I think
ADU additions/conversions are a very good investment here in So Cal, especially in areas like the San Fernando Valley where many of these older 1950's-1970's homes were built with detached garages and larger yards.
Originally posted by
@Will Barnard:
Originally posted by @Pavan Sandhu:
Every SFR in CA should have at least 1 ADU. I'd even go as far as to say you are losing money every month by not having an ADU on your property. These new laws are only in effect till 2024. What's stopping you from adding an Accessory Dwelling Unit to your property?
I disagree. While the new ADU laws are awesome for investors, as a personal residence, I would not appreciate having an ADU in all of my neighbors yards where many would come from garage conversions placing more parking on the street, tenants rather than homeowners in the neighborhood, and all the negatives that come with renters flooding a residential neighborhood. This is yet ANOTHER example of politicians ineptness to resolve huge issues like housing shortages. Similar to their resolution to water conservation, Los Angeles instituted rain harvesting tanks as a requirement to any new roof areas built. A complete waste of added costs to construction and they actually reduce the amount of rain water that will ultimately be used on the soft scape of the property. You do not resolve the housing shortage by targeting single family residence low density zoning areas. You tackle it by easing the ridiculous red tape for planning/permitting of new construction, increase density in multi family and higher density areas, and you provide easier process and tax credits and other financial benefits to assist developers in subdividing, zone changes (excluding single family residential neighborhoods).
As a developer, builder/contractor of ADU's, I support and welcome the new laws of course so this is a double edged sword. Of course I really love the ADU in the multi family space where you can build multiple ADU's on one lot as well as convert non livable space like car ports, breezeways, and storage areas to livable units so long as you meet fire egress.
As to Dan's comments, I agree that appraisals are not coming in to the cost to build in many cases (but not all cases) which can trap equity which is why I have specifically stated numerous times the importance of a long term hold (bare minimum of 5 years and 10 years better). That timeline will allow the cash flow to recoup the initial investment, allow time for more ADU comps to catch up to values invested, and also allow for natural market appreciation. After all, we are talking about CA here which is a top appreciation location for real estate you cant find in the midwest or even east coast (excluding NY).
I will also disagree with the operating expense ratio as well. The property taxes are NOT 10% of the rent and if you hit such a margin, then perhaps you should absolutely think twice on this strategy for that location. An average 450sf garage conversion to ADU costing $150k in a high rent rate areas like SO Cal would deliver ~$2500 monthly income. Your property taxes would not go up by the full $150k cost you put in. At an average 1.25% tax rate, you are looking at around 5% for tax increases. Property management should also not be 10% assuming this is an investment play where you are also leasing out the main house (or living in main house so managing your backyard rental can easily be done in house). Yes I understand the cost of time to manage yourself but that is not 10%. Dan is also assuming that the appraisals will not improve over the hold period which is likely not true. We are already seeing ADU appraisals coming in much more close to build costs but as many others mentioned, it is very area and appraiser dependent right now.
I think ADU additions/conversions are a very good investment here in So Cal, especially in areas like the San Fernando Valley where many of these older 1950's-1970's homes were built with detached garages and larger yards.
