Any tips on how to estimate property value increase/estimated rent income for ADUs.
New to Real Estate · Oceanside California · Member since 2022 · 11 posts · 18 votes
Any tips on how to estimate property value increase/estimated rent income for ADUs.
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Hunter Broschinsky this is a common element in real estate investing - if there aren't any comps...then you are giving up control of your deal to someone else - the appraiser. Let's take the famous "lake front property" for example. How often do people sell their lake front properties? And the answer is never. So, when a lake front property comes on the market...there's no "true comps" for it. Meaning, there might be properties that are a couple of streets off the lake...but those aren't really comps. So, when I sell that "lake front property" I have to know that I am limiting the number of people who an buy my "lake front property" and that's to people who have enough cash to cover the difference between the appraised value and my sales price. What will an appraiser say the "value" of the view is? That's REALLY hard to agree on. And that's why I'm giving up control to that appraiser.
Take that same concept and apply it to putting in a pool...what if there are no comps that have pools? Apply it to adding bedrooms, quartz countertops, and everything else you can think of. Just understand that you may not get ANY value from adding something to your house if there are no comps. I know it's hard to think that it's not possible...but if I had comps, then I would know the EXACT value of that property.
Hope all of that makes sense.
6 Replies
- 2yJake AndronicoBusiness MemberRealtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
Welcome to BP! Using Rentcast.io for rent comps can be very helpful.
You can also search in Zillow under "keywords" for "ADU" and sort for sold comps to get an idea if any have traded in your area recently.
Zillow is an extremely powerful tool when you don't have MLS access. Best of luck to you!!
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Hunter Broschinsky this is a common element in real estate investing - if there aren't any comps...then you are giving up control of your deal to someone else - the appraiser. Let's take the famous "lake front property" for example. How often do people sell their lake front properties? And the answer is never. So, when a lake front property comes on the market...there's no "true comps" for it. Meaning, there might be properties that are a couple of streets off the lake...but those aren't really comps. So, when I sell that "lake front property" I have to know that I am limiting the number of people who an buy my "lake front property" and that's to people who have enough cash to cover the difference between the appraised value and my sales price. What will an appraiser say the "value" of the view is? That's REALLY hard to agree on. And that's why I'm giving up control to that appraiser.
Take that same concept and apply it to putting in a pool...what if there are no comps that have pools? Apply it to adding bedrooms, quartz countertops, and everything else you can think of. Just understand that you may not get ANY value from adding something to your house if there are no comps. I know it's hard to think that it's not possible...but if I had comps, then I would know the EXACT value of that property.
Hope all of that makes sense.
In the absence of comps, you are likely to get a poor valuation for your ADU and start with a large negative position meaning the ADU addition costs more than the value added.
I personally know multiple occurrences where the ADU addition value is over $100k less than the cost of the addition. Unfortunately my oldest friend is having such a case currently (in Seattle area). She spent far too much on a small basement ADU. She is the sweetest person, she said she just wants to provide someone nice housing. It will take her many years to recover her initial negative position.
As for rent comps, I find rehabbed duplex units and other ADUs are the best rent comps. In the absence of either of those, I would use SFH and subtract for the smaller yard, reduced privacy, etc that impacts your ADU.
By the way ADUs in southern CA are often one of the worse RE investments. Here are some reasons why:
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
- 2yKenny SimpsonBusiness MemberLender · San Diego, CA · Member since 2022 · 137 posts · 96 votes
Quote from @Hunter Broschinsky:
Converting my 505 sq foot garage into a ADU. Im looking for market specific tips to estimate the potential property value increase. There is also only 1 comp for rent near me, making the estimated rent fairly hard. Im in oceanside california about 13 minutes inland. Struggling to decide if the long term play or the short term play would be better. I know there are a lot of factors here to consider but id love to get some advice.
The ADU: bedroom separated from living room, full bathroom, kitchenette, washer and dryer. Everything is going to be fairly nice with the bathroom and flooring being on the higher end.
