in $2600/month....

 

Originally posted by @Davido Davido :

@Justin Tahilramani is correct. Your costs are too high -over $450 per square foot (based on a 650' ADU) with no expenses for land? Get the costs down to $150,000. You'll have enough available, you'll get it done and you'll turn a profit.

Use an already completed and engineered design that is close to what you want and can be purchased for a few hundred $. Set up a cheap website and get all your drawings on the website, then use Craigslist adds posted in out of state major cities with depressed economies. Your add should seek a builder, with tools, who can build your chosen design, within 6 months. Provide a link to your website so the design can be reviewed from anywhere, offer $2000 per week in cash with $1500 paid weekly and the rest paid in lump sum only upon completion. Also offer strong incentives for early completion (incentive like paying six months labor even if your builder completes it in 5 months). You'll have plenty of people interested, but choose wisely, many will be more interested in being paid, than in completing the ADU.

You could sweeten the deal by offering to let the out of state builder stay in a spare a room in your home. Also use less expensive materials if you are still over budget. Choose fixtures, finishes and appliances that can be upgraded later when the finances are stable. Under this arrangement you get an ADU very close to what you want, limit your labor costs to $50,000 and your materials to $100,000. You already have enough to get it built. You do have to manage the project and the builder, and you just do the permitting yourself.


Mind blown! I wondered how one might do this for less. This idea makes so much sense. My alley neighbor built an ADU by himself-2 car garage and 450 sqft living space and he gave me his drawings so I can go back to that architect to make some changes and get pretty close to what I want. Permitting seems daunting especially for ADUs in Denver, seems the rules change from time to time and that can be a setback. Thanks.

 

Originally posted by @Justin Tahilramani :
Originally posted by @Jillian Beth Estes:
Originally posted by @Seth Borman:

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

I certainly dont want to dissuade you from building an ADU since it will generate income and likely add quite a bit of value to your home, but consider the opportunity cost. You could look at investing in a lower COLA and build a portfolio of homes with that same $275k.

I recently bought a 4 plex in NC for 189k that brings in $2600/month....

Thanks Justin. I put this info out there for feedback. That's what I'm getting. 

There is plenty of information that falls in to the "I know that I don't know" and then there is the "I don't know that I don't know" category. No dissuasion here. Your points are exactly why I keep vacillating between Denver and OKC. I figure I can find a deal in OKC that can generate income for less investment and it is just a matter of time to realize either of these ideas. I appreciate the added touch of your recent purchase info. I can do this. Set the goal and go! 

 

 

Originally posted by @Justin Tahilramani :
Originally posted by @Jillian Beth Estes:
Originally posted by @Seth Borman:

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

I certainly dont want to dissuade you from building an ADU since it will generate income and likely add quite a bit of value to your home, but consider the opportunity cost. You could look at investing in a lower COLA and build a portfolio of homes with that same $275k.

I recently bought a 4 plex in NC for 189k that brings in $2600/month....

BTW I found a turnkey 3 bed 2 bath in OKC with a two story structure in the back which I think could be converted into an ADU. I am looking into it but it seems weird the seller says "Behind the home, there is a two story out building that has potential to be converted into two separate living spaces. Current back building is not suitable for living and we are currently suggesting that anyone entering or inspecting it proceed with caution as no work has been done to make this building ready for entry. Existence/Repairs/Removal of back building are negotiable." So I don't know if the city has some restrictions on ADUs or if the flipper ran out of money, hard to tell.

 

 

Originally posted by @Jillian B. :
Originally posted by @Justin Tahilramani:
Originally posted by @Jillian Beth Estes:
Originally posted by @Seth Borman:

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

I certainly dont want to dissuade you from building an ADU since it will generate income and likely add quite a bit of value to your home, but consider the opportunity cost. You could look at investing in a lower COLA and build a portfolio of homes with that same $275k.

I recently bought a 4 plex in NC for 189k that brings in $2600/month....

Thanks Justin. I put this info out there for feedback. That's what I'm getting. 

There is plenty of information that falls in to the "I know that I don't know" and then there is the "I don't know that I don't know" category. No dissuasion here. Your points are exactly why I keep vacillating between Denver and OKC. I figure I can find a deal in OKC that can generate income for less investment and it is just a matter of time to realize either of these ideas. I appreciate the added touch of your recent purchase info. I can do this. Set the goal and go! 

 

 

You definitely have the right attitude! I'm sure that whatever decision that you make - you will be successful. I am really interested in the topic of ADUs. I think they will continue to increase in popularity in states like CA, OR, CO and WA. Do you know what the return on investment is from an overall home value perspective? If your home is worth $500k in Denver and you add a $275k ADU - what do you feel the overall value of the home would rise to?

 

Originally posted by @Justin Tahilramani :
Originally posted by @Jillian Beth Estes:
Originally posted by @Justin Tahilramani:
Originally posted by @Jillian Beth Estes:
Originally posted by @Seth Borman:

I would relook the price to build the ADU. Do you need a three car garage? Can you make a larger ADU if you make a smaller garage?

