ADU cost - for estimates

[Pandu Chimata]

Hello team, How is everyone doing? I recently bought an house in San Bernardino City and doing the rehab. 

This is a small house with 850 Sq footage ( 3 bed and 1 bath) and also a smaller lot of 5100 Sq Footage. 

While doing a rehab, exploring an option of adding an ADU as well. I was told by city that the ADU has to be between 800 and 1000 Sq footage.

Now I am evaluating whether it makes sense to add an ADU or not.

Per my relator, it does not worth from listing aspect, as he does not see lot of data that supports the return for the ADU investment? Thoughts?

FYI - Its going to be an ADU from the ground-up since the existing garage foundation may not work for the ADU.

[Dan Heuschele]

Normal state rules would limit ADU to 50% of current dwelling. San Bernardino must have more liberal rules if they allow larger. They cannot prohibit smaller than 800'.

Your realtor was spot on one reason (probably the primary reason) ADU additions are one of the worse RE investments.

Here is my list of why hands off ADU additions often are one of the worse RE investments:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) The financing on an ADU is typically far worse than for initial investment property acq
uisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to the value added by the ADU, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to the value added by the ADU, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) if CA an ADU and JADU can be added to virtually all homes. However, Freddie/Fannie will not finance a parcel with 2 ADUs. This lowers refinance options. It can potentially limit your buyers when/if you go to sell.
10) JADUs require OO. Note this is not only to rent the JADU, but in strictest interpretation to even have a legal JADU. This limits purchasers to house hackers significantly limiting the potential buyer. JADU are value subtract as they typically reduce the value of the RE and often best option at selling is to remove the JADU.
11) if the ADU is being added to a SFH, the ADU can make the house rent controlled (if it is over 15 years old). See AB1482

ADU laws were added to add housing. However building small unit count, small units is very expensive housing. It is resulting in increase to housing costs and poor returns for the hands off investor. Some jurisdiction recognize this and allow large number of ADUs which compounds the NIMBY against ADUs. For example in city of San Diego you can designats a few units as affordable units and build 15 units in a single family zoned area. No one wants 15 unit apartments built next door to their SFH.

Good luck

[Pandu Chimata]

Quote from @Dan Heuschele:

Normal state rules would limit ADU to 50% of current dwelling. San Bernardino must have more liberal rules if they allow larger. They cannot prohibit smaller than 800'.

Your realtor was spot on one reason (probably the primary reason) ADU additions are one of the worse RE investments.

Here is my list of why hands off ADU additions often are one of the worse RE investments:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) The financing on an ADU is typically far worse than for initial investment property acq
uisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to the value added by the ADU, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to the value added by the ADU, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) if CA an ADU and JADU can be added to virtually all homes. However, Freddie/Fannie will not finance a parcel with 2 ADUs. This lowers refinance options. It can potentially limit your buyers when/if you go to sell.
10) JADUs require OO. Note this is not only to rent the JADU, but in strictest interpretation to even have a legal JADU. This limits purchasers to house hackers significantly limiting the potential buyer. JADU are value subtract as they typically reduce the value of the RE and often best option at selling is to remove the JADU.
11) if the ADU is being added to a SFH, the ADU can make the house rent controlled (if it is over 15 years old). See AB1482

ADU laws were added to add housing. However building small unit count, small units is very expensive housing. It is resulting in increase to housing costs and poor returns for the hands off investor. Some jurisdiction recognize this and allow large number of ADUs which compounds the NIMBY against ADUs. For example in city of San Diego you can designats a few units as affordable units and build 15 units in a single family zoned area. No one wants 15 unit apartments built next door to their SFH.

Good luck

Thank you Dan for the detailed response. 
on 1, This seems to be an systematic issue because when additional living space is introduced that should result into increase in value. I understand it will not increase the land value but should increase the building value. 
Also I see most of the flippers in in LA city do add ADUs. I am not sure how they are being appraised but definitively getting marketing value. The same can not be true in suburbs, like in my case.

2. Makes sense, since HELOC depends on the apprised value 

3. I agree, if BRRRR can be done with the original investment, it makes lot of sense 

4. Yes, Permitting does take time, depends on the city - anywhere from 3 to 6 months and plus development time

5 & 6 - ADUs are not meant for every buyer. Some buyers want space, not another structure 

7. I wonder - why? ADUS are not considered duplex? May be because they don't need to have separate utilities and separate address on their own

8. Makes sense

9. Good to know that

10 & 11 - Good to know that.

Thank you once again for your input.

[Dan Heuschele]

Quote from @Pandu Chimata:

Quote from @Dan Heuschele:

Normal state rules would limit ADU to 50% of current dwelling. San Bernardino must have more liberal rules if they allow larger. They cannot prohibit smaller than 800'.

Your realtor was spot on one reason (probably the primary reason) ADU additions are one of the worse RE investments.

