Should I legalize my in-law unit in SF?

10 Replies | San Francisco, California

I'm doing some renovations in my single-family house and have the opportunity to convert to two units if I want to. My architect warned me that it's difficult to undo this decision. Because they city wants more housing units, they rarely allow you to go back to a single-family home after converting to a two-unit. She also said that single-family homes have better resale value then comparable duplexes.

I plan to live here for at least another 10 years, but maybe forever. The second unit will either be a rental or home for a parent. I don't think I'll ever need the extra space. If anything, I'll need less space when my kids leave the house.

Is it true that I'll lose value by converting to a duplex? Does it make sense for me to keep it as a single-family home?

@Mike Lin, if you do that your property will fall under rent control.  You don't want that.  You can still build-out an in-law for that extra rental income.

Your architect is right SFH fetches higher value than with an in law unit. If it's a classic duplex, you can condo convert in certain situations. But in-law can't

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I'm not convinced that an SFH is more valuable than an SFH + *legal* inlaw, assuming same sq ft, and all else being comparable (location, quality, etc). Reason being, you're not the only one that wants a 2nd smaller unit for parents/family or extra rental income. And I think this holds for modest priced neighborhoods (lots of multigenerational ethnic families) as well as higher end neighborhoods (where will they put the au pair?)

The key is that the unit should be legal. Illegal in-laws now can be a complete clusterf*ck in SF. Imagine the unassuming owner gets their unit called out by DBI. Before, you could just eliminate the unit. Now, you’ll be forced to legalize it (and not everyone wants that.) So I always suggest to people with illegal in-laws- either legalize it, and get the added value of the legal space, or tear the kitchen out quietly on a Sunday, when inspectors aren’t around. The kitchen is what usually determines that it’s a unit, and if you get caught, you’re screwed. 

Now you’re a different case, as you’re pro actively looking at adding the inlaw. Yes the bldg will be under rent control, but as long as you vet tenants well and keep it a small unit, you can probably cycle through younger and upwardly mobile tenants that won’t stay there for 20 years. And in the future you can use it for family. 

Oh another trick, best of both worlds: plan the unit so you can access it from an internal staircase from the main house. It will technically always be 2 units, but you could use it as a downstairs suite if you wanted to. Your architect will need to maneuver that feature so plans can be approved. 

my2c

@Mike Lin, Just a disclaimer first - I'm not totally up to date on all the SF regulations cause things have changed a bit the last few years. 

But just food for thought, I have a recent anecdote where a friend of mine bought a single family home with an additional non-legalized space with a back entry door. He wanted to legalize the square footage to the house and flip the property. The city DID do research to see whether that extra space had ever been rented out. He got lucky and they didn't find anything, but they said they wouldn't have allowed it if there was proof of a rental history. 

Great points on both sides. Thanks for the comments everyone. I also heard that property insurance and possibly property tax will be greater as a duplex. I'll take all this into account when making a decision.

@Mike Lin in my case prop taxes only went up by ~$60,000. They have some weird formula, but I think they are generally not applying the full market value of the new unit. At least it seams if you legalize an existing illegal inlaw. I'm not sure what they do if you add an ADU. There are several different add a unit "programs" out there- legalize existing illegal inlaw, add an ADU, add ADU with soft story, different regulations for 1-4 bs 5+ units, etc. So it's never clear what will exactly happen until after it happens (but I was pleased with my reappraisal :)

You can always rely on sfgov to make things complicated!

As for property insurance, ask your agent, but I’d only expect it to go up by a couple/few hundred $$. 

@Amit M. To be clear, you mean that your property value was re-assessed for $60K more with the additional unit and the annual property tax went up by 1% of that, right? I would not be pleased paying an additional $60K in property taxes each year!

@Mike Lin yes that’s right. It’s only about $600 per year. At least it’s not a $500k reappraisal! (You can’t expect to significantly alter and improve a property w/o some reassessment. Reassessments even happen after interior remodels btw.)

@Mike Lin Why not keep the SFR the same as it is, but buy a "Tiny House" for somewhere between 25K and 50K....put it in your backyard and use that as a short term rental. There are people here in the Bay Area that are advertising "The Tiny House Experience" that are doing quite well.

Then when you move you can either take the Tiny House with you....or leave it there.

Just a thought.