All Forum Posts by: Carlos Olarte

Hey Carlos, all depends on your lot size, what kind of unit you can build there and the rental return you can get. 

Building an ADU is not like building a structure on a vacant lot. It is usually difficult to take money against it from the bank, it might not be a 1:1 value add - meaning if you invest 100k into an adu it might not raise your value by 100k

That being said, it can be pretty lucrative especially in expensive and sunny CA - since building lots are no where to be found and existing real estate returns are very poor.

My partner builds these units. In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m. 

Even in philly in D class area it is tough to hit the 1% rule. Here you are basically hitting it without needing to manage a property in another location. IMO those numbers make a lot of sense.

I think its better of an investment than trying to buy OOS. If you need me to connect you to him I am happy to do so

>Is it worth building Adu's in Orange County / Long beach ?

In general it is not worth building a single ADU for a variety of issues but the largest is the cost to add the ADU is typically far greater than the value added by the ADU. This creates a large negative equity position. This negative equity position consumes the initial cash flow to re over the negative equity position. It often takes many years to recover the negative equity position. I invite you to search this forum about ADU appraisals. Building a single small unit is the most expensive residential development..

Here is a list of why adding a single ADU in dingle family zoned areas 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 than building a single ADU.
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 an 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.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

Good luck

I have not done it myself, but have helped some people with financing. It's all about the numbers. If you can find a fixer at a good price, with room for an ADU, and the comps are good, then you have a deal.

Are you planning on flipping or long-term holds?