Is adding a ADU worth it?

Question

My 45,000 square foot property in Maili, Honolulu, is zoned R20.
I have tentative approval from the City and County to subdivide.
My question, is adding a ADU to the front property, already has a single family home on it, worth the cost of the build, how much value would the ADU add to the overall value of the property?

It would be an owner builder exercise and I could build the 800 square foot ADU for less than $150,000.

The ADU will be positioned so that it will not encroach on the set back requirements of the pole lot at the rear of the property.

Appreciate any suggestions and comments.

Dan H. · Answer

I am going to be the naysayer.  I often am.  However I have been involved in small unit count residential for more years than I want to admit.  I know the costs and effort in my market and suspect your costs will be higher. I do not know how ADUs are valued by appraisers in Hawaii, but in my market they usually are given a value by appraisers far below the hand off cost of the ADU (I recognize you are doing owner builder and you cost will be less than a hands off addition).  This results in an initial negative equity position for those that add an ADU.

I have some doubts you can build the ADU you describe at $150k in Hawaii even owner builder unless you are a contractor.  Hawaii has expensive materials and labor.

Now let’s look at the cash flow.  You did not indicate where the money is coming from but if taking out a construction loan, the loan payment will likely exceed $1k if using construction loan (will be a little less if using heloc).  Maintenance/cap ex will exceed $500/month (again hands off, if you do the work yourself there is huge savings). Vacancy at 5% is $100/month.   Pm, property taxes, insurance.  Let’s just use the 50% rule (that I expect is aggressive for Hawaii and actual cost long term (and hands off) will be more).  50% rule has expenses at $1k/month.

Rent $2k.  Financing over $1k.  Expenses using 50% rule $1k.  About cash neutral if financed (likely slightly negative cash flow).

It is a lot of work doing an owner builder ADU addition for something that if financed appears to have negative cash flow initially.  in addition to your work and time, there is the calendar time required.  How long from initial outlay to first revenue?

The big problem with ADUs is that small unit count, low footage is the most expensive housing to build and always will be.  Politicians add ADU laws in hopes of adding housing, but they fail to account that the housing being added is very expensive.

Good luck

Garrett Crosby · Answer

In most cases, if this is a permitted addition, the answer is a resounding yes. In addition to what has already been said in regards to the rental income it can make you, another important element to consider is the added equity in the property. A permitted addition of a guest house adds incredible desire among many home buyers (and investors). When the time to sell comes along, you will see your property get snatched up with multiple offers compared to similar properties that lack the permitted ADU addition.

If the numbers make sense and it doesn’t put you in a bad place financially, I say go for it! :)

Ziad Hamati · Answer

I second Tim.

Just need to figure out how hard is your money working for you. What return would you get if you invest the $150k else where?

Isi Nau · Answer

A 2/2 with a carport is a slam dunk.  $2000 a month rental rate is a solid estimate.  Even if the $150k is financed, you should still net close to $1000 a month.  Great opportunity.  Congratulations.  Yeah the permitting timelines are unacceptable.  There are some engineers who are certified (not sure that's the exact term) by the C&C to review plans on behalf of the DPP.  Then the DPP gives the final approval.  This cuts down on the processing time quite a bit.  Good luck!

Andrew Ellison · Answer

Aloha Isi, the intended design will be 2 bed 2 bath with carport, carport is not included in the ADU square footage limitations as per the city and county. There will be off street parking for at least 2 vehicles probably 4. The R20 zoning does have it's limitations but an ADU of less than 800 square feet with off street parking is allowed and the permitting process is generally quicker because of the nature of the building. I do have the architect exploring other options so far as an Ohana or another single family home being allowed on the R20 lot however the permitting approval process for a single family home of any nature can be quite long, at least that's what I've been told.

Jay Thomas · Answer

Adding an extra living space, called an ADU, can be a good idea, but it's not a sure thing. Here are the good parts: it can bring in more rent money, make your property worth more, and give you options for different uses. But there are some not-so-great parts, like how much it costs to build and the time it takes. Check the rules in Honolulu, where there are specific guidelines. Think about whether it fits your budget and if you have the time to handle it. Also, get quotes from builders, and remember to consider ongoing costs like taxes and upkeep.

Is adding a ADU worth it?

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