San Jose ADU Investment Progress
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.
@Brian Larson. Thanks for sharing the details. I am Sanjose resident,on the fence of getting my garage conversion. But still not confident on few things Can u share your experience
- Like Sanjose ADU construction cost vs rent income. How & where to find data
- where to find experienced ADU contractors who give quote by seeing the garage structure (Lot of contracts give general quote per SFT)
- how to do math for ROI
Congrats on the progress! Love it that you have a new garage as a result of this project! All the hard work will pay off!
Yes, would be interested in hearing about the numbers once this is all done!
Glad to be a part of this project - cant wait to do the next @Brian Larson!
@Ramu Uppalapati - I completely understand the uncertainty. I decided to do this because it made sense for my situation. Only you can decide if it works for your situation. No amount of data will make it any more or less of a risk. I mostly designed spreadsheets to run scenarios on this construction and potential income. The biggest issue, as with most projects, was that the entire project cost was much, much higher than I initially anticipated. I must admit that Adam did a terrific job setting my expectations on the expense of construction in the Bay Area. But it was still hard to adjust my frame of reference.
Given the large expense, there are some days that I regret this investment for the following reasons:
1) I am concerned about the long-term outlook of the Bay Area with COVID and it's impact on Tech. But I think it will come back strong because companies like Google and Apple have too much real estate capital invested here to relocate now.
2) I think that an OOS real estate investment of this size would have returned lots more cashflow over the past 2 years and some appreciation too. So from a pure investment standpoint, it might have been a better option.
On the upside, I hit some great timing on the following items:
1) Reduction of local taxes in San Jose to build the ADU. They were reduced by about $5,000 in August/September 2019. (I think Adam might remember the specific timing better than me).
2) The building rules relaxed for setbacks and roof height in 2019 so we where able to build higher and closer to the property line. (Yay!)
3) We submitted plans in 2019 so we were allowed to use gas appliances in our design.
Hi @Brian Larson - thank you so much for sharing your recent experience. Congrats on getting close to the finish line!
Would you mind sharing a little more on the unexpected items that results in over-budget? Anything else for us to watch out for when we think of anticipating possible cost for the entire ADU project?
@Vic Bui - Sorry for the slow reply. I think that the project has gone very well overall. I believe I invested time finding the right partners (i.e. architect and contractor). The cost has not been entirely unexpected. My comments have more to do with my personal frame-of-mind adjustment.
When I started this project, I expected to spend $200K-$250K. At this time, I am projecting the total expenses to be closer to $350k.
Much of the "unplanned" cost is wrapped into the general cost to build my project which, despite Adam's advice, I was not entirely certain on until June 2020; when I hired Zab, my general contractor. I spoke with 3 other contractors besides Zab but I ultimately went with him because I felt comfortable with his work-product, cost, and communication.
One other thing to note about my project is that we have a HUGE amount of concrete to pour onsite. There is over 100 feet of new driveway to be poured. Plus, new sidewalks around the new garage, and a new sidewalk on the side of the existing main house. These items are partially contributing to the increased cost from my early projections. I attribute the rest of the cost to my lack of understanding on the general costs to build.
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Hi Brian, So you will live in the new "ADU" while renting out your old apartment ?
With the good design ADU that you just created, seems like an excellent plan.
The new ADU seems so good I think it's good as primary.
@Carlos Ptriawan I'm designing on now that homeowners are designing to the max to live in the adu and renovate and rent out their home
Brian,
This is a fantastic post, and much in line with what I am thinking of doing on my property as well. Your initial post and follow up answer have been very informative, thank you very much for posting! In fact, I've already had an initial call with @Adam Mayberry a few months ago. I have a couple of questions I am hoping you can answer.
Are you able to share the rough breakdown of costs along materials/labor lines? I imagine that the cost of lumber has skyrocketed since your project, and can thus seriously impact the total cost.
Why did you choose the particular square footage that you did? I know that there are some property tax implications with ADUs 750 sq ft and larger, so is there any particular reason you did not take advantage of the full 749?
Are you aware of any limitations in having exterior as opposed to interior access stairs to the second story ADU, particularly how they may/may not affect setback requirements?
And finally, I (and I'm sure others) would love to see photos of the final product if you are able!
Best Regards,
Akhil Tandon
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?
Originally posted by @Dan Heuschele: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
Originally posted by @Chen Zhou:Originally posted by @Dan Heuschele: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
I do not have the local market expertise to be able to tell from the listings the value added by the ADU (note I am not indicating that your comment is not true but that I cannot tell because I do not have the expertise to know the value of the property without the ADU).
