Finance ADU now or wait?

8 Replies | Los Angeles County, California

Hi all, I am curious what opinions folks may have about this ADU opportunity.

My partner and I recently bought a duplex in Vermont Square that we owner occupy. When we move out, it will cash flow $300-$400 a month after all expenses. We have 2 400sq ft single car detached garages in the backyard, and want to eventually convert at least 1 into an ADU.

We do not currently have the cash or equity to utilize to convert a garage.

What would you do? 

A) Use a renovation or construction loan to convert. If you would choose this option, what type of loan would you do? This lists lots of options (FHA 203k, Fannie Mae Homestyle Renovation, Shared Appreciation agreement, private money, construction loan, renovation loan etc.). What do you think of doing a renovation loan and then refinancing the home loan and the renovation loan into 1 loan?

B) Move out and buy homes in lower cost markets using low down payment loans. We work remotely so it fits our lifestyle. Do this until we have the equity to HELOC or cash out refinance to convert this Vermont Square garage (we have family here we could stay with to be around for the conversion).

What would you do? I am still learning about the factors regarding each option.

I don't have an answer to your question(s). I did want to point out that I would get the ADU done, and a Junior ADU, now while you are occupying the property. Many cities have enacted laws that only allow an ADU with owner occupied if there's a Junior ADU. I don't believe LA has done that….yet. Plus, any financing you would obtain will be better terms because you live there. Not to mention rates are low now and it will be so much easier to manage the build/conversion while you are there. Also, you'll be embarking on a year + journey- figure out how to start now. Just some observations, not facts.

@Myles Blackwell Just my 2 cents - what ROI will you get with the ADU ie how much will it rent for and what will it cost? Compare that ROI against what you can get elsewhere (including your option B).

A) From my understanding you can use a 203k or Homestyle loan as a refinance and include renovation costs into 1 loan. I know a lender in socal you can speak with if interested let me know.

Here are a few reasons why you may want to consider doing the conversion now:

1. If you rent out both units and want to convert the garage later on, you may not be able to assuming the tenant had access to the garage.  Because they rented the unit with a garage, you cannot take that away.  By doing it now, you could convert the garage that you have access to.

2. Cost of materials and labor keep going up and building codes change all the time. Just in building codes from when I built my ADU to now has changed to where you have to pay for a survey to be done. That's $2,000-$3,000 that you now have to pay. Codes changed right when I bought it to where I had to dig out a dedicated sewer line instead of just connecting to the house. That double the cost alone. The longer you wait, the more expensive it may get. Another great is example is if you build an ADU from the ground up (not a conversion), you are now required to have solar panels. Give it time before they require it for ADU garage conversions. There goes another $6,500 and you probably won't get much of a premium on the rent.

3. Interest rates are low.  If you can take advantage of the owner occupied rates, it is probably worth jumping on.

Conversely, here are a few reasons not to do it and reinvest elsewhere:

1.Typically in Los Angeles, parking is really bad in neighborhoods with 2+ units. If you convert the garage, you lose out on parking for your tenants, which could be a problem later on for renting.

2. ADUs are not getting dollar for dollar value for appraisals. I utilized the FHA 203(k) loan for my renovation and garage conversion. The appraiser gave me $10,000 in value but then took away $10,000 for not having a garage. On my refinance I got around $45,000 in value. For one of my house hacking clients recently, he was given $20,000 in value but then had $10,000 taken away for not having a garage. You will have to really drill down on the after repair value and work with the appraiser on it. Talk to the lender first before doing so because sometimes if you try to influence the appraiser they will reassign you. There are work arounds.

I hope this helps.  Good luck!


I'm working on adding a ADU now and when I looked into any of the construction loan products they where more of a headache than I was willing to deal with. I don't do garage conversion ADUs, only detached new ADU builds, so your returns may be different but even with the worst financing terms this strategy still made sense for me. I would take your build cost estimate, double it, and then compare it against your worst case monthly rent scenario and see if the returns warrant considering more non-conventional financing (100% LTV HELOC, personal loan, borrow from your 401k, hard money). You will need the full amount ready to go up front because you'll be burning through checks once you start.

I'm with Rick on this one, waiting will likely only increase your costs and perhaps your lending costs. As long as it pencils out, find the money and build it. There is no better way to gain more cash flow than building an ADU on dirt you already own! You only have construction costs and soft costs, no dirt to buy and in CA, dirt often costs more than the improvements!