Accessory Dwelling Unit (ADU) as Flipping Strategy

[Greg Bass]

This idea has been coming at me hard and I want to share it with you to see what you think: Flipping SFRs is back and can be way more profitable than ever, yet no one is doing it yet. Here's how I think we can get in on it.

You can buy a Single Family Home in an area with a price per square foot, let's say Santa Cruz for fun. The right neighborhood may cost $1000 per sf for the purchase of the home. A nice 2/1 with a 1000 square feet might sell for 1.1 million. If it has an attached 1 car garage of about 250 sf, a savvy investor can buy the home, use the liberal ADU codes to convert the garage into a nice 1/1 studio that can be part of the original property, or be an actual separate unit. Because the construction is inside the original structure and the permitting is easy, the work can be completed in 4 months. The cost of construction, even on the highest end, - it's inside an existing structure remember? - is $150 per foot. So with all costs in you've put $42.5 into the construction, and added $250,000 to the value of the property. In less than 6 months. You use leverage to buy a property at $1000 per foot, use easy preapproved construction to add value at $150 per foot, and flip in 4 months.

If it takes 200k to buy, and add the ADU, and 6 months to start and finish the deal and the profit is $200k, that's a pretty good deal. You can even put short term renters into the main house to cover the payments while the garage is being converted. All you need is a market with high cost per sf real estate and a home with an attached garage in a city with easy ADU zoning.

Hit me up with your questions and let's figure this out. 

[Seth Borman]

People are doing it, but the appraisals and finance is hit or miss. This is covered in all the other threads on ADUs.

[Greg Bass]

Thanks Seth. Yeah in the appraisal review world the questions is always: will it make value? Where are the comps? Would you mind pointing me to any good ADU threads here so I don't keep double posting out here alone? Thank you!

[Teri Feeney Styers]

@Greg Bass I have done comparable multiple times. First, I need to point out that garages frequently don't make good conversions and their slab floors frequently don't meet IRC code. However, I have divided houses and built on to houses and recently just flat out built two small houses on one lot. Multi-family / multi-generational is desirable in almost all communities. 

[Jonathan Frank]

@Greg Bass

ADU's might be more niche than what you are using in your example.

Someone paying 1.1 Mil for a beach house probably wants a garage for a sports car more than a college student living in their garage paying rent.

[Dan H.]

Originally posted by @Jonathan Frank:

@Greg Bass

ADU's might be more niche than what you are using in your example.

Someone paying 1.1 Mil for a beach house probably wants a garage for a sports car more than a college student living in their garage paying rent.

 I wish I could get a beach house with garage for $1.1m.  I suspect that would be a steal in Santa Cruz.   In San Diego, maybe a major fixer upper on a small lot with no garage and with a major road between your house and the beach.  I saw one a week ago like this asking just over $1.1m.  Best use likely would be a tear down on the one I looked at.  

I definitely want on property parking near the beach.  That might as well be a garage.