All Forum Posts by: Marisela Arechiga

I own a company that specialized in building ADU's in Los Angeles and while I can't speak to the demand in your particular zip code what I do know is that each ADU we've built has created an ROI for our homeowners. The process is very involved as you'll have to navigate pre-construction activities that involve architectural plans and approval from the city and then the construction activities (Shovel to soil) take anywhere from 5-9 months depending on how much your building. 

What I will say for certain is that if you are going to build an ADU you should not do this on your own unless you have experience in building. Unlike a kitchen or bathroom renovation your literally building a second house on the property and your dealing with everything from grading, soils, foundation, electrical, plumbing, framing etc. If you don't know the process you leave yourself very vunerable. Find yourself a good team who builds ADU's has a project management team and of course has all the licenses and insurances to protect your property.
Quote from @Michael Adamo:

Hi BP Community,

I’m exploring adding one or two ADUs to a property I own in the Miracle Mile area, near 3rd Street and La Brea in Los Angeles. My goal is to understand the current demand and rental potential for ADUs in this part of the city, as well as the costs involved in building. I'm particularly interested in any insights or recent experiences with the following:

1. Rental Demand and Rates: What is the current rental demand for ADUs in this neighborhood? Are 1-bedroom units more popular than studios or 2-bedrooms? Any insights on rental rates for ADUs would be helpful.

2. Actual Cost to Build: For those who have built ADUs in LA, what were the actual costs you encountered? Do you recommend using a general contractor, or would it be more cost-effective to handle it myself with subcontractors?

3. Occupancy and Market Trends: How is the ADU market trending in Miracle Mile and nearby areas? With the new subway line being built nearby, do you think this could boost demand for smaller, ADU-style units?

4. Advice on Layout/Design: For those who have added ADUs, do you recommend standalone units, garage conversions, or a combination of both? My property has a rear detached garage with alley access, so I’m exploring options there.

5. General Tips for ADU Investments in LA: Any advice on maximizing ROI from ADUs or common pitfalls to avoid when building and managing ADUs in LA?

Thanks in advance for any insights you can share. I’m excited to learn from others who have experience in the LA rental market, particularly in this neighborhood.

$85K seems extremely low for a garage conversion. Typically it is at a minimum $100K but likely closer to $150K and that's with no addition. An independent sewer line alone can be as much as $10K. My hunch is that's $85K for the garage itself before plans, permits, engineering, sewer line, electrical panel, etc. 

The thing with ADUs is it is for cash flow. I have an ADU on my property and it was the best thing I did. But I did it pre inflation so the total cost was around $75K at the time.

The question is really about opportunity costs. Can you use that $85K towards another property that would generate the same or more cash flow. Even if it is slightly less cash flow, you now have a second appreciating asset. Plus the challenge with mid term is you are generally on the hook for things like internet, utilities, etc. That can hurt your cash flow and could equate to the same as a traditional long term hold without the headache and management.

I'm not saying don't do it, I'm saying you have to look at all options. 

Quote from @Marisela Arechiga:

Thanks for your input! In my analysis the cost for an ADU in kern county would run about $85K and I have saved about 75% of that right now.

 Your estimate seems low, but even at that cost, it will not add that value.   You will be lucky if it adds $50k of value.  Building small units in small counts is expensive development.  Add the financing challenges and that you existing structure likely will become rent controlled.  

Here is a list of why 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.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

I believe you are typically far better purchasing a different property with conventional financing than adding an ADU. If you want an ADU, buy a property with an adu. You will likely achieve a better return than adding an ADU.

Good luck