Additional Dwelling Unit (ADU) Build

[Chris Jacobie]

Hi seasoned investors,

I'm new to BP and only own the SFH that I live in.

I'm considering adding an ADU as a way to House Hack and get started in building some passive income.

The rent from an ADU definitely won't cover the whole mortgage but could help make a dent in it and help me get my feet wet as a landlord and going through the building process.

What questions should I be asking to determine if this is a smart move or if I should be looking at just buying a second property of some kind?

Thanks!

Chris

[Brian Goodling]

@ChrisJacobie I just closed on a property in St. Petersburg FL and am planning to do the same thing. There are a few issues that youll need to look into before jumping into the ADU scenario.

First and foremost, does your local zoning laws even allow you to have an additional unit on the property. See what your property is zoned for, then go into the regulations and see what is a permitted use, conditional use, and what may need a variance. If it's permitted you're good to go as long as you adhere to other regulations (setbacks, minimum SF, permits, etc.), if its conditional youll have to go to a hearing and essentially explain why you should be allowed to build an ADU on your property. and if it needs a variance youll have to apply for one with the municipality and go to multiple hearings to get things approved. If an ADU is a prohibited use then you're out of luck.

Secondly, which is the issue I am running into, is if an ADU even makes sense to construct. Price per SF that I've seen has been between $100-150/SF. So a 400SF ADU (assuming a 1/1 with an okay size kitchen and small living room) is already going to cost you roughly 40k. This doesnt take into account permits, inspections, contingencies, etc. You'll have to run your numbers and figure out what you think you could get the ADU to rent for in your area and compare that ROI against what else that 40k could buy you. Could it buy another SFH? a duplex? Compare and see whats the best path for your money. While adding an ADU can often jump your SFH into duplex territory for appraisal purposes, there's steps in between that could hold you up or cost you more money instead of buying something already built.

Personally I am a fan of adding ADU's if I can get them cheap enough. If I could add an ADU for 20-25k on each SFH I'd buy I would be swimming in cash flow. The house I bought in St. Petersburg cash flows $350+/mo once all expenses are taken out and if I can put a 400SF 1/1 where the garage is I could bring in another $500/mo from the ADU which would be a 20% ROI assuming a 30k all in cost for it. So really, the answer like most things is that, it depends. Hopefully I pointed something out that may be beneficial, but I am totally on board with the addition of ADU's but the price has to be right for it to make sense over buying another property assuming the zoning works out.