Here is my list of why hands off ADU additions often are one of the worse RE investments:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) The financing on an ADU is typically far worse than for initial investment property acq
uisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to the value added by the ADU, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to the value added by the ADU, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) if CA an ADU and JADU can be added to virtually all homes. However, Freddie/Fannie will not finance a parcel with 2 ADUs. This lowers refinance options. It can potentially limit your buyers when/if you go to sell.
10) JADUs require OO. Note this is not only to rent the JADU, but in strictest interpretation to even have a legal JADU. This limits purchasers to house hackers significantly limiting the potential buyer. JADU are value subtract as they typically reduce the value of the RE and often best option at selling is to remove the JADU.
11) if the ADU is being added to a SFH, the ADU can make the house rent controlled (if it is over 15 years old). See AB1482

ADU laws were added to add housing. However building small unit count, small units is very expensive housing. It is resulting in increase to housing costs and poor returns for the hands off investor. Some jurisdiction recognize this and allow large number of ADUs which compounds the NIMBY against ADUs. For example in city of San Diego you can designats a few units as affordable units and build 15 units in a single family zoned area. No one wants 15 unit apartments built next door to their SFH.

Good luck

Thank you Dan for the detailed response. 
on 1, This seems to be an systematic issue because when additional living space is introduced that should result into increase in value. I understand it will not increase the land value but should increase the building value. 
Also I see most of the flippers in in LA city do add ADUs. I am not sure how they are being appraised but definitively getting marketing value. The same can not be true in suburbs, like in my case.

2. Makes sense, since HELOC depends on the apprised value 

3. I agree, if BRRRR can be done with the original investment, it makes lot of sense 

4. Yes, Permitting does take time, depends on the city - anywhere from 3 to 6 months and plus development time

5 & 6 - ADUs are not meant for every buyer. Some buyers want space, not another structure 

7. I wonder - why? ADUS are not considered duplex? May be because they don't need to have separate utilities and separate address on their own

8. Makes sense

9. Good to know that

10 & 11 - Good to know that.

Thank you once again for your input.

On item 1, flippers are not hands off ADU additions. Flippers can add ADUs for significantly less than hands off costs.

Good luck

[Pandu Chimata]

Quote from @Dan Heuschele:

Quote from @Pandu Chimata:

Quote from @Dan Heuschele:

Normal state rules would limit ADU to 50% of current dwelling. San Bernardino must have more liberal rules if they allow larger. They cannot prohibit smaller than 800'.

Your realtor was spot on one reason (probably the primary reason) ADU additions are one of the worse RE investments.

Here is my list of why hands off ADU additions often are one of the worse RE investments:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) The financing on an ADU is typically far worse than for initial investment property acq
uisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to the value added by the ADU, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to the value added by the ADU, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) if CA an ADU and JADU can be added to virtually all homes. However, Freddie/Fannie will not finance a parcel with 2 ADUs. This lowers refinance options. It can potentially limit your buyers when/if you go to sell.
10) JADUs require OO. Note this is not only to rent the JADU, but in strictest interpretation to even have a legal JADU. This limits purchasers to house hackers significantly limiting the potential buyer. JADU are value subtract as they typically reduce the value of the RE and often best option at selling is to remove the JADU.
11) if the ADU is being added to a SFH, the ADU can make the house rent controlled (if it is over 15 years old). See AB1482

ADU laws were added to add housing. However building small unit count, small units is very expensive housing. It is resulting in increase to housing costs and poor returns for the hands off investor. Some jurisdiction recognize this and allow large number of ADUs which compounds the NIMBY against ADUs. For example in city of San Diego you can designats a few units as affordable units and build 15 units in a single family zoned area. No one wants 15 unit apartments built next door to their SFH.

Good luck

Thank you Dan for the detailed response. 
on 1, This seems to be an systematic issue because when additional living space is introduced that should result into increase in value. I understand it will not increase the land value but should increase the building value. 
Also I see most of the flippers in in LA city do add ADUs. I am not sure how they are being appraised but definitively getting marketing value. The same can not be true in suburbs, like in my case.

2. Makes sense, since HELOC depends on the apprised value 

3. I agree, if BRRRR can be done with the original investment, it makes lot of sense 

4. Yes, Permitting does take time, depends on the city - anywhere from 3 to 6 months and plus development time

5 & 6 - ADUs are not meant for every buyer. Some buyers want space, not another structure 

7. I wonder - why? ADUS are not considered duplex? May be because they don't need to have separate utilities and separate address on their own

8. Makes sense

9. Good to know that

10 & 11 - Good to know that.

Thank you once again for your input.

On item 1, flippers are not hands off ADU additions. Flippers can add ADUs for significantly less than hands off costs.

Good luck

Okay, in any case, I have dropped the idea of building ADU for this location.