Anyone have experience with ADUs?

Question

Hey all! I'm going to be in Atlanta in a week for my new job and will be aggressively hunting for a property to house hack. As such, I was wondering if building an ADU on a property in the Atlanta area is a wise investment? I know a lot of places are getting more lax when it comes to ADU laws, and the idea is very intriguing to me. Was wondering if anyone had some first-hand experience with them. Would love to hear any and all advice! Thanks!

Dan H. · Answer

I believe ADUs and the associated experience varies by locale.

It is my belief that building a hands off ADU in southern CA produces a lower return than most other RE investments. Here are some of my thoughts:

• In many areas, the value placed by appraisers (and correspondingly buyers) are significantly lower than the hands off construction costs.   This basically means you start with a negative return and the initial cash flow goes to recovering this negative return.  It can take a few years to recover this negative. Due largely to item 1, it is cheaper to purchase a property with an existing ADU.
• Financing limitations typically either places the rate higher or the loan is backed by an asset other than the ADU (HELOC, portfolio, margin, etc.). The issue is that most investors have fairly small amount of such assets. Tying up an asset to back a long term finance such as an ADU basically limits the subsequent loan. Compare this to if I purchase an asset with a backed loan (I usually use margin loan), rehab, refi 6 months later (BRRRR). I pay off the asset based loan and can use it again. Due to item 1, refinancing is not a great option for the ADU addition because the ADU was the opposite of a value add. Adding JADU (probably CA only term), due to the owner occupancy (OO) requirement, limits options. For example if the investor moves from the property, his options are either not to rent the unit as a separate unit, sell, or try to get away with breaking the rules. Selling has challenges because the buyers are mostly constrained to house hackers due to the JADU OO requirement. Virtually all ADU addition return projections (pro forma) that I have seen do not include the initial loss of return in the calculations.  Of course, they project much better than they would if they reflected the 10s of thousands that they spent above the value that will be set by appraisal or correspondingly a buyer.

Give me a BRRRR or under value acquisition (best being both) every day over building an ADU. On our BRRRR, we typically obtain infinite return for about the same effort as an mostly hands off ADU addition.

As indicated, this is what I believe for Southern CA.  Some of my thoughts may be applicable to Atlanta.  The comment about JADU likely is not relevant to Atlanta.

Good luck

Geoffrey Lane · Answer

@Dan Heuschele Ohhh okay makes total sense. Wow that's incredibly pricey, and I see what you mean about the garage situation. I'm gonna do some poking around to see what the ball park price would be in atl and whether it would be worth it or not. Thanks again for the thoughtful responses Dan!

Dan H. · Answer

By hands off I mean hiring all work out including the use of a GC who is responsible for hiring/managing all subcontractors and managing the effort.   All trades work is done by people hired by the GC.

The owner’s responsibility is basically hire the architect/designer, hire GC (designer may be associated with a GC), choosing design, choosing finishes, paying designer and GC.

In So Cal, you would be shocked at what garage ADU conversions cost.  Hands off start at ~$80k, but most cross $100k.   I would hope in Atlanta the costs would be a lot less. I am not a fan of this approach in So Cal for the reasons I already listed.  Basically, the value being less than the hands off addition costs is the big one.  Also, I find many tenants like their garages.  They stay significantly longer.  We have 6 LTR units with garages.  Four are on their original placed tenant or the inherited tenant.   Hard to know how this extrapolates to the Atlanta market.

Good luck

Geoffrey Lane · Answer

Also, you mentioned purchasing a home that comes with an ADU usually makes more sense. Does that include converting a garage into an ADU? Are you a fan of doing that? @Dan Heuschele

Geoffrey Lane · Answer

Wow @Dan Heuschele I really appreciate the in-depth response! What do you mean by "hands off" exactly? Apologies if that's a noobie question!