All Forum Posts by: Whitney Hill

Great insights, @Dan H.. A few further thoughts:

1-2) I do not know what more accurately means in this case. The appraisals are still coming in in general far below hands off costs.

Accurately meaning reflecting the increase in value the ADU will bring to the property. Unfortunately there is little conclusive data available here yet. I do agree with Dan that appraisals are more unpredictable, but would expect this to improve with increased activity & national recognition of ADUs in the lending world.

3) Not sure what is meant by stability. I do agree most brrrr do not add living space.

ADUs increase the rentable space/unit of a property and do not rely on an increase due to renovation alone. Depending on the scope of the BRRR, you could add space there, too, but point being ADUs always increase living space.

4) Do you think 6 to 7 months without income is good? 

Certainly the timing is better on a quick rehab vs. a permitted ADU project. But characterizing the timing of an ADU project as all funds due for more than a year is not accurate, even with modular construction where more is paid earlier. You may of course have costs committed to the project though for longer.

6) Sell faster than what? A SFH? I seriously doubt that as there are many more owner occupied buyers than investor buyers.

Correct, sell faster than a comparable property without the ADU. Again, this will be anecdotal, with few data points available yet (especially not at the granularity that would be nice, e.g. what are the days on market, sell prices, buyer pool for SFH with ADU, 2-4 unit with ADU etc). However, nearly 20% of households are now multigenerational, and 73% of buyers are non-investors.

7-8) However, from an accounting perspective, there is no profit until the initial negative position can be recovered....Then add in that the ADU is getting financed at home purchase terms, someone else has done the work, ADU income will start month 1.

Fully agree that lack of leverage is a huge issue. My response about short term rentals was to point out that you can rent all ADUs in CA for periods of 31+ days (in some areas less), and that plenty of viable options exist outside of STR.

9) By the rules, adding 2 ADUs does not qualify for conventional financing... duplex with 2 ADUs that get the conventional financing (contrary to the rules) seem to comp with a quad.

Right, Fannie/Freddie currently allow for one ADU, though Freddie does allow one ADU for a duplex or triplex. Some good discussion on this topic on an appraisal blog as far as how this might develop over time.

10) Higher per unit returns than what?

Compared to a single family property without the ADU, e.g. Dan's previous contention about ADUs lowering value of the SFH. But no doubt, developing 10 units is cheaper than 2 units.

11) I have seen jurisdictions apply the rent control to the ADU on day 1 when it was converted from an existing space that is over 15 years old (such as an old garage).

Good intel, and as Dan points out throughout, there is much more variability with ADUs at this point in their development than other options. We also see this on the construction side, with varying interpretations of code - so a large part of our job is advocating for homeowners to push back on local jurisdictions requiring improvements that CA state law prohibits.

@Michael Shea it's great that you are open to the important points @Dan H. raised, and I'm glad the cost info was helpful. I agree several of these could be deal breakers depending on your particular investment criteria. That said, I do want to respectfully offer some counterpoints to Dan's assessment that may provide a broader perspective on the value and feasibility of ADUs.

1-2. Appraisal Value & Financing: While it's true that ADU appraisals lagged behind costs a few years ago, the market is quickly catching up. Lenders are now recognizing ADUs more accurately, especially as national programs like Fannie Mae and Freddie Mac incorporate them into their guidelines. More fixed rate second position programs based on ARV (after adding the ADU) are also available now, providing more opportunities for leverage.

3. Effort vs. Return: Adding an ADU does require a significant effort. Unlike a BRRRR strategy, an ADU offers an increase in living space and potential income, contributing long-term value and stability, especially as the real estate market evolves.

4. Capital Outlay Timing: The capital required for an ADU is not all spent upfront. In fact, the majority of expenses - around 75-85% - occur during the last 6-7 months of construction.

5. Impact on Property Value: ADUs generally bring in more rental income than they could  possibly detract from the main home’s value. While it’s true that ADUs might reduce yard space or parking, the additional income stream easily offsets these downsides.

6. Market Demand and Multigenerational Living: There’s a growing demand for ADUs, particularly for multigenerational living. Many families are specifically seeking homes with ADUs. Realtors often report that homes with ADUs sell faster.

7. Rental Strategies and STRs: ADUs don't need to rely on short-term rentals to be profitable. Medium-term rentals (31+ days) are less regulated and still generate significant returns. There are many viable rental strategies for ADUs that can be adapted to local regulations.

8. Cost Comparison with Existing ADUs: Purchasing a property with an existing ADU can be cheaper than building one from scratch, but this isn't always the case. In high-demand areas like coastal San Diego, the potential for higher rents in prime locations can make building an ADU a more attractive option.

9. Financing and Exit Strategy for Multiple ADUs: Adding multiple ADUs or an ADU to a multi-unit property can complicate financing, particularly with conventional loans. However, this primarily affects a niche market. For most property owners adding a single ADU to a single-family home (or even adding two ADUs to a duplex), the impact on financing options is minimal, and the benefits of additional rental income outweigh these concerns.

