300k to build 1100 SF 3/2 ADU or invest in stock market

[Victor Latimer]

Hello all. So I live in the south bay of Los Angeles (Torrance/Harbor Gateway). My primary property is a 3/2 1266 SF home on a 7500 lot. We have in a hand the permit to build a 3/2 1100 SF home in backyard. I I can get the build done for 275k. This is a very reasonable price. And yes it's legit. The upside would be passive income in the range of $3500mo. Not sure about the added value to overall property since this is relatively new. Of course the new bill allowing us to possibly sell off either property is enticing but not sure how to value that either. The down side would be having tenants in our backyard along with all of the other potential landlord headaches. We have a duplex and a lake townhouse that we rent long and short-term out of state so we have some experience as landlords. Now I just want to ask any of you out there would you build in my position or invest that same amount of money? They both have have uncertainties. I'm enticed by stock market as I believe AI will likely make for greater returns in future due to companies running more efficiently. Assuming I could get ROI of 10% over 20 years investing in the market, what would you do?

[Nesha Renucci]

Quote from @Dan H.:

Quote from @Nesha Renucci:

Quote from @Dan H.:

Quote from @Nesha Renucci:

Hey Victor,

Diversification is always going to be the best thing to do so definitely invest also in the stock market in general but I would advise that you move forward with that ADU. So stocks are good but the issue is as you liquidate the asset depletes and till its eventually gone. With real estate your cash distribution is not from the asset it is based on the cash flow that you are getting in excess from the monthly rent. If you plan your expenses properly the income you get from your properties will cash flow for decades and that is money you can reinvest into stocks if you want but it is a stream that is ongoing and you can pass down if you want.

Have you added an ADU? Can you provide addresses of the properties you added an ADU?
There is a reason experienced flippers are not doing ground up ADUs in CA

In general, ADUs cost more to add than the value added creating an initial negative position and typically cause the primary structure to now be rent controlled (even though I believe that is not applying the law as intended).  The issue is building a single small unit is very expensive development.  It is why developers that build in small numbers  (1 to3 units) always build large units. 

Add the finance issues, level or effort it requires, loss of something from primary unit (even if it is just yard), and the amount of time between first capital outlay and initial income.

In general, adding a ground up ADU in SF zoned area is a poor investment.

Best wishes

No I have not added an ADU myself, I have only worked with developers that have added ADU's on their properties and have seen return but that is in the Hollywood hills so not sure what market you are in. As you know it is not one size fits all so it worked for their personal strategy. My response was specifically in regards to investing in the stock market vs real estate. If the numbers are right holding his real estate could be a better option. I never said anything specific about the ADU. You provided a good perspective. Not sure why you felt the need to single out my post and not just answer his question. Best wishes to you also.

>Not sure why you felt the need to single out my post and not just answer his question. 

I was curious because your comment “I would advise that you move forward with that ADU.". I was curious if you had done what you were recommending the OP do. if you had done a ground up ADU addition, I was curious what your valuation was. Maybe you had a different experience than what many investors are encountering. I did not mean any offense, just curious. Apologies if I offended.

Search the forums to see the appraisals many of these ground up ADU additions in SF zoned areas  are getting.  They are regularly getting poor valuations compared to the cost to add the ADU.   

Again I apologize if I offended you.  

Good luck

I appreciate you replying and apologizing Dan. I should have been more clear in my response so that was my fault for not elaborating about working the numbers on the deal. I was just trying to make a point of analyzing it from all sides first before giving up. I had no idea about how bad the valuations are for building the ADU units. Of course it sounds good as extra income but as I am looking it does sound like a headache and not appraising well. Again appreciate you Dan for taking the time inform me.