All Forum Posts by: German Fernandez

 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

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

Happy to. Message me your questions.  

Call local plumber?