How much value does turning duplex to a triplex add?

Question

Hey folks,

Roughly how much value does adding a legal ADU to a duplex and converting it to a triplex bring?

The duplex is in the Inner Sunset in San Francisco, and the 2 existing units are 2BR/1BA 1200-1300 square feet. The additional unit would be a ~450 square foot 1BR or studio.

It seems like the average price per rent-controlled unit in SF is around $400K. That's the number I've seen in some reports, and also what I calculated by going through a couple of months of SFAA (San Francisco Apartment Association) magazines and writing down the sale price and # units of multi-family buildings.

But of course that's just an overall average, and wouldn't necessarily be what applies in this situation. So was hoping someone had guidance

Meghan McCallum · Answer

Yes sir. They have been warning of corrections in real estate in hot markets for awhile now...also a correction in the stock market is very likely. Those two looming clouds would send me to do as much as possible to protect my gains. Either of the two scenarios would drop prices in SF. It's just my two cents. Something to think about. Every market cycles. The smart ones just continue to buy low and sell high. I am currently looking at my exit strategy for some Chicago properties. Everyone is saying how the boom is just starting but I bought a duplex in a really nice area for $280k in 2012. I was told to list it for $875K yesterday. I will take that bird in the hand any day. I will 1031 that gain into multiple cash flowing apartment buildings in secondary and tertiary markets. It may be another year or two before Chicago cycles again, by then I will have more money and hopefully be able to buy up the MF's that all the new investors lost at this newest bubble burst. Perhaps I will even branch out to a couple other cities that are down too. Who knows. What I do know is that, like the tide...you can't control it, you can read it and wait for the perfect time to ride the waves though!

Matt Sanford · Answer

@Harman N.  yes, I have done about 10 of these as a contractor.  A lot of these technical details have been solved by myself and other contractors.  The architect gives us a "design" and gets us a permit.  Then they hand it over to me to do the actual work.    Now is a good time to get ADU approvals with the planning department.

Here are your steps to getting the ADU:

• Apply for condo conversion of the existing property.  Could take about 3-6 months to get permission and schedule an inspection from the city.  The city will create a list of "items" that need to be addressed before condo conversion.  Hire a contractor to address the "items" from the condo conversion report.
• Hire architect and finalize a design for the garage ADU. (which I would suggest you start the same time as item #1)  Technical details like plumbing, electrical and sound proofing are all part of the design typically.
• Hire a contractor to do the garage ADU conversion.
• Put completed ADU on the market and start collecting rent.

Let me know if you have more questions.  These steps are the "big strokes".   Many details need to be solved, but that usually falls on the shoulders of the contractor and sometimes the architect.

You are sitting on a gold mine!    I encourage you to proceed, it will be a great investment.

Sean Walton · Answer

@Harman N. if you have the head height I would do 2 layers of drywall attached to resilient channels on the ceiling won't cost that much and will keep the tenant happier not hearing as much noise from above. Obviously fill the space between joists with batt insulation as well.

Hope you can make it to the happy hour at 6pm tonight (3/25/17) at 86 2nd st.

Amit M. · Answer

@Harman N. on of your condo convert #'s, title transfer costs almost nothing (you save $15k yay!) but gut renovating top unit will cost much more than $50k - but no matter - I agree with you that the ADU is a better option for long term buy/hold. And you'll need to contort some alternative facts so the new 25% owner shows as occupying the 2nd unit, no small feat.

As for ADU value, it's really hard to say. Once enough buildings sell with ADU's we will have a sales record. Even as a 1br I doubt you'll get more than $2000 in rent, as it's a basement unit. But using a 15grm, $24k x 15 is still a sweet $360k value, which I think is safe. Now, IF you can sell the building in the future as 3 tics (meaning no tenants in them, renovated nicely for end user), then the ADU will probably be worth even more ($450-500k) as long as it's  finished nicely and shows well. Remember that smaller units sell at a higher PSF, so $800-1000 PSF is certainly doable in the inner sunset when the market is strong. The renovation is going to be so expensive anyways that I'd spend an extra $10k on nice finishes. It's always worth it in the long term for SF.

Hope that helps.

Meghan McCallum · Answer

@Jeff Burdick it is actually Evanston, IL.

Sean Walton · Answer

Hi @Harman N. I've never done one of these before but it seems like you have a pretty easy conversion since the door out the back appears to be at grade so easy to add windows. Do you have at least 7'-6" ceiling heights? That would be a code requirement. Ideally you would want 8'-0" to make it more like a typical living space.

Is there a passageway from the back yard to the street without going through the building? If not you will probably need to make a wall with door from the left fin wall of the bottom stair to the wall above it so that is a safe exit in case of a fire

You would also need to make sure you have room on your electric panel or pay for another electric meter and panel

Johnson H. · Answer

I am a big fan of condo conversion as it unlocks a lot of value and keeps your units rent control free for the time being. However, adding sq ft will always add value as well. Best way is just to look at the comps in your area for duplexes with in-laws (illegal and legal) to see what the best value potential would be. I lived in the Sunset my whole life until last year and there are many illegal in laws in the area still. Some will keep the the in-law with the 2nd floor condo for more living space. If you can see yourself living there for a long time you might want to keep the living space and garage for yourself.

I would just add that with finishing the ground floor, it would be good to think about adding anchor bolts to the foundation (if you want to), adding drainage to the garage (makes it easier to clean up and if a water heater were to leak) and backyard if there isn't any (for when it rains you dont want a huge puddle back there), replacing all the galvanized piping, and adding new wiring like Ethernet. Once you add the in law, the city will make you finish the garage as well so its the best time for these upgrades if you plan on holding the property long term. (This is from what I know, maybe things have changed but I doubt it.)

Matt Sanford · Answer

Harman, can you give us some more info.  Most lots in the inner sunset don't have space for an ADU, but does yours?  If not, I am guessing you will be converting part of the garage to an ADU.  I have done a bunch of these in SF.   Its a great neighborhood to have additional rent coming in!!

Sean Walton · Answer

Are you adding the ADU in the back yard or excavating under your existing building? If you are taking space from one unit or garage to make the 3rd it may not add as much value as you think. All else being equal I would take the duplex with ADU but I may not be the typical buyer. I don't think duplex with ADU will appraise as a triplex relative to triplex comps because I think in SF the owner needs to occupy one unit (double check this).

Kyle Lewis · Answer

Hi @Harman N., I'd say the increase in value is a factor of the additional rent you're able to collect by adding the unit. Having lived in SF and knowing the crazy rental demand, I think this is a great general strategy. With rents being so high in SF, I'd guess that it makes sense to add the unit, if you can do it at a reasonable cost.

If the strategy is to hold, I'd look at the cost to add the unit and increased rent and decide if you like that return. If the strategy is to buy, add the unit, then sell shortly afterwards, I'd find the new value using the formula VALUE=NOI/CAP.  I know CAP rates are usually used for commercial properties, but I also like using it for triplexes. Another approach to value is to look for comps in the area. Look for the average difference in price between properties similar to your current property and properties similar to what your property would be with the added unit.

Hope this helps!

How much value does turning duplex to a triplex add?

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