With the ever rising cost of housing in the San Francisco Bay Area, the case for developing an ADU on your property makes more and more sense. As more California homeowners become aware of this as a viable option to increase property value and generate rental income, the valuations and investment models around ADUs should become more standardized. While this opportunity seems like a black box to most homeowners and individual real estate investors, we've started to see evidence that the market has picked up in a big way over the last year and would love to hear from those who are engaged in this market first hand or have been watching on the sidelines.
So... Who is building ADUs?!
There is quite a few people on here that build ADUs to have an increase value in flips but cannot be done legal with non owner occupants investments. I’ve see flippers turn what would normally be a 5-10% profit flip (cosmetic) into a 20+% profit once the ADU was built. ADU run about 200-275 per sf, with most homes around the Bay Area from the 400+, it pays for itself easily. Just have to abide by the regulations.
Originally posted by @Henry Chi:
There is quite a few people on here that build ADUs to have an increase value in flips but cannot be done legal with non owner occupants investments. I've see flippers turn what would normally be a 5-10% profit flip (cosmetic) into a 20+% profit once the ADU was built. ADU run about 200-275 per sf, with most homes around the Bay Area from the 400+, it pays for itself easily. Just have to abide by the regulations.
Thank's for the post Henry, good info on average costs and ROI. You'll probably be happy to know that there are certain cities in the Bay Area that have recently eliminated the owner occupancy requirement, and Oakland is one of them actually. See quoted provision and link to Oakland's code text here:
"Occupancy requirements The property owner is not required to live in either the Primary or Secondary Unit. The Secondary Unit may only be occupied on a 30-day or longer basis."
Seems like things are really opening up for ADUs!
I did not know that. That is excellent news. Time to find some properties to kick start the new year!
I checked out your website, pretty cool. I think ADUs are going to get more and more traction as cities see them as an easy way to get more urban density. I have an investment SFD in Albany, next to Berkeley, and I just submitted my plans for a permit to get an ADU at the back of the property. Prior to this year, the city required fire sprinklers in all new construction which was cost prohibitive. The law changed and now buildings under a certain square footage (I think it's 1000 square feet?) are exempt from needing fire sprinklers. Process with Albany was pretty straight forward - the do preliminary plan review first and then ask to submit full plans. Overall, so far so good. I hope to break ground in the Spring.
We are seeing many cities allowing them with less red tape. Sb 1069 was so needed and thank goodness it passed. I am really curious to see if most of cities will only allow them to be occupied by a relative versus having and actual renter in it.
@Ori Skloot that's great you are in the process of permitting an ADU now. It would be great to get some updates and photos as you go through the steps of approval and construction! We plan to launch a page for Albany shortly, so we'd be up for doing a feature article on it at some point it 2018 if you'd be up for it!
@Jo-Ann Lapin Yes! We hope that legislation can go even further to help ADUs start to gain traction in California. Reducing the Owner Occupancy restriction is really one of the biggest factors that can grow their popularity among real estate investors. Financing is also an issue, so it would be great to get a bit more of your thoughts on that aspect of this market. We have heard a lot about homeowners using equity lines and renovation loans, but it is kind of a black box for many. We wrote a bit about what we've learned about ADU financing here.
Thanks for the post, Jo-Ann. Looking forward to hearing back!
Henry Chi thanks for the info. So, you’re saying that the average cost to construct a new ADU is $200-275 per square foot?
We live in Petaluma and converted our garage into an ADU (we included a bathroom, hallway, and bedroom from our home as well by just walling off the hallway leading to the garage). So now we have an attached 760 sq. ft. one bedroom/one full bath apartment with it's own separate laundry room and an outdoor storage shed. We added a driveway for the unit as well (separate from our driveway) along with a patio and gate/walkway for privacy. The permit fee in Petaluma used to be $64k for an ADU, then it dropped to $17k and we paid a $9k permit fee in late 2014 (I suspect lower because we did not add to the square footage of our home). All-in we spent about $120k (fixed some foundation/structural/plumbing/etc. stuff along the way) and we rent it for $2,200 per month. We also write off about 30% of our property taxes, water/garbage, gas, and insurance against the unit. It has been a fantastic outcome and our mortgage payment is now fully covered.
I look for SFH opportunities in the area with similar layouts and would gladly do the exact same thing again.
200-275 for completely detached new ground up ADUs. Really depends what city too. This is strictly talking about Bay Area construction cost, when fully getting a GC to do the work. I have seen people do garage conversions as low as the 100 per sf range but all depends on the quality.
@Bill Bockwoldt Thanks for sharing your success story, and congrats. Lots of work. Can you talk a bit about the pre-construction phase? Did you do a "feasibility study?" How did you chose an architect?
We hired a local architect who was referred to us and he drew up the plans (no feasibility study - but again we weren't adding any "new" space). We hired a GC out of the East Bay based on some reviews (found an ad in a local magazine initially). That turned out to be a bad idea. Most of the work was good but they grossly underestimated some materials and just tried to charge us for it - didn't even notify us or want to talk about it. I would not work with them again or refer them to anyone. The crew members did a good job, the issues were with the GC management & owner.
The architect worked with the city on the plans and any changes. That part all went very smooth and we continue to use that architect for other projects. We ensured that all permit requirements were met, and we built a unit we would live in so it went well beyond finishes necessary for a rental unit. Overall it was a great experience and we have been very happy with the unit and our tenants.
@Bill Bockwoldt Thanks for sharing your experience we'd be happy to connect with you about featuring more details of your story and the process to permit your ADU in Petaluma if you're interested. We're planning a series of articles featuring ADU owners throughout CA and it sounds like your property would be a great fit.
I am applying for permits in San Mateo and Hayward for two ADUs.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing