ADU Friendly Cities in San Diego
San Diego, CA · Member since 2015 · 11 posts · 5 votes
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
Im an agent and investor over in Phoenix. We have alot of folks in socal doing that same strategy over here bc the prices are cheaper and the regulations are much more lax.
@Michael Shea My wife and I are doing this strategy right now! Would love to offer any advice we can.
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
Really appreciate all your thoughts on this topic. I think your points are all valid and you're definitely more savvy than me lol. The adu option is still appealing to me though, especially compared to the BRRR'ing as the work to build one ADU is probably much less (and less time) than the number of BRRR's it'd take to accomplish the same cash flow. With all those additional units you've BRRR'ed you have a lot more capex liability too. I'm looking for a safe place to park cash long term with great cash return, so I'll explore ADU's more for now.
The capital cost short and long sucks though, no argument there!
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
Really appreciate all your thoughts on this topic. I think your points are all valid and you're definitely more savvy than me lol. The adu option is still appealing to me though, especially compared to the BRRR'ing as the work to build one ADU is probably much less (and less time) than the number of BRRR's it'd take to accomplish the same cash flow. With all those additional units you've BRRR'ed you have a lot more capex liability too. I'm looking for a safe place to park cash long term with great cash return, so I'll explore ADU's more for now.
The capital cost short and long sucks though, no argument there!
@Michael Shea you are asking the right questions! Lots of factors affect friendliness...
Fees: Google "All About ADU Permit Fees & Waivers" for a breakdown of these on average by jurisdiction in San Diego County. Encinitas is cheap, City of SD is expensive, Vista is brutal
Requirements: Stormwater management, surveys, soils reports -- these are big ticket items that vary a lot by city. Cities that require each:
Soils reports ($6-7K for report & required work): Carlsbad, Chula Vista, Encinitas, La Mesa, National City, San Marcos, Vista
Storm water management ($5-7K): Del Mar, Encinitas, Vista
Building Verification Survey ($3-8K): Del Mar, Oceanside, San Marcos
Utility upgrades are also a very important consideration, and City of SD in particular is enforcing more requirements than they have in the past, e.g. water fixture counts and requiring ROW work to upgrade. They also have lower fixture count levels than other cities.
Property Specifics: no matter what town you build in, you have to pick an ADU friendly site. Slope is not your friend, neither is poor access and there are many more to watch out for. Google "ADU Sitework & Utility Costs: 10 Hidden Costs."
Hope this helps!
@Michael Shea my husband and I are in central SD North Park/South Park and we are currently adding ADUs to our property. I definitely recommend doing your own research but our architect helped us through the regulation and permitting process.
Hey @Michael Shea,
I'm not native of San Diego, but I have loved it there while visiting. I don't know if you follow Rich Somers, but he shares a lot of great info on San Diego & ADUs. He is very bullish on them as many others are!
I know of a few ADU facebook groups that seem to be a wealth of knowledge for people building them or intending to build. People share their stories and post their questions. That could be really beneficial to connect with some others that are already doing it.
It is good that you are doing research for the regulations of the different cities. It would be a huge mistake to not factor that into your decisions. You will be house hacking, so ask yourself "Is this somewhere I would like to live?" You will be living there for some period of time, so I think it is important to think about that too.
Good luck Michael. Keep us posted on how it goes for you!
Thanks everyone! Not going to lie, Dan really got me rethinking this plan...Currently researching multi-families in other markets now.
All the costs Whitney outlined along with my construction budget seem too cost intensive for the ADU build. Finding a marginal cash-flowing SFR in a decent neighborhood in SD is challenging as well.
Capital is going further in another city
@Michael Shea it's great that you are open to the important points @Dan H. raised, and I'm glad the cost info was helpful. I agree several of these could be deal breakers depending on your particular investment criteria. That said, I do want to respectfully offer some counterpoints to Dan's assessment that may provide a broader perspective on the value and feasibility of ADUs.
1-2. Appraisal Value & Financing: While it's true that ADU appraisals lagged behind costs a few years ago, the market is quickly catching up. Lenders are now recognizing ADUs more accurately, especially as national programs like Fannie Mae and Freddie Mac incorporate them into their guidelines. More fixed rate second position programs based on ARV (after adding the ADU) are also available now, providing more opportunities for leverage.
3. Effort vs. Return: Adding an ADU does require a significant effort. Unlike a BRRRR strategy, an ADU offers an increase in living space and potential income, contributing long-term value and stability, especially as the real estate market evolves.