It is less about need and more about if I am going to do it, then just DO IT sort of mentality. Plus it maximizes the ADU space. In Denver one can only build an ADU that is 75% of the bottom floor, so this would maximize the rentable space.

 

I certainly dont want to dissuade you from building an ADU since it will generate income and likely add quite a bit of value to your home, but consider the opportunity cost. You could look at investing in a lower COLA and build a portfolio of homes with that same $275k.

I recently bought a 4 plex in NC for 189k that brings in $2600/month....

Thanks Justin. I put this info out there for feedback. That's what I'm getting. 

There is plenty of information that falls in to the "I know that I don't know" and then there is the "I don't know that I don't know" category. No dissuasion here. Your points are exactly why I keep vacillating between Denver and OKC. I figure I can find a deal in OKC that can generate income for less investment and it is just a matter of time to realize either of these ideas. I appreciate the added touch of your recent purchase info. I can do this. Set the goal and go! 

 

 

You definitely have the right attitude! I'm sure that whatever decision that you make - you will be successful. I am really interested in the topic of ADUs. I think they will continue to increase in popularity in states like CA, OR, CO and WA. Do you know what the return on investment is from an overall home value perspective? If your home is worth $500k in Denver and you add a $275k ADU - what do you feel the overall value of the home would rise to?

Thanks Justin. Let me give you an example check this address out 1376 Raleigh St Denver, CO 80204. It was a regular home, renovated, then ADU added, (exact one I am interested in). If you check the numbers you can see for yourself $150K now $735K, well actually $728K. To answer you directly I understand from people I have talked with that appraisal of ADUs is not streamlined yet so their value is not completely accurate at this time. So the answer is I don't know because it is still in its infancy.

 

 

Originally posted by @Julie Hill :

@Jillian B. I own a home in that neighborhood just a few blocks down... I have always wanted to build an ADU on it and now I REALLY want to!

Right? Yeah it's pretty impressive. I'm in Barnum. Truth is my little house was built in 1906. Not big or remarkable at all. I wonder if it would make more sense to demo it and build a duplex not the Adu. Not sure about zoning. I'll need to research.

@Jillian B.

I love Barnum! Great little Denver neighborhood, close to downtown. And we love it for our young house-hacking clients because there are a fair number of homes with basement apartments or mother-in-law suites out back. 

And it's funny you mention 1376 Raleigh. I showed that place to a client earlier this year. Beautiful space. It was owned by the owners of L&D Construction, which have a niche in ADU construction. (Something tells me you already know this.) I will say they do beautiful work but that I'd also be interested in what a pre-fab home out there would cost. Sounds like you really want that garage, though, too.

I think the ADU is a great option. Have you considered doing an Airbnb in there? AirDNA says a 2br unit in the Barnum area would get about $24,000 in revenue per year. I wish you luck.

Originally posted by @James Carlson :

@Jillian B.

I love Barnum! Great little Denver neighborhood, close to downtown. And we love it for our young house-hacking clients because there are a fair number of homes with basement apartments or mother-in-law suites out back. 

And it's funny you mention 1376 Raleigh. I showed that place to a client earlier this year. Beautiful space. It was owned by the owners of L&D Construction, which have a niche in ADU construction. (Something tells me you already know this.) I will say they do beautiful work but that I'd also be interested in what a pre-fab home out there would cost. Sounds like you really want that garage, though, too.

I think the ADU is a great option. Have you considered doing an Airbnb in there? AirDNA says a 2br unit in the Barnum area would get about $24,000 in revenue per year. I wish you luck. 

James, it appears you are good at what you do. Yes to all that. 

I'm convinced that the Adu would be a good investment and have a positive return sooner or later. It's getting it built for less than $275k which means potentially overseeing the build myself that causes me to hesitate. There is also a program, a forgivable loan of $25k, to build an Adu to ease the housing crisis and keep rents moderate, basically pre-fab but no garage only an Adu... Thanks for the well wishes.

@Jillian B. - I think you're onto a great line of questioning here!  Obviously we can't predict the future with any real accuracy, so who knows what the broad market will think about ADUs 30 years from now, but in my market even though they are uncommon, they spike the value of homes anytime they are well kept.  Who doesn't love the value that an alternate income stream can bring to a property? 

As for the options you lined out, I think if you are going to quit your W-2 job soon and head into 1099 work, then right now is the easiest time in the next few years for getting a loan to build the ADU. If that is a high-priority project and you feel strongly that it is the play you want to make, then I'd say today is a good day to go for it.

If getting a property in our market is in the cards, you could easily accomplish that. You could even refinance it and pull all or most of the cash back out and build the ADU.

The most important question here, and the one that can guide you the best is this . . . which of the possible decisions best fits your goals and vision for real estate investing? Rental properties in OKC are great, but they are inherently NOT in Denver. So if you envision yourself building up a stable of high performing, moderately appreciating properties in a market like mine and being as "distant" from the operation as possible, then that's a useful thing to realize. If, conversely, you'd value having some of your property right there with you then you can't get much closer than an ADU.

So, while there isn't a right or wrong answer here, there is a better path for you.

I hope this helps!

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