Making a triplex out of a single family house

[Sean Cager]

Hey California investors and homeowners.  I'm considering buying a sfr and converting it into a triplex by adding adu's.  I'm just curious to see how it has gone for those of you that have already added adu's to your homes.

[Nicholas Coulter]

@Sean Cager are you up to speed with the processes that must be taken place with the city?

[Alex Larcheveque]

Look at local zoning laws and restrictions. In my area, you're allowed an ADU and a JADU, which can both be rented out. Good luck!

[Sean Cager]

@Nicholas Coulter not really. I'm under the impression that it takes 60 days for plans for an adu to be approved. But if I'm wrong, tell me please. Take me to school!

[Nicholas Coulter]

Quote from @Sean Cager:

@Nicholas Coulter not really. I'm under the impression that it takes 60 days for plans for an adu to be approved. But if I'm wrong, tell me please. Take me to school!

I have heard as long as 6months! I would give a call to your city zoning department. Most times they are super friendly and will try and help out 

[Dan Heuschele]

Quote from @Sean Cager:

Hey California investors and homeowners.  I'm considering buying a sfr and converting it into a triplex by adding adu's.  I'm just curious to see how it has gone for those of you that have already added adu's to your homes.

Contrary to what ADU developers promote, adding an ADU is one of the worse RE investments. As poor an nvestment as adding an ADU, adding a JADU is worse. JADUs detract value from most properties in large part due to the owner occupancy requirement limit buyers to house hackers only.

Here are some reasons adding an ADU is 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 acquisition 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 number 1, 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 number 1, 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?

good luck

[Rick Albert]

Typically it is just the ADU and then a JADU. JADUs require an owner to live somewhere on the property.

Regarding Dan's comment, I agree and disagree. You can create privacy with ADUs and I would argue only a small fraction of buyers really want a garage. I have an ADU property for sale and we received 6 offers with only one being an investor. The rest loved the ADU because they need it for their older relatives.

With that said, he is 100% right that it is cheaper to buy a property an ADU already existing. But we don't always have that luxury due to low inventory.

When thinking about creating effectively a triplex, you will have to think about parking, personal space, etc. It may not make that much sense to do it for the long run. Adding an ADU, although will not appraise dollar for dollar, you do get cash flow benefits. I converted my garage into an ADU and my tenants are paying the equivalent to the interest on my mortgage. I have a 0% interest mortgage. Later I will rent out my main house and will be cash flow positive.

The value of a property is just on paper. Cash flow is just as important.

[Dan Heuschele]

Quote from @Rick Albert:

Typically it is just the ADU and then a JADU. JADUs require an owner to live somewhere on the property.

Regarding Dan's comment, I agree and disagree. You can create privacy with ADUs and I would argue only a small fraction of buyers really want a garage. I have an ADU property for sale and we received 6 offers with only one being an investor. The rest loved the ADU because they need it for their older relatives.

With that said, he is 100% right that it is cheaper to buy a property an ADU already existing. But we don't always have that luxury due to low inventory.

When thinking about creating effectively a triplex, you will have to think about parking, personal space, etc. It may not make that much sense to do it for the long run. Adding an ADU, although will not appraise dollar for dollar, you do get cash flow benefits. I converted my garage into an ADU and my tenants are paying the equivalent to the interest on my mortgage. I have a 0% interest mortgage. Later I will rent out my main house and will be cash flow positive.

The value of a property is just on paper. Cash flow is just as important.

 >Adding an ADU, although will not appraise dollar for dollar, you do get cash flow benefits. I converted my garage into an ADU and my tenants are paying the equivalent to the interest on my mortgage.

If an investor pays $50k for an asset that is worth $50k, the initial income - expenses is cash flow.  

If an investor pays $100k for an asset that is worth $50k (hands off conversions are now over $100k, but I am choosing easy/round numbers), there is no cash flow until the negative position is recovered. If the ADU cash flows $500/month after all allocations (including maintenance/cap ex projection, vacancy projection, etc), the -$50k initial position consumes the first 100 months of cash flow (maybe less if the rent increase is greater than the inflation rate).

I cannot emphasize enough the need to know the value of the ADU before proceeding. No one wants to pay more for an investment than what it is worth but this is in effect what is happening with many of these ADU additions. The initial negative position kills COC and return.

As indicated adding an ADU even hiring out all work is work. Research the designer, GC, design decisions, etc. much easier and more profitable to purchase an existing ADU or duplex.