4. Capital Outlay Timing: The capital required for an ADU is not all spent upfront. In fact, the majority of expenses - around 75-85% - occur during the last 6-7 months of construction.
5. Impact on Property Value: ADUs generally bring in more rental income than they could possibly detract from the main home’s value. While it’s true that ADUs might reduce yard space or parking, the additional income stream easily offsets these downsides.
6. Market Demand and Multigenerational Living: There’s a growing demand for ADUs, particularly for multigenerational living. Many families are specifically seeking homes with ADUs. Realtors often report that homes with ADUs sell faster.
7. Rental Strategies and STRs: ADUs don't need to rely on short-term rentals to be profitable. Medium-term rentals (31+ days) are less regulated and still generate significant returns. There are many viable rental strategies for ADUs that can be adapted to local regulations.
8. Cost Comparison with Existing ADUs: Purchasing a property with an existing ADU can be cheaper than building one from scratch, but this isn't always the case. In high-demand areas like coastal San Diego, the potential for higher rents in prime locations can make building an ADU a more attractive option.
9. Financing and Exit Strategy for Multiple ADUs: Adding multiple ADUs or an ADU to a multi-unit property can complicate financing, particularly with conventional loans. However, this primarily affects a niche market. For most property owners adding a single ADU to a single-family home (or even adding two ADUs to a duplex), the impact on financing options is minimal, and the benefits of additional rental income outweigh these concerns.
10. Cost of Small-Scale Development: It’s true that building very small units can have a higher per-unit cost (we spend much of our day educating homeowners on the true all-in costs). However, ADUs can provide higher per-unit returns, especially in areas with high demand for housing. The scalability of ADUs also allows homeowners to add value incrementally without the risks associated with larger developments.
11. Rent Control Implications: The risk of an ADU bringing a single-family home under rent control depends on the local jurisdiction and regulations - it's not something I understand to affect our area. Often, this risk can be managed or avoided with careful planning.
Again, I think Dan always makes great points on why you should think twice about ADUs as investments. Many of our clients are families adding ADUs as a lifestyle choice, valuing the flexibility they offer. However, we've also seen plenty of our investor clients decide that an ADU made solid financial sense within their portfolios, especially when factoring in property appreciation. Wishing you best of luck in your research, Michael!
@Michael Shea it's great that you are open to the important points @Dan H. raised, and I'm glad the cost info was helpful. I agree several of these could be deal breakers depending on your particular investment criteria. That said, I do want to respectfully offer some counterpoints to Dan's assessment that may provide a broader perspective on the value and feasibility of ADUs.
1-2. Appraisal Value & Financing: While it's true that ADU appraisals lagged behind costs a few years ago, the market is quickly catching up. Lenders are now recognizing ADUs more accurately, especially as national programs like Fannie Mae and Freddie Mac incorporate them into their guidelines. More fixed rate second position programs based on ARV (after adding the ADU) are also available now, providing more opportunities for leverage.
3. Effort vs. Return: Adding an ADU does require a significant effort. Unlike a BRRRR strategy, an ADU offers an increase in living space and potential income, contributing long-term value and stability, especially as the real estate market evolves.
4. Capital Outlay Timing: The capital required for an ADU is not all spent upfront. In fact, the majority of expenses - around 75-85% - occur during the last 6-7 months of construction.
5. Impact on Property Value: ADUs generally bring in more rental income than they could possibly detract from the main home’s value. While it’s true that ADUs might reduce yard space or parking, the additional income stream easily offsets these downsides.
6. Market Demand and Multigenerational Living: There’s a growing demand for ADUs, particularly for multigenerational living. Many families are specifically seeking homes with ADUs. Realtors often report that homes with ADUs sell faster.
7. Rental Strategies and STRs: ADUs don't need to rely on short-term rentals to be profitable. Medium-term rentals (31+ days) are less regulated and still generate significant returns. There are many viable rental strategies for ADUs that can be adapted to local regulations.
8. Cost Comparison with Existing ADUs: Purchasing a property with an existing ADU can be cheaper than building one from scratch, but this isn't always the case. In high-demand areas like coastal San Diego, the potential for higher rents in prime locations can make building an ADU a more attractive option.
