To build an ADU/JADU or invest in out of state?

Question

Please help this newbie out! Im looking to build an ADU and JADU on our property in Northern CA.  I'm trying to figure out if it is worth it or if I should start investing in another state.  The cost to build both (new construction) would be about $320,000.  We would cash flow about $1200 per month after all said and done.

The cons are its a long process to build and new construction in CA isn't cheap.

The pros are it is on our priority for easier management (hopefully traveling nurses).

For context, I have aspirations of becoming a large investor and am just getting started.

Any success stories around this area?

Thanks!

Nathan Gesner · Answer

Use the BP calculator - or any calculator - and analyze the ADU like you would any other investment. If it truly cash flows $1,200 per month (meaning that's what you keep after paying PITI and setting aside money for vacancies, maintenance, property management, etc.), then it's a winner.

Brian Larson · Answer

@Krissi Miramontes - Welcome to the forum.

As someone who has done both an ADU and an investment out-of-state (OOS), I feel your pain.  It is not an easy decision.  Ultimately, I think it depends a lot on your personal goals.  The BP calculators can be quite helpful in making this decision.  I recommend running scenarios with those first.

When you do the scenarios, I think you will probably find that cash-on-cash (COC) returns are better if you invest OOS with your money.  But if you think you have a good shot at significant appreciation and you can still cash flow in California, go for that.

I personally built an ADU in San Jose and then invested OOS in Pittsburgh, PA.

When I think back about it, I regret it some days because I could have invested more and gained greater cash flow OOS.  Ultimately, as long as the Bay Area continues to go crazy with appreciation, it should work out to my benefit but the short-term returns are not great.

FYI - If you build an ADU.  Make sure that it is classified as an "owner-build" project and act as your own GC.  I did not do this and I regret that sometimes too.  If I have done it that way, the cost might have been kept down and the returns might have been better.

Krissi Miramontes · Answer

Thank you!  Such good responses. I think I want to do one ADU and on OOS property! So excited!  The question…now or wait 6 months?

Brian Raynoha · Answer

The cash flow seems a little low, did you do a rent survey and give the units a little premium since they will be brand new?

Osazee Edebiri · Answer

Hey@Krissi Miramontes,

You got some good responses in here, so what I would add is, some of these will be math and some of this will be what's easier for you to operate at least in the short-term (A home based business or OOS business). On the David Greene Team he always tells us to invest in California first, unless you don't have the funds for California, then go out of state.

Based on the info you provided it seems you have the funds to build an ADU and JADU, which seemly means you can currently afford to invest in California. While you will typically get more cash flow OOS, a property in California will on average gain more appreciation and rent appreciation over time (hence our higher rents over time should give you better cash flow than out of state).

So when it comes to making a decision what gets you to your goal of becoming a "large investor" faster. Cash Flow now with OOS or appreciation in your current property that you can pull out to put towards acquiring more property.

When you run the math, you need to take into account what is the ARV of your home when you add two units to it? You put that you are located in Sacramento. So if you if your home is an area like the Fab 40's or near Kaiser or Sutter for traveling nurses that will vote well.

Since Sac adopted to allowed two ADU's to be built on one lot that also votes well, I believe ADU's will be more and more popular as more consumers seek to gain rental income from their primary home or multi-generational living.

Carlos Ptriawan · Answer

The biggest cons of ADU development is the appraisal. Make sure if you plan to sell the house, the appraisal marks the price of the house appropriately.  Because of this, I canceled my ADU plan and instead just do BRRR in a duplex in CA, and then sell it again.The biggest cons of investing out of state are maintenance and repair, it's very easy for the repair to wipe out one-year cash flow even for a turnkey property. If not the tenant causes the trouble, the city is creating a headache.

Dan H. · Answer

>Make sure that it is classified as an "owner-build" project and act as your own GC.

We have acted as our own GC on all of the rehabs we have done except for a fire that insurance paid for the GC and it is my view it is only worth doing if you plan to do it more than once.  Here is my thinking.  1) It takes effort and time to find good subs.  One bad sub can easily result in the savings from acting as a GC vaporizing.  2) Coordinating the various subs and managing the tasks requires time and the first time you do it there are likely to be some inefficiencies that result in lost time and increased costs.  3) it takes effort.  It is much easier to manage a GC than to manage the plethora of subs.  4) GCs often get discounts associated with their volume and relationships.  This can partially offset the cost of the GC.

if you plan on having multiple projects that you will act as a GC, you can leverage the relationships established on the first time acting as GC and learn from the previous efforts to reduce the mistakes (Note I said reduce and not eliminate).  The more times you act as GC the less effort is required and typically the less mistakes you will make.  The first time acting as GC is full of potential mistakes (biggest possibly is hiring a poor sub) and requires a lot of time.

On the fire, which was after we had acted as GC close to a dozen times but had never needed large scale remediation, my wife hired a remediation company prior to having a GC.  I knew on day 1 that there were issues in communication.  I let it go.  Every interaction there were issues.  I let them go. The remediation was supposed to take 2 to 3 weeks.  The entire time there were red flags.  I fired them at 8 or 9 weeks.  He was claiming to finish prior to the alternate remediation company which the wife pointed out.  I indicated he has made no other of his time estimates so why believe this one.  As indicated there were a lot of red flags and I should have reacted earlier.  Hiring a replacement remediator takes time/effort.  Firing a sub is uncomfortable.  This mistake would have been bad enough, but the timing was terrible.  less than a month after the new remediation contractor finished the remediation, the initial covid shutdowns hit.  A project that was projected to take 6 months (but by the time remediation had finished was already  over 2 months behind) ended up taking 12 months.  Over 2 months due to the remediation, GC had a health item that likely added close to 1 month, 3 months Covid impact.  My point is even with the experience I had, I made a large mistake (a rookie mistake) that ended up effecting the project significantly.  My mistake was not so much hiring the bad remediation sub because I had no existing relationship with a remediation company (but I maybe should have received recommendations), but not firing him much earlier as there was a plethora of indicators.  I had rent insurance (insurance paid me rent for the entire 12 months) so it did not cost me as much as it could have.  This is just one example of what can go wrong acting as your own GC (even though this project had a professional GC, this hire was on the wife and I prior to the GC).

Nathan Murith · Answer

@Krissi Miramontes, welcome to biggerpockets and congratulations on doing the work!

Super exciting journey ahead of you!

While I have no expertise in ADUs, I am based in California and do invest out of state. happy to share any successes, failures, stories, tips, tricks. Do not hesitate to reach out, connect, and DM me if you want to chat.

A couple great resources on the ADU topic in Cali, not sure if you know about One Rental at a Time, but he has a whole playlist on the topic and his experience trying to build one in Cali: https://www.youtube.com/playli...

His ADU guest also has a ton of great content: https://www.youtube.com/c/That...

Hope this helps!

To build an ADU/JADU or invest in out of state?

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