Buying a 2nd property vs. building ADU?

Question

Hello, this is my first time posting so let me know if I do something wrong!

We currently house hack a 1890’s triplex that we have more or less completed a BRRRR and gotten stabilized. However, it is an oddball in that it has a 500 square foot vault (like think concrete bunker with steel vault door). This is attached to the unit of the house we currently live in.

We are trying to figure out our next step — we have had an architect draw up plans to convert the vault into livable space — part would become a 4th unit (studio) that we would intend to use as a STR, and part would become additional living space for our unit (take it from 1ba to 2ba, add a laundry/storage room…)

or, we could leave it more or less as-is, get our unit rented, and buy a new property to move into (ideally looking for something with a detached ADU we could rent to keep building/scaling our little portfolio).

I’d like to get some personalized input around what might make the most sense given our specific goals and market conditions. But, what kind of person should I even look for that could advise us on our strategy? Who would be familiar with the trade-offs between continuing to improve a property or buying another… and have insight into short term as well as long term rentals… and be familiar with my locational market?

Thanks! Appreciate any thoughts either on who I should be looking for, or on the decision itself. also let me know if there is a better category I should post this question in!

Dan H. · Answer

You are not the typical case adding an ADU to a SFH.   However, if you were, Colorado Springs has near the worst ADU valuation in the country per NAR data.   If I look at the NAR data and assume the homes without ADU were similar to the homes with an ADU (not necessarily a valid assumption) not only do ADUs add much less value than their cost to add, but the ADU addition lowers the value of the property.

Adding a single small unit is the most expensive residential development.   In addition it has as much or more work than other value adds.  The capital outlay starts long before income is produced.

I highly believe if you can find a good investment property to purchase that it is likely to produce a better return especially if it has a value add other than adding an ADU that is similar scope to adding an ADU.

The first dollar value is the average home selling price without an ADU and 2nd value is with the ADU addition.  The first non dollar value is all listings, the 2 nd is those with ADUs.  First percentage is percent of listings with ADU, 2nd percentage is he price added/subtracted by the ADU as a percentage.  NAR Data Nov 2021 (a bit dated):

Colorado Springs, CO

Colorado

$418,100

$235,000

1,012

15

1%

-44%

good luck

Caleb Burdett · Answer

@Caleb Brown thanks for the reply! It is zoned R5 + OR so I don’t think there will be any trouble from the zoning end — also, there has been some recent regulation making it easier to add ADUs to properties here, so I’m not terribly concerned about that.

Also, owner-occupants generally don’t have too hard of a time getting greenlit for STR here, (we have used a unit of this property as an STR already), but it’s a helpful to remember that if we move off of the property we might have trouble continuing to use that unit as an STR.

We have been in communication with a GC in conjunction with the architect work and have a rough ballpark cost that we think should at very worst break even... In terms of equity, the added equity should at the very least match the cost of construction but possibly be much higher. From a cashflow perspective, the income from the added unit, even as a long term rental, should cover the payment on the HELOC (we would be funding it with a HELOC) — as a STR we should be able to do much better than that. But I’m working with a pretty wide range of potential added equity and potential cashflow and hoping for more accurate numbers.

I could go to the trouble of getting an “after renovation” appraisal, but I feel like that will be only part of the information I am hoping to get. I’m trying to think what kind of person might have the experience to know whether this is an incredible plan or just a mediocre one.

So I guess to sum up — in terms of “difficult/expensive/takes a while” I expect it to be relatively easy on the zoning/permitting front, moderately expensive but not prohibitively so, and on the time front, the permitting might add a couple months but I fully anticipate we could complete it by the end of 2026.

Caleb Brown · Answer

My main question with adding the 4th unit would be the zoning, permits and dealing with the city. That can take awhile and they might not allow it. I would do some digging there about how feasible that is. Along with that getting bids would be something I would get before going to deep either direction. Financially it might not make much sense. If it'll be difficult/expensive/take awhile it'll make more sense to house hack another property. Another question if you did that ADU, does the city allow STRs?