Do ADU’s hold there value?

Question

I live in So Cal and I’m looking to invest in rental property here. Prices are so high that rental income never exceeds the mortgage plus expenses. But, with the new ADU laws passed in 2020, ADUs are a good way to get great CF. The CF from an ADU can easily cover construction cost and cover the negative from the existing house. I’m just worried about the value add on the property when building an ADU.

My question is probably for appraisers out there. Does an ADU hold a good value? Since there aren’t many comps yet it is hard to get an ARV. Can you use a duplex as a comp as long as it’s the same SF and room count as the ADU?

Cesar Perini · Answer

@Dan Heuschele

Your right! I’m actually going to do this as Owner builder so it’ll definitely save on construction cost. Hopefully it’s enough to get some of the investment back when I refi.

Cesar Perini · Answer

@Matthew Forrest

Yeah hopefully with these new laws favoring investors to build ADUs there might be more homes with ADUs selling in the near future. When houses are sold with ADUs it holds good value but I’ve only seen 1 sold so far in my neighborhood. Hoping to see more sold in the future. Thanks for your input!

Dan H. · Answer

A past protégé of mine sold his house with ADU about 7 months ago.  The value of the ADU set by the appraisal was not even 50% of the hands off construction costs.  I think this is normal.

If you want the ADU to be a value add, it cannot be a hands off project.  Typical GC fees for private party are 30% (less for insurance claims).  Acting as your own GC (assuming you can do it competently achieving similar production and discounts which is probably unlikely if this is your the 1st time you are acting as GC) would help significantly.  If you can do many of the low skilled tasks yourself that would also help.  If you can do the high skilled tasks also then I suspect you would get achieve some sweat equity.

If you build a hands off ADU, realize that the profits will be in the long term cash flow.  It is not a value add that is likely to be reflected on an appraisal (it will cost more than it will be appraised).  It is very unlikely that a refinance will allow anyone to extract the full hands off costs of a hands off ADU.

Good luck

Matthew Forrest · Answer

@Cesar Perini I am not an appraiser, but I have had my property appraised and you're right there are not many comps for ARVs. That being said, SFH with ADUs are NOT comped with duplexes so the lack of direct comps hurts the appraisals. My appraisal was less than the cost to build the ADU, though the cash flow is very good! Nothing is for sure, but I expect the values of ADUs will improve in the future. I hope this helps!