Taking on an ADU in MA now or later?

[Ethan McRae]

With the new Affordable Homes Act , come Feb 2nd 2025, you can build an ADU by-right and also use the ADU as a long-term rental in Massachusetts. Said differently, you won't need a special ADU permit to create an ADU.

I'm interested in potentially purchasing a single-family home in eastern MA (Norfolk or Middlesex county), and doing this exactly. The ultimate goal would be to live more affordably with the help of rental income, and then to cash flow after moving out. However, I have some reservations about buying a house before seeing how things shake out after Feb 2nd for a few reasons: 

- Towns seem very unclear about how they will adopt this new law. Many towns don't have any ADU ordinances. The towns that do have ADU guidelines could completely change their rules. I wouldn't want to buy a house today with an ADU plan in mind only to find out that it wouldn't work once guidelines change later on.

- From what I understand, just because you can build an ADU by right doesn't mean you can build whatever structure you want. It seems like towns could dictate if you can build an attached vs detached adu for instance. I worry that towns might make the zoning requirements for ADUs so specific that it would just be too cumbersome/costly to pursue this.

- Towns could potentially challenge the law if they don't love the idea of people living in the backyard of SFHs. That would make it tough to pursue this for obvious reasons. 

Really seems like the smart move is to just hold on and wait to see what happens in early spring next year, but if anyone feels differently, I'm all ears. Is anyone planning on taking advantage of this new law? I'd love to hear about your general strategy. 

[German Fernandez]

Hey Ethan,

I'm actually in the same position as you, except I already have a house that has a detached garage I want to convert into a ADU, just wondering when I should start.

[Dan H.]

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs in my CA market is typically a poor RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. 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.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (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 currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.

Good luck

[German Fernandez]

Quote from @Dan H.:

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs in my CA market is typically a poor RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. 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.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (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 currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.

Good luck

This question is more for my specific property but how do you feel about properties that need less work to convert into a ADU? I have a big garage that has electricity and plumbing already and has a second floor. This property shouldn't cost as much in my understanding. Everything you've mentioned does make sense. Doing this like a brrrr I see as the best bet, for example my property does still have room for improvement adding a bedroom and bath to the primary structure and then the ADU. However, I do agree the risk is the appraiser still may not appraise the ADU enough.

[Dan H.]

Quote from @German Fernandez:

Quote from @Dan H.:

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs in my CA market is typically a poor RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. 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.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (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 currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.

Good luck

This question is more for my specific property but how do you feel about properties that need less work to convert into a ADU? I have a big garage that has electricity and plumbing already and has a second floor. This property shouldn't cost as much in my understanding. Everything you've mentioned does make sense. Doing this like a brrrr I see as the best bet, for example my property does still have room for improvement adding a bedroom and bath to the primary structure and then the ADU. However, I do agree the risk is the appraiser still may not appraise the ADU enough.

 Note my response is for my market and may not hold for other markets.

I look at large volume flippers for guidance.  What I see is that they in single family zoned areas they often will convert other living space (craft rooms, offices, finished wood shops, etc) to ADUs but do not convert garages.   Garages are often cheaper to convert to ADUs than ground up construction, but not cheap enough to obtain a profit worth the effort.  I have also seen some garage conversion ADUs get valuations below ground up construction.  


Good luck

[German Fernandez]

Quote from @Dan H.:

Quote from @German Fernandez:

Quote from @Dan H.:

In CA we have had statewide ADU laws since 2019 and every year they add new statewide ADU laws.

The biggest issue with ADUs is small units in small count is very expensive development. Combine this with poor ADU valuations (especially in single family zoned areas) result in hands off ADU additions costing significantly more than the value they add. This results in an initial negative equity position that consumes the initial cash flow. If using realistic expense estimates (such as the50% rule), this negative equity can take years to recover.

ADU providers (designers, developers, etc) state the appraisals have not caught up with the true value of he ADU.  After 5 years and very little progress on the ADU valuations I suspect the ADUs simply do not have a value equal to the small unit, small count cost and never will.  

Here is a list of what adding ADUs in my CA market is typically a poor RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. 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.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (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 currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.

Good luck

This question is more for my specific property but how do you feel about properties that need less work to convert into a ADU? I have a big garage that has electricity and plumbing already and has a second floor. This property shouldn't cost as much in my understanding. Everything you've mentioned does make sense. Doing this like a brrrr I see as the best bet, for example my property does still have room for improvement adding a bedroom and bath to the primary structure and then the ADU. However, I do agree the risk is the appraiser still may not appraise the ADU enough.

 Note my response is for my market and may not hold for other markets.

I look at large volume flippers for guidance.  What I see is that they in single family zoned areas they often will convert other living space (craft rooms, offices, finished wood shops, etc) to ADUs but do not convert garages.   Garages are often cheaper to convert to ADUs than ground up construction, but not cheap enough to obtain a profit worth the effort.  I have also seen some garage conversion ADUs get valuations below ground up construction.  


Good luck

 Yes thanks for your input.

I can see why flippers would not want to do garage conversions. I guess this strategy is more of a long-term buy and hold strategy. Usually when I hear of someone converting their garage it's the house hacker willing to move into the conversion and lower their living expense. But yes I guess this strategy may not be for the person looking to get the highest return on investment.