9. Financing and Exit Strategy for Multiple ADUs: Adding multiple ADUs or an ADU to a multi-unit property can complicate financing, particularly with conventional loans. However, this primarily affects a niche market. For most property owners adding a single ADU to a single-family home (or even adding two ADUs to a duplex), the impact on financing options is minimal, and the benefits of additional rental income outweigh these concerns.
10. Cost of Small-Scale Development: It’s true that building very small units can have a higher per-unit cost (we spend much of our day educating homeowners on the true all-in costs). However, ADUs can provide higher per-unit returns, especially in areas with high demand for housing. The scalability of ADUs also allows homeowners to add value incrementally without the risks associated with larger developments.
11. Rent Control Implications: The risk of an ADU bringing a single-family home under rent control depends on the local jurisdiction and regulations - it's not something I understand to affect our area. Often, this risk can be managed or avoided with careful planning.
Again, I think Dan always makes great points on why you should think twice about ADUs as investments. Many of our clients are families adding ADUs as a lifestyle choice, valuing the flexibility they offer. However, we've also seen plenty of our investor clients decide that an ADU made solid financial sense within their portfolios, especially when factoring in property appreciation. Wishing you best of luck in your research, Michael!
>1-2) Lenders are now recognizing ADUs more accurately,
I do not know what more accurately means in this case. The appraisals are still coming in in general far below hands off costs.
>3) Unlike a BRRRR strategy, an ADU offers an increase in living space and potential income, contributing long-term value and stability
Brrrr do increase income, contribute to long-term value. Not sure what is meant by stability. I do agree most brrrr do not add living space.
> 4) the majority of expenses - around 75-85% - occur during the last 6-7 months of construction.
Do you think 6 to 7 months without income is good? Note if I buy a new rent ready rental, I typically receive the first rent before the 1st mortgage is due. If I do a brrrr, I typically rehab in ~2 months. My last rehab was the largest I have ever done and it took 2 months and 1 week.
>6) Realtors often report that homes with ADUs sell faster.
Sell faster than what? A SFH? I seriously doubt that as there are many more owner occupied buyers than investor buyers. I am not stating it never happens, but I certainly doubt it is often.
>7) ADUs don't need to rely on short-term rentals to be profitable.
ADUs because the land is already paid for produce a better rent to cost ratio than virtually all other options. 1%+ ratios are possible. This implies cash flow, if not including the land value, is greater than virtually all other options. However, from an accounting perspective, there is no profit until the initial negative position can be recovered. I use expense ratio of 50% all inclusive. Take rent/2 - p&i to get quick (but not extremely accurate) realistic cash flow. Divide this number into the initial negative position to determine the month when first profit is achieved.
>8) Purchasing a property with an existing ADU can be cheaper than building one from scratch, but this isn’t always the case.
Maybe not always, but in a very large percent of the cases purchasing existing ADU will have lower cost. Then add in that the ADU is getting financed at home purchase terms, someone else has done the work, ADU income will start month 1. Much smarter move from an investment perspective.
>9) adding two ADUs to a duplex
By the rules, adding 2 ADUs does not qualify for conventional financing (look at the rules). I have seen cases where the rule is not applied, but this would be a risk. If conventional financing is unavailable, the valuation will take a hit. On the positive, ADUs added to Mf appear to appraise with associated same unit count Mf if it gets the conventional financing. So duplex with 2 ADUs that get the conventional financing (contrary to the rules) seem to comp with a quad.
>10) However, ADUs can provide higher per-unit returns, especially in areas with high demand for housing.
Higher per unit returns than what? If I develop 10 new units, my cost per unit will be much lower. Assuming they are in the same area, my rent will be similar but my costs were substantially less. Similar if I build one much larger unit, my PSF is lower than the small ADU unit. A single small unit will have highest PSF cost.
>11)Rent Control Implications ..
it's not something I understand to affect our area.
State law 1482 states that MF property are rent controlled and the rent control applies to units that are older than 15 years old. If the existing home is over 15 years old, it is now rent controlled by 1482 (even though this is contrary to the rational of the 15 year exemption). In addition, in 15 years the newly constructed ADU will be rent controlled. Costa Hawkins prohibits rent control on SFH so it went from non rent controlled to rent controlled. I have seen jurisdictions apply the rent control to the ADU on day 1 when it was converted from an existing space that is over 15 years old (such as an old garage). Again, these seem to be against the rational of the 15 year exemption, but within the wording. Senator Weinstein may address this.
Before any large investment, do a thorough underwriting. Start by determining the valuation added by the ADU. Maybe you can find multiple comps that can provide a better valuation. This could minimize the initial negative position. Consider the other items. Make an educated investment.
