Garage Conversion VS ADU

[Vu Trinh]

Good morning everyone!

I'm new to BP and looking to soon start building my RE Investing portfolio.

My wife and I just bought a house in South Bay LA, California which is our primary residence. It's a 3bd/1.75br. With 20% down our mortgage is currently at $3400/month and so we are planning on househacking it to help us reduce our mortgage.

We are thinking of either converting the garage into a studio and rent it out, or adding an ADU in the backyard and eother move into the ADU or rent it out. We understand that building an ADU will cost a lot more than a garage Conversion. Since we just got the house, we don't have a lot of money left over so we're thinking of the best way to approach this.

Our questions are:

1. Anyone in the local area knows how much it usually cost for a garage Conversion and for an ADU?

2. Should we do the conversion first and occupy it and then save more money to build the ADU later?

Any tips and advices are greatly appreciated. Thank you in advance.

[Dan H.]

You likely can only do one or the other of the proposed ADU additions. There are exceptions in various areas, but it would require concessions such as committing to low-income housing.

Before you add the ADU, make sure you understand how the ADU will be valued. Unlike what the various ADU developers market, ADUs are often one of the worse RE investments. This is largely because they usually add less value than the hands-off costs. This makes them a negative value add and starts with a negative position. The initial cash flow goes to recoup this negative position. The negative position can consume years of cash flow. Add to this that it detracts from the existing units, the financing terms are typically poor, and the effort involved and ADU additions typically produce poor returns when compared to other RE investments. It is similar to the work of a BRRRR, but due to no likely extraction of investment the returns are far worse.

The price of ADUs varies depending on numerous criteria, but the Texas estimate is way low for So Cal.  You are likely looking at just over $100K for the garage conversion (hands-off, easy access, mid grade, average contractor pricing).   The stand alone will be over double for something approaching the 1200' size limit (hands-off, easy access, mid grade, average contractor pricing).  I will add that some cheaper contractors are not a deal; sometimes they are cheap for a reason.  

Good luck