ADU - How do you calculate cost vs reward on these?

Question

I am looking at some properties in San Diego. I am wondering what all you ADU property investors are doing to evaluate adding the unit in an area that has no comps with an ADU or comparable sq footage. I have learned that San Diego values can fluctuate street by street in some locations. Help??

Kevin Fox · Answer

Hey Alissa,

You are very wise for considering an ADU strategy here in SD. With the new regulations, I think there is a TON of opportunity out there for you.

Your question is one that a lot of newer investors struggle with.

I think the best way to answer that question is this:

First,  before doing any serious number crunch or analysis on the development, I would ask whether or not the submarket is likely to be favorable for an ADU strategy.

Whenever the existing inventory of the submarket lacks anything similar to the project I’m considering, the first thing I ask myself is - Why?

For something like this, the answer could very well be that the old regulations made it unfeasible and have nothing to do with the neighborhood’s likelihood of adopting to the increased density/higher sqft properties. However, you want to make sure that is, in fact, the case and not the other way around.

While there are a ton of neighborhoods in San Diego that play VERY favorably for ADU additions, there are others that the strategy is not well suited for.

With that warning in mind, there are several ways to evaluate ADU deals in areas with scarce comparable sales.

The first thing I’d do to get an indication of value is look to the 2-4 unit market, with duplexes obviously being the best basis for comparison.

Second, I would look to derive value from comps that are similar to just the main home. That would serve as the “base.”

Then, I would look at the income potential of the ADU in that neighborhood and reverse engineer it’s value based on the market cap/other factors and add it to the base.

It’s definitely a tricky process that takes quite a bit of experience to master, but it is absolutely doable.

If you’d like any help with your evaluations, please feel free to reach out. My team and I are well versed in the space and would be more than happy to assist.

Best of luck!

Kevin

Kevin Keith Beck · Answer

Hi Alissa,

I'm not sure if I can answer all your questions but am here if you need a "sounding board"?

I'm now a retired contractor looking for partners to flip in San Diego (I know, crazy huh?).  In the meantime, I am happy to offer advice and guidance based on my 30+ years as a "Green" builder and high-performance home designer.

I'm trying to get to a point where I can build small net-zero/green communities of "mini-houses" and multi-family builds.  To get there may require other avenues of income and capital generation, but hey, if it were easy, everyone would be doing it right?

In response to your initial question, my gut reaction would be to analyze existing home price/per sq.ft in the specific area you're contemplating.  Example: say you research and find that "C-type" homes on your block of interest are going for $100 a square foot and "A-type" homes are at $300/ft.  There's you're gut check math.  Can you add/rebuild/repurpose the footage within those brackets and still profit.  You can't change the numbers, they are what should guide us.  If you overbuild (add a ADU on a house that already has 6 bedrooms) you'll have trouble selling.  The trick will be to find a great deal on a property (BIG problem #1 in San Diego) that can use the ADU addition approach.  You'll need to evaluate each property for potential AND know what your strategy is for providing that ADU.  You gonna crane it in, build it on site, buy a package???  Many choices.

Let me know if you'd like to discuss further.

Glad to help,

Kevin