Build an ADU or invest out of state?

Question

I recently got an estimate for converting my garage to a legal studio apt. rental (ADU) unit. It's upwards of $100k, I know, it sounds insane to most of you but is pretty average for Los Angeles considering the amount of permitting. I could probably rent it for at least $1500 per month so that's a pretty decent return, but then we would have a stranger living in pretty close proximity (small lot). It's also more cash than I have available so I would have to supplement with a HELOC or refinance. Would I be better off buying an out of state property and not putting all my eggs into the property I live on? I'm interested in buying a duplex in Portland, Ore. so my son can get a break on rent and I can rent out the other side, but that market is pretty expensive too and there are few duplexes. Assuming I could raise $100k in cash, it would be pretty tough to find a fixer upper in the LA area that I could rehab and rent out for under $550k, which is another alternative. What would you do? Realistically I would prefer to just use the $60k I have in cash and not have to deal with extra loans. Thanks!

Account Closed · Answer

What is creating the stir?

Account Closed · Answer

I'm in Phoenix flipping a 1600 sq ft house with a 960sq ft building in the back that will become an apartment or duplex or ADU or AirBnb and even so the price is nowhere near the numbers you are wanting to do this at. The property has an ARV of $325,000 and the back building will get $1,500 a month rent which is your target amount and the house would get another $1,900 to $2,200 per month or someone could live in it and rent out the apt. Arizona is much less expensive than LA, California or Oregon. To do what you are suggesting for the amount you want to spend I think you are looking at the midwest. That presents a management problem in that it is more difficult to get to the property for you. So, all that being said, for a cash purchase you may be priced out of the market at the numbers you are using. You may want to reconsider using a bank loan and just accelerate paying it off.

Jeff S. · Answer

@Pat Saperstein Why don’t you come up here and look around. Just beware there is a war on landlords in the city of Portland. Some see this as a buying opportunity because some multi family investors are jumping ship, and institutional investors are uneasy.

Brad Hammond · Answer

@Pat Saperstein, I think you also need to look at what the ADU will do to your home value and if you are going to sell/refinance any time soon.  If not, you might be able to do better in Portland.  It is expensive, you would be looking at around $300k-$400k for a duplex and cap rates are around 4-6%.  However, you should be able to cash flow and realize increased rents over the next few years.  Let me know if you have other questions on the Portland market.

David Maldonado · Answer

I personally believe investing in an ADU in expensive markets in California is a great idea. I would wait on it until January of 2020 when sb 13 kicks in and you'll save a lot of money on the permits. How many quotes from contractors have you gotten? 100k just seems too high especially for a conversion of an existing area. If you're handy and have time, I highly reccomend you do some of the work yourself and you'll save a lot of money. I conveted my garage into an ADU for 35k (with permits) I outsourced and managed the electrical, plumbing, drywall and texture. Im planning on adding a detached 2bed 1 bath adu on the right side of my home early next year.

Having a stranger live close is not bad and will depend on if you properly screened them just like any other tenant. I fenced the backyard for the adu so they have their own backyard.

Damaso Bautista · Answer

@Pat Saperstein

Hey Pat,

I ponder this question all the time and for me it comes down to personality.  I know I have to be hands on and have eyes on the property.  I don't trust that someone thousands of miles away is going to have my best interest.

If you can get over having to share your property with you, the returns on an ADU are great in Los Angeles.  We have streams of people coming here every year so there is never going to be a shortage of tenants.

I see some crazy listings in my area.  People renting a single room for $1000 a month. So I am sure your ADU will rent for more.

Just my two cents!

Caleb Brown · Answer

If it was me i'd raise money for adding onto where you live. ROI looks good from the estimates. If you aren't comfortable with a stranger by you, you can live there for a year or two then move out or sell to get a multi. The other option is out of state like in the Midwest. It's best to stay local but you do get more bang for your buck around here.

Build an ADU or invest out of state?

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