So Cal ADU vs. Investing out of state

[Nikki O.]

We own a home in middle class neighborhood in a quiet residential neighborhood Los Angeles with a decent school district. Our lot size is about 6500 sq. ft., with a detached garage space which we are considering to covert to an ADU rental unit for extra income. We are going to be having a baby in 1.5 year and we would like to use the rental income so I can be home with the baby. We should preface it to say the home is near two small colleges, Google campus and near the shopping center (includes T-Joe).

This ADU will cost about $100k to $150K(cash) 400 sq. ft., from start to finish on the existing structure. I can rent out the unit for $1700 to $2200 a month which pays more than 60% of my mortgage, but I have so many questions that only gets me too scared to make the next move.

1. My concern is what affects having the ADU will have on my home's resell value 10 years from now. In my neighborhood where homes are listed between $900k for a tiny fixer-upper to $1.8 for a decent size turnkey, I have seen smaller homes are so hot, high in demand by first time buyers where as larger homes go stagnant due to the higher pricing (due to the sq. ft. not because of the location)and targeting smaller audience group who can afford that higher price point. I have watched homes listed for $1.7m reduced down to $1.5 to sell. Home that sits on the market has to compromise in the sale price-that's the bottom line.
2. To the contrary, one can argue that having the rental income is going to entice those first time buyers who may otherwise be priced out of that range but if I were a buyer I would first start to wonder how hard it is to keep the unit occupied throughout the year? Then my second question is the issue of privacy. I may even ask "Am I a chill, laid back landlord who is cool with living with a stranger?" How many of you would actually rather have a small fixer-upper than a large home where you have to share the space with a tenant?
3. The alternative is to take that money and invest it in areas like Riverside, Inland Empire, Modesto etc, but that would require another loan and the money is getting more expensive as we know it. 
4. The last option is to invest in another state, but this idea seems far fetched and risky especially that I am going to be home-bound with my baby. But if I were to do it I wouldn't want to leave the west coast.

At the end of the day, there is no risk free investment. Can all of you real estate experts shed some light on my dilemma. I would surely appreciate it.  

[Tony Kim]

@Nikki O. I'm in a similar situation as you in the sense that my wife is really interested in building an ADU by converting our garage. Since we are within a half mile of public transportation, we are not constrained by the city requirement to have covered parking for your car.

Here are my thoughts when it comes to an ADU.

I hate ADU's that totally feel like garage conversions (although admittedly, they ARE garage conversions). In order to build it one so that it doesn't feel like you're living in a garage that's just been prettied up, you will spend a considerable amount of money..... probably more than whatever quote some of these local garage conversion specialists have told you. My wife's co-worker is in the process of building a 2br/1ba ADU ...they demo'd the existing garage and are building it from scratch from the foundation up and are almost done. So far, it looks beautiful....the type of property that I would love to live in if I were 10 years younger and single. However, it is costing them about $75K more and 6 months longer than initially estimated. But in the long run, it will be worth it because any hint of this structure being a garage has been completely eliminated, new utility meters have been done, and the property itself has its own address. Basically, his home was converted to a duplex that is perfect for house hacking. And I'm convinced that this structure will indeed substantially increase this property's market value.

You also must have a contractor that you know will do a good job. I have a person that I use all the time and 90% of his work consists of me and a few other of my closest friends. If I didn't have someone like him who I've used many times in the past with great results not only for me but also for everything he's done for my buddies, I'd be less confident about building an ADU.

With that said, there is no place in So Cal where you can spend 200K on a building and rent it for $2.5K. Although you will go through a lot of stress during the build process, the return on your capital will be hard to match.

Another option is to build the ADU and rent it as an Air BNB. We live in Wilshire Park, which is a very good place to run an Air BNB...and from what I can gather, you also live in a perfect place to run one as well. This will provide even better revenue, plus you get the flexibility to keep it vacant when you have out of town family visiting.

We looked at other places in CA that have higher cap rates, like Bakersfield and Fresno, but ultimately decided not to invest for reasons that are too long to list here.