Is it worth building Adu's in Orange County / Long beach ?

Question

Hi everyone my is Carlos i am currently in Costa Mesa. I am planning on not resigning my lease and starting of my RE venture. I have done some research on ADUs and have come to conclusion that getting a house near a hospital or good college area with a big yard to add an adu and convert gargae to junior adu would be best. The only inssue is that i have not found many people in the area that have done it and would like to ask if any one here has done ADU's in Orange County or Long Beach and has it been worth it for you .

Thank you so much hope to hear some feed back !

Dan H. · Answer

>Is it worth building Adu's in Orange County / Long beach ?

In general it is not worth building a single ADU for a variety of issues but the largest is the cost to add the ADU is typically far greater than the value added by the ADU.  This creates a large negative equity position.  This negative equity position consumes the initial cash flow to re over the negative equity position.   It often takes many years to recover the negative equity position.  I invite you to search this forum about ADU appraisals.  Building a single small unit is the most expensive residential development..

Here is a list of why adding a single ADU in dingle family zoned areas in my CA market is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

Good luck

Dan H. · Answer

>In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m. I am unsure how you think this can recover a negative equity position any time soon.  Let’s look at some numbers:

1) does not meet the 1% rule.  In San Diego at the current rates for a purchase loan (which has better rates than an ADU additions) at high LTV, I show 1% does not cash flow on a sustained basis.  This will be negative cash flow if using sustained maintenance /cap ex. It will be a while before the negative equity starts to be recovered.  Then many years for the equity position to be recovered.

2) let’s go no financing and use 50% rule so $900/month after sustained expenses.  $10800/year towards the negative equity position.  The negative equity often exceeds $50k but even if I use $25k (it would be rare to have this low of an initial negative equity position), is nearly 2.5 years to recover.   After which they invested $190k for $10800/year return or 5.6% (not even discounting for the 2.5 years to recover the initial negative equity).  Non-passive to achieve this level of return.

Add the addition of the ADU makes the main unit rent controlled if over 15 years old.the work to add an ADU likely exceeds the effort of a brrrr that can achieve infinite return  Experienced investors are adding multiple ADUs by leveraging items like bonus density, committing units to affordable housing, etc.   these can produce good returns but best chance for success is for those that have experience in this area (I am a partner on an effort adding 8 ADUs, but it is not performing to the initial underwriting (underperforming) and it is an experienced team).

good luck

Cedric Ferrell · Answer

@Carlos Olarte

Carlos, that’s a smart approach—ADUs and JADUs are great ways to boost cash flow, especially in high-demand areas like Orange County and Long Beach. With strong rental demand near hospitals and colleges, plus California’s pro-ADU laws making approvals easier, this strategy can be a game-changer. Just be sure to check local zoning rules, manage construction costs, and explore financing options like HELOCs or DSCR loans. Are you planning to live in the property or use it purely as an investment? DM me, and I’ll point you in the right direction!

All the best!

Kirk Wurffell · Answer

This makes a lot of sense.  I'm not sophisticated as Dan, but if you simply do the straight math, it may be close to 10 years before you break even on $190k.  Plus I didn't include the Taxes and insurance for an ADU.

IMO, it makes sense if you have the right sized property and a willing to think long-term.

Alan Asriants · Answer

Appreciate the detailed response. I counld'nt agree more about brrrr. It is a really ineffective strategy right now with the rates where they are. I recently posted about this and my experience underwriting a current project im working on. Unfortunately it only makes sense for a flip. Flips themselves are hard to come by and as you said its a job not an investment.

Alan Asriants · Answer

Hey Carlos, sent you a PM

Dan H. · Answer

>Its the same thing for doing a renovation. Sure don't do the renovation, I only do renovations that project a return of 2x the cost of the renovation. This 2 to 1 ratio is required because 1) they are work and my time deserves to be highly compensated. 2) big rehabs have some risk. My last rehab was projecting far better than a 2 to 1 return which was fortunate because we went way over budget (my worst over budget by far ever).

>By this logic investing in a new roof also doesn't make sense. Ah screw it, you can sell it for the same amount right. Its not like a 30k roof will improve my property by 30k right? not everything is 1:1.  Typically a new roof only makes sense to protect the asset. I have never done a new roof to add value for the refi on a brrrr because it will not add the necessary value.

>for some people it can be a decent opportunity.

I have yet to see an underwriting that holds up to my scrutiny that shows that adding a hands off single ADU in single family zoned area that projects a return that justifies the effort and risk.

>Also why are you deducting 50% for expenses?

1) 50% rule is a well accepted generic approximation 2) hundreds of underwriting has shown it to be fairly close for my underwriting for a SFR purchase in San Diego.  Note at “standard” MLS market rent to price ratio, the property tax alone is ~20%.>What would you rather do?I have made a lot of money doing BRRRR and the majority of my purchases have achieved the infinite return.  However, my under writing due to the recent rate hikes shows large cash negative after a high LTV refi to extract the equity so I am not currently actively pursuing BRRRRS and I find this is true for many of the local investors that were doing brrrrs a few years ago.  Some of them have converted to flips, but I do not do flips because it is a job (stop flipping, stop earning).  My current purchase (closing in February) is a luxury cabin that will be an STR.  Projected annual income is 20% of the purchased price.  I am also a partner on adding 8 ADUs on a property.  I am a big fan of sophisticated value adds such as lot splits, coop/tic, leverage laws for multiple unit additions.  After the luxury cabin, I will likely do it again in a different market.  By year end I will tackle a MF, value add with my son that would be sweet if we can swing the coop/tic (handling the finance challenges is the hurdle) so he ends up with a unit at below 50% of retail.  Note these are only residential options.

Always interested in alternative financing as it is the easiest way to cash flow at high LTV in markets with good historical appreciation.@henry Clark has posted on BP exact detailed steps to create a self storage facility.  The value of the info he provided cannot be understated.

Residential RE is more challenging then a few years ago, but there are a lot of ways to make money in RE.   However, make sure your underwriting is conservative and accurate.  For any effort make sure you know the value that will be added.  The value added should be significantly greater than the cost of the effort to compensate for the effort involved and the risk.

Good luck

Carlos Olarte · Answer

Hey Alan ,

Great to meet you , thank you so much for replying to this post helps a lot . Some great information here and totally agree with it . Yes that would be amazing if you’re able to connect me with him really appreciate that .

Carlos Olarte · Answer

Hi Dan,

Amazing  information here thank you so much

. I will definitely take these into consideration , thanks for taking the time to reply to this post .

Carlos Olarte · Answer

Hi Jesse ,

That’s awesome to hear and totally agree about what makes adding an ADU a good deal . My goal is to hold these long term.

Is it worth building Adu's in Orange County / Long beach ?

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