Should I convert my garage into ADU for a Short Term Rental?

Question

My husband and I are looking for ways to generate passive income, so we did done some research on a garage conversion ADU.  We live in Inglewood, California. They have just built two large stadiums near by, so we thought we would build ADU and do short term rentals.  Then I did more research and found out the City of Inglewood does not allow you do STR with a newly built ADU. My plan was to do a Home Equity Loan and the STR income will pay off loan in maybe 3 years.  If i do long term rentals i could only charge 1,600-1,800 a month in rental income. Not sure what to do now, and i don't want to carry a loan for a long period of time.  Any suggestions??

Allen Duan · Answer

Hey Renee! How about MTR? That can help you get more cashflow and doesn't fall under the STR regulations. My company manages 25 MTRs in Los Angeles. Let me know how I can help =)

Some rough numbers. If the ADU is a one bedroom, MTR rents are $3000-4000. For a 2 bedroom, MTR rents are $4000-5000.

Henry T. · Answer

So live in the ADU and STR the house?

Renee Coss · Answer

Good idea!!

Dan H. · Answer

In general hands off ADU additions cost more than the value that they add.Have you looked into what the garage could rent for as a garage?  In my market, 1 car garages go for $225 to $300 and two car garages go for $350 to $500.  you have an easy house hack opportunity that does not have the disadvantages of an ADU.

Here is a list of what adding ADUs, especially in single family zoned areas,  in my CA market is typically a poor RE investment: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 by the ADU (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?9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value. 10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return. 11) adding an ADU to SFH can make the SFH fall under rent control.  In CA currently only MF properties are rent controlled.   If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific.  Make sure you know the impact that adding an ADU will have on any rent control.  12) investors seldom include the land value in the overall ADU costs.   The reality is the land has value.

good luck

Rick Albert · Answer

To convert the garage into an ADU, you would be adding a kitchen and bathroom. The cost of a garage conversion right now is about $125,000-$150,000.

You could explore renting out the garage as storage for someone, but then you need to look into insurance, liability, etc.

Rick Albert · Answer

Hey Renee,

I have an ADU on my property here in LA County. It is a statewide rule that you cannot use an ADU for STR. The idea is they want to add more long term rentals to the market to help with affordability.

The mid-term market is interesting but then you are covering utilities, internet, etc. You may be netting the same.

It might actually make more sense to get the HELOC and buy another investment property. With the $150K that it would cost, that actually gives you roughly $500K in buying power. That could be into a small condo or even out of state. Just something to consider.

Marisela Arechiga · Answer

Chiming in late here but one thing that you have that you won't get if you go purchase another home with a $150,000 HELOC is location, location, location. You are currently sitting in Los Angeles's entertainment mecca and Mid Term rentals/30+ day rentals are a great alternative to the STR limitation. Not only would the rent cover your heloc costs (eventually) your property value increases giving you the equity you options for additional real estate investments down the road. Clearly and ADU would be a long term investment but in with the location your in, worth it in my opinion.

Mohammed Rahman · Answer

Hey @Renee Coss

Great that you caught the STR restriction before starting construction!

In my experience, a garage ADU can still be profitable with long-term rentals, but you'll need to crunch the numbers carefully.

At $1,600-1,800/month, how does this compare to your estimated HELOC payment plus other expenses (maintenance, utilities, etc.)? Even if it takes longer to pay off, having a steady, reliable tenant might actually be less stressful than managing an STR.

FYI - consider starting with a regular rental but structuring it as a 6-12 month lease. This gives you flexibility to reassess if Inglewood's STR regulations change in the future.

Dan H. · Answer

The prices I listed was to rent the garage as a garage, no bathroom required.  These are the prices to rent garages in San Diego area.

https://sandiego.craigslist.org/search/prk?query=garage#sear...

If you can rent a 2 garage at $450 without spending ~$150k for a garage ADU conversion, no work/risk of the ADU conversion, the lower maintenance/capex, easier eviction, no rent control, less tenant interaction, it will not convert your SFR to rent control, etc, it seems superior to the garage ADU conversion.  See my long list posted earlier of the issues adding an ADU.

Good luck

Renee Coss · Answer

These are great ideas!

My garage is a two car garage. It does not have a bathroom. How will i rent out the garage with no bathroom?? How will that work??

Should I convert my garage into ADU for a Short Term Rental?

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