Syndicators, prior to the rate hikes, were returning large returns (upper teens was common) and is very passive.  

BRRRR is similar work to ADU addition but when done correctly results in infinite return (extraction of full investment versus many ADU additions starting with a negative equity position). I admit with current market and rates, good BRRRR candidates are hard to find.

Flips are similar work to ADU addition but in many cases faster. Faster implies investment dollars can be redeployed faster which can compound the return.

More sophisticated value adds take experience to recognize (or a good teacher). These may be best option at current time.  Example, there is an area that recently increased height limits from 30’ to 100’.  This opens up development options.   Throughout the country, these sophisticated value adds abound but knowing about them and recognizing them is the challenge  

There are many RE investments that should out perform most ADU additions. I state this even if the ADU can add value equal to the hands off cost.

Good luck

[Haley Dahlgard]

Have you thought about converting existing square footage to additional units/ADU/JADU, or, if zoned, correctly, to a triplex? One of my clients have done this and I think that it's such a great strategy that I'd like to implement it for my next property. It's a great alternative to building an ADU/JADU from the ground up because it significantly reduces your upfront costs while still greatly increasing your cash flow.

My client bought a 4 BR/2BA SFH with a garage that was previously converted to the 4th bedroom. They turned this bedroom into a separate studio unit by adding a bathroom and converting the door leading to the house into a wall. They do short term rentals so instead of adding a whole kitchen/kitchenette, they just added a mini fridge and microwave. They also turned the master bedroom into a 3rd unit by converting the door to the rest of the house into a wall (they actually might have just kept the door locked..). The master bedroom already has an attached bathroom and it has a door leading to the backyard, so they just had to add a fridge and microwave. This family of 4 then lived in the rest of the house with 2 BRs, 1 BA, the living room, and kitchen. Genius!

[Sean Cager]

@Dan Heuschele thanks.

[Gordon Cuffe]

@sean 

@Sean CagerI just remodeled a home in Antelope with a start date of july 23rd. 2022. I finished the remodel in sep 16th 2022. I had to take out a permit with sacramento county because the prior owner had a building code violation from a old permit in 2018. he never had the prior permit signed off. The permit process was started on july 28th 2022 and sac county finally signed off my permit on december 20th. I wanted to hit my head on concrete so many times when dealing with sac county permit dept. I just wanted to give you a real world example of what happened to me recently. I hope that you can accomplish adding a ADU.

[Sean Cager]

@Gordon Cuffe I appreciate the heads-up

[Scott Scoville]

Hey Sean, I added an ADU to my primary residence in Sacramento a few years ago and have been renting it out as mid term rental mostly to traveling nurses. I would love to share my experience and answer any questions if you'd like to jump on a call. Let me know if you have time to chat. Best of luck.

[Sean Cager]

@Scott Scoville What's your email address?

[Coba Cao]

Scott’s email address is http://www.scovilleri.com/

Scott and I have are about to close on my first investment property in Sac. He’s been a pleasure to work with. Very professional, punctual and delivers on everything he says. I highly recommend Scott for all your residential real estate needs. 

[John M.]

Sean. I am in CA. Just did a detached ADU at my primary residence. Yes, 60 days in the administrative time a local agency has to approve your plans and put building permit in your hand. CA has additional ADU laws which start tomorrow, Jan 2023. These laws allow for a total building height of 18' in certain circumstances. Advantageous for a two story ADU. A multi-family property can now also have an ADU added to the lot. To turn a SFR into a "triplex" you would most likely put a JADU in the garage and add a detached ADU in the yard. Check out the SB9 law, which allows for splitting your SFR lot. Main house can have an ADU and the new lot can have essentially 2 ADU's. CA has opened the flood gates for creative SFR ADU options.

[Scott Scoville]

Quote from @Coba Cao:

Scott’s email address is http://www.scovilleri.com/

Scott and I have are about to close on my first investment property in Sac. He’s been a pleasure to work with. Very professional, punctual and delivers on everything he says. I highly recommend Scott for all your residential real estate needs. 

 Thanks Coba. Can't wait for you to close on that property and start your renovation. Looking forward to seeing how you utilize that property.

[Sean Cager]

@Dan Heuschele I appreciate the tip on buying a sfr with something already built

[Monique Samuel]

How can one find the comps with existing ADUs in the area?