I’m sorry if my post seemed to imply that ADUs are always valued less than the hands off value of the ADU addition. That was not my intent. If there are comps that can be used in establishing a value of the ADU above construction costs then you may get a fair/good appraised value for the effort and costs of an ADU addition.
however, there are many locales where the comps are not present to even obtain close to the ADU addition costs.
In summary, I recommend 1) do your research on the value of the ADU versus the ADU addition costs (research the comps located near your ADU addition and realize if there are no comps, you have little idea how the appraisal will value the ADU) 2) recognize regardless of what ADU providers indicate, properties with less than 5 units (including those with ADUs) are not valued based on rent/cash flow, they are valued on comps.
I know a small developer in San Diego that often adds ADUs to the properties. his costs to add the ADU is far less than the hands off costs. In addition, he does his research prior to adding the ADU and knows what value the ADU is likely to add. If it is not likely to add value to justify the cost/effort, he does not add the ADU.
ADUs are better investments in some markets than others. Do your research before deciding to add the ADU.
@Akhil Tandon - We chose the total SQFT for 2 reasons:
(1) I still wanted a usable backyard because I live there. Also, I figured that opens up the buyer pool if I sell to another owner-occupier.
(2) The size limit at the time in San Jose was 700 SQFT based on our small lot size. The local city rules have changed a lot since 2019, when we first submitted plans.
Additionally, we considered exterior stairs but I ultimately pushed for interior stairs because I wanted them to be more structural and not ever need to be replaced. Also, it is my understanding that stairs cannot be in the setback zone but talk to some local experts like @Adam Mayberry and confirm.
Lastly, I'll add some photos in a bit.
@Dan Heuschele -- As usual, I agree with you. The value-add and construction costs do not usually balance. I wish they did. In my personal situation, the appraiser on my refinance gave this structure a $190K valuation in his report. I spent around $350K (design, fees, and construction) so I was not very happy.@Chen Zhou
@Chen Zhou -- Your assumption about "almost immediately" adding value from the construction of an ADU are not indicative of most people's experiences.
Can it be done? - Sure.
Did you accomplish this? - Sounds like you did.
Is it repeatable for the average homeowner with zero construction background or experience? - Probably not.
Originally posted by @Brian Larson:@Akhil Tandon - We chose the total SQFT for 2 reasons:
(1) I still wanted a usable backyard because I live there. Also, I figured that opens up the buyer pool if I sell to another owner-occupier.
(2) The size limit at the time in San Jose was 700 SQFT based on our small lot size. The local city rules have changed a lot since 2019, when we first submitted plans.
Additionally, we considered exterior stairs but I ultimately pushed for interior stairs because I wanted them to be more structural and not ever need to be replaced. Also, it is my understanding that stairs cannot be in the setback zone but talk to some local experts like @Adam Mayberry and confirm.
Lastly, I'll add some photos in a bit.
@Dan Heuschele -- As usual, I agree with you. The value-add and construction costs do not usually balance. I wish they did. In my personal situation, the appraiser on my refinance gave this structure a $190K valuation in his report. I spent around $350K (design, fees, and construction) so I was not very happy.@Chen Zhou
@Chen Zhou -- Your assumption about "almost immediately" adding value from the construction of an ADU are not indicative of most people's experiences.
Can it be done? - Sure.
Did you accomplish this? - Sounds like you did.
Is it repeatable for the average homeowner with zero construction background or experience? - Probably not.
Absolutely agreed with you. It's not a good idea to build without a clear idea of how much value an ADU/addition could add to the property, otherwise people end up spending way more than they should. All the more important to go with the right design and architect that understands the cost-benefit trade-off.
I don’t want to be a Debbie downer but in earthquake country, two story garage units are the very unsafe. I’m fact after the 1989 big one, they were banned…in Santa Clara co..just a thought— maybe get EQ Ins rider?
@Gayle Eisner - Thanks for the comments but this is designed, structurally engineered, permitted, insured, and LEGAL in Santa Clara County / San Jose.
Looks like it turned out great. We just took out a home equity loan to put a 600SF unit on our lot in Truckee, CA. Crazy times right now in the construction world but excited to get it rolling and get it rented. What sort of rents are you getting in that part of the bay area for a 1 bedroom unit?
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Great job Brian!
You also have a Great name and you spell it correctly :-)
@Jameson Schwab - Rents are a bit disappointing right now. We are only getting $2,200 a month for a long-term tenant. But we like the tenants, which is important because we live here too.