build adu on property or purchase another property ?

Question

Happy Sunday! I’m seeking advice on where to invest my money next.

I currently own two properties in California, and at 21 years old, my goal is to continue purchasing properties and eventually pay them off to achieve financial freedom.

I’m considering two options:

1. Converting my garage into a studio: The conversion would cost approximately $20,000, and I could potentially earn $1,400 per month in rent.

2. Investing in a fix & flip or BRRRR strategy: I have about $75,000 in my bank account that I could use to acquire and renovate another property, which could help me build more capital.

Which option would you recommend for maximizing my investment potential? Thank you!

Alecia Loveless · Answer

@Henry Rodriguez The estimate you have is way too low in my opinion. If all your plumbing and electrical are in place that would reduce it some but not down to $20,000. I would get a second estimate.

I have a recent estimate of $110,000 for a studio garage conversion. I made the decision to purchase a 6 unit building with those funds that will eventually cash flow $4200/month.

I would focus on buying your 3rd property and skip the ADU.

Dan H. · Answer

good luck

Matthew Kwan · Answer

HI Henry,

You would want to make sure your county allows you to condomize it so that you can two separate parcel numbers for the main house and the newly built DADU/ADU so that you can get appraised separately. However, based on regulations, only Seattle and San Jose allows you to have two separate parcel numbers. There are rumors that it will soon be for multiple counties in CA in June 2025. However, it's important to have your plans ready upfront so that you can execute it full speed when the time comes. @Albert Bui @Carlos Valencia

River Sava · Answer

Hey Henry - Congrats on you success! Both options you’re considering have their pros and cons.

Converting your garage into a studio would give you a fairly quick ROI with the potential for passive income. If you’re aiming for a stable, hands-off income boost, this might be the way to go, especially with the cost being relatively low compared to other investments and being in an expensive market.

The flip or brrrr route could help you grow your capital faster, especially with your $75K budget. If you find a good deal, you can pull cash out after refinancing, which allows you to scale quickly and reinvest. However, it is more hands-on.

One thing to consider - are you open to investing outside of CA? If you're willing to look at other markets, you likely could find higher returns or better opportunities than what’s available locally for a flip and/or brrrr.

Raju Balakrishnan · Answer

I agree that 20k cost estimate is low. Rent controls will be a real issue if you are planning it as a rental investment which in fact reduce the value of the main house as a rental. Secondly, if the appraised value is less than replacement cost, ADU does not make sense for a value add. If you do not have data/comps to find out your post renovation value, that ads a huge risk, and makes the move less valuable.

Henry T. · Answer

If you're building for yourself, great. If you're building for rental, I think you're better off as an investor buying another property, thinking long term. There's no way you're gonna build a LEGAL ADU for that price, at least five times that, maybe. No way.

Jonathan Greene · Answer

ADUs are a great idea and California (and most of the West Coast) is on the forefront of the most allowance and options for them, but I would think about your long-term value also. If you convert the garage, you lose that as an asset to the home and a future home buyer. You also then are parking next to your ADU tenant all the time and in front of their "home."

At 21, I wouldn't do a fix and flip right now with rates and inventory of homes available where you can make money. You would need substantially more money saved to do well on a flip I think. BRRRR is VERY hard right now out West.

So, you have the primary that you live in and what is the other property? I would make sure they are both up-to-date on repairs and mechanicals before investing in a third asset that could have repairs come due all at the same time as your others.

Aristotle Kumpis · Answer

I also agree that a garage conversion will cost much more. The permit will probably cost $5K alone, maybe a little less. Some cities are now giving you money in the form of a loan to help build ADU's, which is great. To me, monthly cash flow is better in the long run. It depends on what your long term strategy is though.

Trevor Finn · Answer

@Henry Rodriguez, congrats on being a 21yr old real estate investor! That's a great accomplishment!

Both options have great potential, but here’s a quick breakdown:

• Garage Conversion: At $1,400/month in rent, you’d see a strong return on your $20K investment, with cash flow starting immediately. This option adds value to your current property, which could also help with future refinancing.
• Fix & Flip/BRRRR: Leveraging your $75K for a BRRRR or flip could significantly grow your capital, especially if you find the right deal. This strategy, however, carries more risk and requires market knowledge to avoid unexpected costs or longer holding periods.

If you want steady cash flow, go with the garage conversion. For capital growth and experience, the BRRRR or flip route offers a bigger upside. I would love to hear what you choose to do!

Becca F. · Answer

Congratulations on owning 2 properties in California at 21 years old!

I agree with the other comments. I wouldn't do a flip or BRRRR right now. I've seen experienced investors  do flips in the Bay Area. The open houses I attended for flips recently - their  costs were around $300,000 for a major renovation  in 2024. That's about what my major renovation cost (new electrical, plumbing, new exterior and interior paint) in 2022 but I bought  in-stock cabinet, light fixtures and faucet fixtures myself.  Since it was my first renovation I probably paid a little high. I rented the home out. I don't know what the market like is in SoCal but I would imagine that contractor costs aren't much less there in LA area than the Bay Area.

With @Dan H.'s point #11 about ADUs I looked into one for my SFH rental and adding an ADU (mine would be attached to the main house, not a separate structure) would cause my SFH rental to become a 2 unit and under rental control. There are some ways around the rent control issue in my location by making the ADU an STR (not a long term rental) and apply for a license to STR on the ADU. I haven't investigated this option yet. Your quote for an ADU sounds really low to me.

I'd recommend attending local real estate meet ups near you. You can talk to investors who have done flips and BRRRRs  and ADUs and ask them lots of questions so assess if either of those are viable options for you. Some of them might even will let you walk their projects. Good luck.