Accessory Dwelling Units (ADUs) (<900 SF) to be built by-right

[John Liao]

Hi All -

A bill was recently passed to allow Accessory Dwelling Units (ADUs) (<900 SF) to be built by-right in single-family zoning districts.

https://www.mass.gov/info-details/accessory-dwelling-units

My understanding is that you could buy a single family home and build an ADU on it and rent it out.

Thatch Nguyen (for those familiar with him) really popularized this on the west coast in Seattle.

Is anyone planning on getting into this game? Seems like a real cash cow if you get ahead of the ball. 

Would love to hear opinions and thoughts on this!

[Dan H.]

Quote from @John Liao:

Hi All -

A bill was recently passed to allow Accessory Dwelling Units (ADUs) (<900 SF) to be built by-right in single-family zoning districts.

https://www.mass.gov/info-details/accessory-dwelling-units

My understanding is that you could buy a single family home and build an ADU on it and rent it out.

Thatch Nguyen (for those familiar with him) really popularized this on the west coast in Seattle.

Is anyone planning on getting into this game? Seems like a real cash cow if you get ahead of the ball. 

Would love to hear opinions and thoughts on this!

California has had statewide ADU laws since 2019. The ADUs have not been a good RE investment.

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. This is especially true in single family zoned areas. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU. Building small units in small unit count is some of the most expensive development.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA MF is rent controlled but SF is not rent controlled.

12) the ADU will result in property tax increase more based on cost than actual value added item #1 implies the property tax you will be charged is more than if it was based on value.

My top advice is make sure you know the value added to the property by adding an ADU.

good luck