Good luck
Great insights, @Dan H.. A few further thoughts:
1-2) I do not know what more accurately means in this case. The appraisals are still coming in in general far below hands off costs.
Accurately meaning reflecting the increase in value the ADU will bring to the property. Unfortunately there is little conclusive data available here yet. I do agree with Dan that appraisals are more unpredictable, but would expect this to improve with increased activity & national recognition of ADUs in the lending world.
3) Not sure what is meant by stability. I do agree most brrrr do not add living space.
ADUs increase the rentable space/unit of a property and do not rely on an increase due to renovation alone. Depending on the scope of the BRRR, you could add space there, too, but point being ADUs always increase living space.
4) Do you think 6 to 7 months without income is good?
Certainly the timing is better on a quick rehab vs. a permitted ADU project. But characterizing the timing of an ADU project as all funds due for more than a year is not accurate, even with modular construction where more is paid earlier. You may of course have costs committed to the project though for longer.
6) Sell faster than what? A SFH? I seriously doubt that as there are many more owner occupied buyers than investor buyers.
Correct, sell faster than a comparable property without the ADU. Again, this will be anecdotal, with few data points available yet (especially not at the granularity that would be nice, e.g. what are the days on market, sell prices, buyer pool for SFH with ADU, 2-4 unit with ADU etc). However, nearly 20% of households are now multigenerational, and 73% of buyers are non-investors.
7-8) However, from an accounting perspective, there is no profit until the initial negative position can be recovered....Then add in that the ADU is getting financed at home purchase terms, someone else has done the work, ADU income will start month 1.
Fully agree that lack of leverage is a huge issue. My response about short term rentals was to point out that you can rent all ADUs in CA for periods of 31+ days (in some areas less), and that plenty of viable options exist outside of STR.
9) By the rules, adding 2 ADUs does not qualify for conventional financing... duplex with 2 ADUs that get the conventional financing (contrary to the rules) seem to comp with a quad.
Right, Fannie/Freddie currently allow for one ADU, though Freddie does allow one ADU for a duplex or triplex. Some good discussion on this topic on an appraisal blog as far as how this might develop over time.
10) Higher per unit returns than what?
Compared to a single family property without the ADU, e.g. Dan's previous contention about ADUs lowering value of the SFH. But no doubt, developing 10 units is cheaper than 2 units.
11) I have seen jurisdictions apply the rent control to the ADU on day 1 when it was converted from an existing space that is over 15 years old (such as an old garage).
Good intel, and as Dan points out throughout, there is much more variability with ADUs at this point in their development than other options. We also see this on the construction side, with varying interpretations of code - so a large part of our job is advocating for homeowners to push back on local jurisdictions requiring improvements that CA state law prohibits.
Hello All,
I'm looking into selling a condo and rolling the equity into a new investment SFR here in San Diego. The second phase of the plan is to build an ADU. I've reviewed the ADU rules on some of the different city's websites, now I realize how much variance there is just within the county...For example, Santee has a new owner occupancy requirement that will go into effect on any ADU's permitted after 2024 and a strict no STR policy, La Mesa on the other hand seems really ADU friendly.
Does anyone here have recommendations on which cities in SD county to avoid and which to explore for ADU's?
thanks!
I specialize in this area. STR is not allowed for ADU's built after a certain year, I believe it is 2020.
I recommend buying within 5-10minutes of downtown area or around college area if you are thinking about ADU adds and conversions. You can also go the garage conversion route. These are the best areas for room rentals (co-living) and STR or MTR with higher ROI.
I am an expert in this area if you have any questions. Feel free to reach out.
San Diego city and San Diego county now allow you to sell your ADU separate from the main house as a condo conversion. It will be interesting to see the value add that an ADU condo could bring vs selling together. We are working on our first one in San Diego county.
My recommendation, buy a property with an existing ADU. Here's why:
1. Appraisals: The highest I've seen an appraiser value an ADU is $100K. It costs $150K+ and that's just a garage conversion.
2. Preserve cash: With an existing ADU, you can finance the property. You can even use the current or projected rental income to qualify. Keep the cash in the bank for future investments.
Or another strategy I've seen done is convert an unpermitted ADU and get it permitted. It may cost the same but it may not. I had a client convert an unpermitted 2 bedroom ADU. Cost her $100K but it would have cost her over $200K between converting and doing the addition.