Early this year, the State made it easy for homeowners to add an ADU on their property. On a cap rate basis, it seems like a great deal for homeowners or investors who want to earn some extra income for their property. If you install an ADU for ~$250K, you can rent it out for $2500-$3000 a month. Satisfying the 1% rule in the Bay Area is HUGE!

My question to you is this: What's holding more "buy and hold" investors from constructing an ADU on their property and how can new investors acquire finance the cost of building an ADU if they don't have a lot of equity in the home?

I don't think much is holding them back, I see many properties with ADUs in bay area. If not ADU, converted garage to room, or extra room in the back with the same concept in mind.

New investors can get financing doing renovation loan, HELOC

With the new statewide law, SFH with ADU will be under rent cap and just cause eviction law unless owner lives in one unit.

Originally posted by @Myo Thein :

With the new statewide law, SFH with ADU will be under rent cap and just cause eviction law unless owner lives in one unit.

 This is incorrect.  New construction is exempt from rent control for 15 years.   The authors of the rent control ordinance did not want to reduce new construction so the rent control does not apply.  

@Derrick Dill , I wonder if there are companies that will help you finance the construction of an ADU for investment purposes. Right now the only financing options that I know about are the ones you mentioned (cashout refi or HELOC). But that doesn't work for someone who's DTI is maxed out. Hard money lenders generally won't finance an ADU construction if the owner lives on the property. Seems like there's something missing in the market that could be a great opportunity for a lender.

Originally posted by @Dan Heuschele :

 This is incorrect.  New construction is exempt from rent control for 15 years.

You are right about 15 years exemption for new construction, maybe ADU will be exempt. But if the main house is 15 years older, which is NOW under rent control / just cause eviction. Again this is something who wants to build ADU should get clarification.

@Sean Pan Renovation loans should do the trick as well for an ADU: FHA 203k, homestyle, CHOICErenovation

I'm guessing perceived complexity/lack of understanding about the process, complacency (many longtime landlords have great cash flow), or lack of desire to build something from the ground up.

Originally posted by @Myo Thein :

Originally posted by @Dan Heuschele:

 This is incorrect.  New construction is exempt from rent control for 15 years.

You are right about 15 years exemption for new construction, maybe ADU will be exempt. But if the main house is 15 years older, which is NOW under rent control / just cause eviction. Again this is something who wants to build ADU should get clarification.

I got straight from an HCD presenter (Greg Nickless) that new ADU construction does not result rent control.

I believe the same would be true if you take a lot that is zoned for multi-unit but has a single unit and upgrade to multi unit leaving the existing unit.  I believe all (including the existing unit) will be exempt from rent control for 15 years using the same rationale as the reason for the 15 year exemption.  The regulation did not want to discourage new housing builds.  Having the old house become rent controlled due to adding new units would be contrary to the goal of the 15 year exemption.   Maaybe @Lee Ripma knows but I think she usually removes the existing unit (but she may still know).

There are many loan options available to install an ADU on a property currently owner OR on a new purchase.

• Cash - I know this is strange coming from a mortgage banker, but if you have the cash and you see this is as a valid use, then go for it.
• Cash-out refi - with rates being as low as they are, this is be best route for a property you own and have a lot of equity.
  
• HELOC - if you currently own, have some equity but cash-out alone will not get you the cash needed to install an ADU
• Renovation loans - can be used on current property or new purchase - keep in mind that you do have a loan MAX
• Construction loan - can be used on current property or new purchase - this would act as a bridge loan to allow you to finance the ADU install using the future value (ARV) and rent, and then at the end refi into a 30 yr fixed
  

Buy N Hold investors should strongly consider this opportunity. The ROI on a detached ADU can unlock a lot of potential 5-10 years down the road. And you're right, the extra cash flow that they'll be making in the backyard is AMAZING (practically pays for itself and more).