Add ADU & convert home to Duplex, then move?

Question

I want to hear everyone’s opinion on what strategy they would prefer to use in my situation.

I own a single family home and 5 rental units.

On my single family I have the choice to convert my garage to an ADU studio 400sq ft and rent it. I would then rent my home as well which is 3 bed 1 bath. Move in 2 years from now and buy another home and live there. By moving and buying another home and essentially moving up in neighborhood with lowering my monthly mortgage but increasing my debt and leverage, however also creating forced appreciation on the new home and have plenty of opportunity for appreciation as I will be buying in 2 years from now where house prices can go down in my market.

If I’m happy where I live and I am consistently investing in real estate would any of you move using this strategy. I am happy where I am live now, however  I like the idea and can visualize lowering my monthly mortgage expense as Scott Trench mentions in his book set for life that Your mortgage expense is your biggest living expense. By making this move I would save 1000 a month in mortgage. Create two more rentals for myself and move to a better neighborhood and schools.

Will Barnard · Answer

Utilizing existing built out space like a garage and converting to a rental ADU is a great way to generate cash flow. Many of the numbers I am seeing for my clients is that they can convert the garages to ADU units and get their investment back in 3-6 years which equates to a very good ROI.

Benjamin Orozco · Answer

@Clarence Johnson

Man what a great point I’m loving the rental market for an ADU and how well this can play into investing.

Benjamin Orozco · Answer

@Kenneth Bullock

Yes Im currently Invested in two out of state deals in kansas

Benjamin Orozco · Answer

@Will Barnard

That is a great investment your absolutely right and it can be a system or niche to do just that! Thank you

Clarence Johnson · Answer

Great plan, I'm doing the same with my duplex right now and when this project is near completion will later do the same with a SFR.  Comps and loan guidlines do become a challenge when there are no other ADUs in the area, but that will likely change with time.  With the cost of garage conversions (I got quotes ranging from $50-65k) and mkt rent in LA (I saw one in 90047 LA last week for listed at $1600 a month), there is no better return in our mkt than to do a garage conversion.

Benjamin Orozco · Answer

@Enrique Huerta

Thank you good advice !

Enrique Huerta · Answer

If you have the resources, then yes create the ADU and lease it out. As for the home, you can get financing on a new primary residence every year so you should rent it out and move into another home if you want to assuming you abide by the time requirements and have the sufficient down payment required.

Best of luck!

Dan H. · Answer

Your plan sounds awesome.  Slow and steady may win the race. Better neighborhood is also nice.

As for separate utilities, it does reduce conflict but is nota necessity in CA in order to have tenants pay the utilities.  You can not charge extra for utilities, but any relatively fair split is allowed.  Most of our units do not have separate water meters, but the tenants pay the water.

Be aware that ADU comps for financing is not crystal clear.   This could be an impact if you change your mind and decide to selL.

Good luck

Kenneth Bullock · Answer

@Benjamin Orozco Have you thought about out of state rentals, in a cheaper market?

Benjamin Orozco · Answer

@Curt Smith

In California and specifically in Los Angeles where I live it’s zoned for ADU conversions. I hear you on separate meters for the water and electric I feel that’s huge as well. I don’t want to sell my home since I got it for a great price and it’s doubled in value and it’s been the catalyst for my investments. So I would only move if I can keep my home as a rental.

Thanks for the advice

Add ADU & convert home to Duplex, then move?

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