When does it make sense to add an ADU?

Question

I just closed on a property and am planning on using the BRRRR strategy. There is a detached garage. I am thinking of converting it into an ADU, so I can rent out this part as well. It should raise the value of the house by at least $30k. However, renovations and permits to convert this will also cost about $30k. Does it still make sense if it breaks even like this? I can likely get about $2k/mo for the main house and maybe about $1k/mo if I convert the garage into an ADU.

Currently, the property is worth $380k. The ARV is currently at $475k. We expect to put in about $50k in the main house, but converting the garage into an ADU would bring the total rehab costs to $80k. And with the ADU, the house will likely be worth at least $505k.

I would appreciate any insight.

Wesley I. · Answer

@Vanessa Banh

Are you in CA? CalHFA has a $40k grant to build ADU. Have you looked into this? The grant is a little tricky to get as you need to get a construction loan then refinance it with your first. Not worth it if you have a low rate on your first IMO. I have called several approved lenders and found one that will do it on 2nd trust deed but the minimum loan amount is 200k.

Sarita Scherpereel · Answer

Hey @Vanessa Banh I agree with you that ADU numbers are very tight. I never really understood why people do this when they can use those funds towards buying another property.

Dan H. · Answer

Typically I think ADUs are a poor RE investment.  They typically appraise below hands off cost of adding (value subtract BP versus value add), they typically have poor financing options, they often detract from existing unit.

However, if you can convert a detached garage into an ADU at $30k hat does not detract too much from existing unit, it seems like it would be tough to go wrong.  Let’s assume your ARV of $30k is correct and your refinance is at 75% LTV (you may be able to get 80% LTV) then you will trap $7.5k for an entire additional detached unit.

I will say the big if is can you really do this for $30k? My initial protege would have spent $90k maybe 5 years ago in San Diego doing a garage conversion ADU but did a lot of the work himself and acted as GC and so his cost was around $50k (but prices have gone up a lot since then).

I consider it an easy decision if you can do for $30k and the ARV is the same (making your initial cost with 75% LTV refi $7.5k for a detached unit).

Erik Browning · Answer

Hi @Vanessa Banh, California is making it very easy for folks to build ADU's in response to the housing crisis, and there are a variety of options on how you choose to proceed. I think it's a great way to start out investing as well as a way to provide affordable housing to folks in CA.

I have no affiliation with this institution, but Redwood Credit Union has an entire program dedicated to ADU's here in CA. You can find out more here: https://www.redwoodcu.org/abou...

Wish you the best of luck, feel free to connect!

Steve Hungerford · Answer

How do you feel they are making it easy ? I keep hearing this when I check at the county level their are lots of permits, reports, issues with converting, confusion, etc. Most people selling something to do with ADU's say its easy this but its far from easy from what I can tell. It should be much easier as bad as we need housing.

Erik Browning · Answer

@Steve Hungerford it's certainly not handed to you on a silver platter, however there are dedicated consultants at banks here in California that push your plans through the permitting process while also funding the ADU project.

Compared to investing on your own, where you don't have a dedicated consultant, this is very easy.

Steve Hungerford · Answer

How would they deal with permitting, do they have a contractors license ? I thought we could do it as owner builder or someone with a contractors license needs to get permits ?

Chen Zhou · Answer

Depending on the neighborhood - if converting the garage into ADU would negatively impact the resell value and by how much.

Steve Hungerford · Answer

So what if I don't need a loan, the bank won't help right ?

I highly doubt they can push your plan through permitting without a contractors license. Why not post out in the open forum so we can all benefit ?

Erik Browning · Answer

Hey @Wesley I. I'm a lender and would like to talk more about this. Going to send you a DM.

When does it make sense to add an ADU?

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