Building an inlaw unit for rent

[Chris Penny]

My house in Union City (East Bay) has 3 beds/2 baths of 1340sqf + garage on a land of 6000. Recently I've been thinking about building an in-law unit of around 600-700sqf with private entrance and put it for rent. The last time I asked (around 6 months ago), a constructor told me it's about $100 - $120/sqf to build, so roughly 80K for the unit. With the construction price getting higher and higher, I'm not sure how much it could be now. Anyway, based on my research, I could rent out the unit for at least $1500, quite good rent-to-value ratio. What do you think about the pros and cons of this approach? 

Another question I have is if I just rent out the unit, how depreciation is calculated? What about I buy another house and put my whole current house for rent, do I get depreciation as my house is now considered as a full rental property?

Thanks

[Alec B Calzada]

Chris,

We're an architecture firm that does work all over California and we have been doing a LOT of ADUs recently because of the recent Senate Bill passing that relaxes a lot of the typical restrictions. I would consider keeping your ear to the ground. While construction costs in your area are likely to be where @Ori Skloot states when it comes to conventional construction, there are Creative Construction methods that you could use that take a lot of the bite off the over-all cost. Structural Insulated Panel System (SIP) framed houses can sometimes have large cost savings or Machine Framed walls and rooves can be constructed in-factory and then assembled on-site (and they aren't considered "pre-fabricated").

What I would do is:

1) Break out the phases of the construction 

  Architectural Plans/Construction Documents/Building Permit

  Grading and Drainage

  Foundation

  Framing

  Windows and Doors

  Mechanical (HVAC)

  Electrical 

  Plumbing

  Drywall/Finishes

  Fixtures

  Paint

2) Identify what you can do yourself (best way to save money), remove it from the scope of work

3) Research or solicit bids from several contractors asking each for a price for all of the above (they may need a set of plans, so that'd be the best place to start)

4) Research unique or creative methods of getting each phase of the project done

    i.e. - Maybe you can get pre-made architectural plans that are easy to modify?

          - Maybe you can get your gardener to do the grading and foundation work? Lots of gardeners I know get small landscape jobs like that and have the people/equipment to do that level of work

           - Maybe you can research alternate framing methods (SIP) or Machine Framed (ABI Tech)

           - Maybe you can put in a store bought HVAC system? Do you have extreme climate to deal with? if not, maybe a wall mounted split AC system is all you need for the whole unit if it's small enough. Utilizing Radiant Barrier and high values of insulation (R-Value) will reduce the heating and cooling needs of the building over-all and aren't very expensive. 

           - Maybe you can purchase windows and doors at auction or an outlet center? Local swap meet or flea market? Avoiding the salesman can save you a lot of money, but you need to know what you're looking for. 

5) Award different contractors smaller sections of the total project and be sure to keep the cost within your budget. 

Do all of that, you still might go over the $80K mark, but if you don't have any other real estate deals to look at, you might as well do all of the research and planning that you can and see if you can squeeze it out. Knowledge is power, knowledge is savings. Do your research and let me know if there's anything I can do to help. Good luck out there!