San Jose ADU Investment Progress

[Brian Larson]

Over 2 years ago, I started out on a quest to explore and build an ADU at my personal home in the Northside Neighborhood of San Jose. In a few more months, this project will finally be completed. Given that this is getting close to completion, I felt it was the right time to share more of my personal story here with the BP Community.

In December of 2018, I engaged @Adam Mayberry as a architect/designer for my project.  He was great!  I highly recommend him.

In January of 2019, I performed a site survey with a small company out of Tracy (unfortunately there are no longer in-business).

Over approximately the next 8 months, Adam and I created a simple but elegant design for a new garage with a 1-bedroom apartment above it.  In this same period, Adam also designed some plans to remodel the primary house.

Toward the end of 2019, we submitted an initial plan to the San Jose Planning office.  This was a long, long process.  We had to respond to questions and resubmit our plans multiple times (keep in mind, we are building a 2-story structure).  It was finally approved on the third submittal in July.  (Yay!)

We hired a great general contractor at the end of June -- @Zab Khan (First Class Construction).  He has been a pleasure to work with.  I highly recommend him too.

In August 2019, we demolished of our current garage and a large tree.  Zab also started the foundation work.

In mid September 2019, we poured the concrete foundation (Bay Area "orange planet" Day -- this photo is not filtered). 

By September/October, framing and rough-ins for electrical, plumbing, and HVAC were completed.

In November, the roof was installed and siding work began.

We ran into inspection delays with the city around the holidays so December was pretty quiet.

In January, we got insulation and Drywall up.  We used spray-in on the ceiling of the apartment.

Currently we are still finishing siding.  Again, the plan is to finish the entire project within the next 2 months. (fingers-crossed)

Overall, I think our family has been really, really happy with the experience.  We hope to rent our 600+ SQFT apartment for about $2100 a month, maybe more.  We also plan to refinance at the end of this period and take advantage for the lower interest rates.

All in all, the goal is to off-set our living expenses as much as possible and roll the savings into another OOS real estate investment in the coming 1-2 years.

FYI - When the entire project is complete, I will share some high-level numbers for the whole project.  In the meantime, let me know if there are any other questions.

[Chen Zhou]

Originally posted by @Dan H.:

The big variable on building ADUs is how they will be valued with respect to the building costs. I have recommended everyone do their research on the value of the ADU (what do local comps show). I make this suggestion because I regularly see ADUs (especially in single family areas) that are valued at about $50k. Note on a $350k build, a value of $50k would consume years of cash flow (hopefully a $350k build is value much greater than $50k). This negative initial position can consume years of cash flow and result in many ADU additions being poor investments compared to other RE investments with a similar level of effort. It is my view that an ADU addition can take effort similar to BRRRR. A decent BRRRR returns at least 50% 1st year. A great BRRRR returns infinite return because all costs have been extracted.

I also see numerous ADU providers advertise ADU values based on rents. There are investors that do not realize the rent price only affects the value if local comps justify the value. RE with less than 5 units are valued based on comps, not income. I consider it a deceiving practice by the ADU providers that do this.

My original protege had a 1 BR garage conversion ADU that we placed hands off cost at $115k to $120k (prior to Covid related material price increases). He was active in the process and spent significantly less than $115k. He had a purchaser who properly valued the ADU, but the financing appraisal came back low because of the low value associated with the ADU. It worked out fine for my protege as the buyer ended up bridging most of the appraisal gap because my protege was willing to rent the place and therefore was not going to sell it at the appraised value (good to have back up plans).

what value were you expecting an appraiser to put on your ADU? Have you got the refinance appraisal and if so, what value did the appraiser place on the ADU?

Any further lessons learned at this stage?   Would you do it again?

Dan,

I did some market research lately in the bay area and found the following SFH transactions with ADUs. It all showed that the ADU added more value than construction cost compared to similar SFHs without an ADU:

https://www.redfin.com/CA/Camp...

https://www.redfin.com/CA/San-...

https://www.redfin.com/CA/Sant...

https://www.redfin.com/CA/Sunn...

https://www.redfin.com/CA/Sant...

https://www.redfin.com/CA/San-...

Not sure about other lower cost areas, but in bay area it's proven that ADU can add more value to the property almost than construction cost (almost immediately) if built with the right design and affordable contractors. Happy to refer architect and contractor if you are looking for great quality at $300/sqft range.

Chen