@Hunter Broschinsky there are lots of comps and scenarios in SD these days. Lots might not be on the market but since I work with lots of clients, I have appraisals, rents, STR rent comps from helping with refinances after doing ADUS. Comps don't always have to be on the MLS, Zillow, etc for you to figure out how to proceed. DM me if I can help further
- 2yRyan ThomsonBusiness MemberReal Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
@Hunter Broschinsky it sounds like you are asking for two things.
1. How much did adding an ADU add to the value of my home? and
2. How can I figure out what to rent it for?
For number 1. Finding comps is one strategy. Paying for an appraisal is another. Not sure any of this is of value to you unless you are going to try to refinance.
2. Surely you can find rental comps for long term rents in the area. See what people are charging on Zillow, facebook, craigslist for something similar. Also, you can make a post, start high, and see if there is any interest. If there is not then start lowering the price. You could get a property manager's advice. Lots of options there.
For the STR strategy I would use pricelabs or airdna and see what comps like yours are making.
The Assumable Guy544 Reviews @Hunter Broschinsky in general, I've found that the rent estimating apps/software online are very hit and miss...sometimes they produce accurate rent values, and sometimes they're WAY off. They also don't allow for particularly nuanced analyses --for instance, in most cities, simply crossing a street can make a big difference in rent and property values, but most rent estimating apps don't allow for such fine-grain analyses.
Because of that, I start off initial analyses with an app , but before I pull the trigger on a new property or investment strategy, I always do my OWN data collection and market analyses--which produces a much more accurate and nuanced understanding of the market than any app. I organize listings into spreadsheets that allow me to compare various types of properties, neighborhoods, etc. If I'm trying to understand a new market or a new type of property, I'll physically go to open houses to see for myself what the property is like, how much the rent is, and how much interest there seems to be from prospective tenants. If it's a market or property type I'm not familiar with, I talk to local realtors and landlords to get a sense of what's what. Is this more work than simply clicking a button on an app? Yes. Does it produce a more accurate, and more nuanced understanding of the market than an app? Yes. I sometimes cross-validate my own analyses with the rent estimating software, but at the end of the day, NOTHING beats first-hand knowledge of your market.
So how do you comp out your ADU? I'll give you some tips on comping the rent, but comping the property value is a whole other ball of wax--I'd suggest talking to local appraisers and realtors about that.
In most markets, you won't find many ADUs to comp against, but you will find plenty of 1 br apartments. Although your ADU isn't exactly the same as a 1 br apartment, it's similar.
So, I suggest comping against 1 br apartments, BUT be very mindful of the sq footage, grade and amenities of those apartments. Your ADU is 500 sq ft, but most 1 br apartments (in my market at least) are around 700-800 sq ft --so, you'd want to leave those out of your comps, or adjust your estimate accordingly. Obviously, you want to comp against apartments that are a similar grade to your ADU (both grade of the apartment, and grade of the neighborhood).
Unfortunately, many apartment buildings will have amenities that you probably don't have (e.g.; pools, gyms, etc), and that makes the comp trickier --you'll need to adjust your estimate downward to offset these differences. To avoid this problem entirely, try to find 1 br apartments that are house conversions (a house where someone built a 1 br apartment in the basement or attic, for instance). These types of properties usually won't have major amenities like pools/gyms that the bigger apartment complexes have, so they'll be better comps for your ADU than an apartment in a big apartment complex.
Look at listings on multiple platforms, because the best comps for your ADU might not be listed on certain platforms. In my market, an ADU or apartment in a house is more likely to be listed on Facebook Marketplace than zillow (but apartments in big complexes are more likely to be on Zillow).
At the end of the day, listing your property and gauging the response is the ultimate test...if you list and you get a tidal wave of inquiries, your rent is probably lower than the market. If you list and hear nothing but crickets, your rent is too high.
Good luck out there!
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