10. Cost of Small-Scale Development: It’s true that building very small units can have a higher per-unit cost (we spend much of our day educating homeowners on the true all-in costs). However, ADUs can provide higher per-unit returns, especially in areas with high demand for housing. The scalability of ADUs also allows homeowners to add value incrementally without the risks associated with larger developments.

11. Rent Control Implications: The risk of an ADU bringing a single-family home under rent control depends on the local jurisdiction and regulations - it's not something I understand to affect our area. Often, this risk can be managed or avoided with careful planning.

Again, I think Dan always makes great points on why you should think twice about ADUs as investments. Many of our clients are families adding ADUs as a lifestyle choice, valuing the flexibility they offer. However, we've also seen plenty of our investor clients decide that an ADU made solid financial sense within their portfolios, especially when factoring in property appreciation. Wishing you best of luck in your research, Michael!

@Michael Shea you are asking the right questions! Lots of factors affect friendliness...

Fees: Google "All About ADU Permit Fees & Waivers" for a breakdown of these on average by jurisdiction in San Diego County. Encinitas is cheap, City of SD is expensive, Vista is brutal

Requirements: Stormwater management, surveys, soils reports -- these are big ticket items that vary a lot by city. Cities that require each:

Soils reports ($6-7K for report & required work): Carlsbad, Chula Vista, Encinitas, La Mesa, National City, San Marcos, Vista
Storm water management ($5-7K): Del Mar, Encinitas, Vista
Building Verification Survey ($3-8K): Del Mar, Oceanside, San Marcos

Utility upgrades are also a very important consideration, and City of SD in particular is enforcing more requirements than they have in the past, e.g. water fixture counts and requiring ROW work to upgrade. They also have lower fixture count levels than other cities.

Property Specifics: no matter what town you build in, you have to pick an ADU friendly site. Slope is not your friend, neither is poor access and there are many more to watch out for. Google "ADU Sitework & Utility Costs: 10 Hidden Costs."

Hope this helps!

@Doug Spence how did your ADU project evolve? Did you end up getting started? Would love an update!

My #1 piece of advice is to make sure you gather true apples to apples bids, that account for the entire scope of the project. To do this, you need to make sure and find designers/contractors that have built many ADUs and can properly determine what your full required scope will be.

Also, jurisdictions are tightening their interpretation of ADU rules, and we're finding MANY more plan check comments are coming back for items not previously requested. E.g. fire rated construction requirements on main homes, survey & soils reports, utility upgrades. This is happening across San Diego County (and also the state) as permitting departments catch up to demand and have gotten more experience. It was truly the wild west for a few years. Now much of our job is client advocacy & problem solving, because (expensive) roadblocks are part of many projects.

The reason for the wild swings in bids is: what is considered as part of the scope? The low bids likely don't account for the entire scope of work required to design, permit and build an ADU, including requisite utility upgrades and other site improvements. They may also not account for finishes, or budget appropriately for required permits.

Try googling "Comparing Quotes and Proposals from Different ADU Builders" for a full list of what to look for (I can't link here because it's my own article). You'll also find links to the full list of costs to consider. This will of course vary by jurisdiction, which is why it is crucial to work with a local builder who has actually constructed many ADUs and dealt with the pitfalls on previous projects. Otherwise, you will be their guinea pig and end up with change orders.

@Thomas Blocker Wanted to chime in with perspective here, as we have designed, permitted, and built ~100 ADUs in San Diego County. Please get a topographic survey. This is so important to avoiding massive issues when you ultimately begin sitework. A planimetric & limited topographic survey will add $2500-$3000 to your project -- it's a cost we actually front for our clients (but they are on the hook for if they end up not building the project). Before we made this step mandatory in our projects, we had to either absorb or pass along up to $20K+ in changes to sitework & foundation costs. Related to this, please also make sure and get a utility planning study done as part of your feasibility process. This means not only mapping the location of your existing utilities, but engaging with an experienced provider who knows how to work with your local utilities. Most new construction ADU projects will need a panel upgrade, potentially a conduit upgrade and right of way work depending on your utility setup. This is extremely complex work if you don't know what you're doing, can also delay your project by 6-9 months if you don't plan accordingly. Google "utility planning consulting."

More about surveys:
A planimetric survey maps out the existing conditions of your property, including the layout of buildings, trees, driveways, and other significant features. It provides a detailed “bird’s-eye view” of the property, which is crucial for understanding how the land’s contours and features will interact with the proposed ADU, which can significantly affect both the cost and feasibility of the project.

A limited topographic survey goes a step further by providing the vertical elevations of the property. This type of survey is crucial for ADU projects because it reveals the lot’s contours, slopes, and elevation changes, which are vital for foundation design and drainage planning. The “limited” aspect refers to focusing on areas critical for the project at hand, rather than a full topographic survey of the entire property, which might be necessary for larger-scale developments. For an ADU project, this means concentrating on the proposed construction area and its immediate surroundings to ensure that the ADU integrates seamlessly with the existing terrain.

Including a planimetric & limited topographic survey in the feasibility study allows for a more accurate assessment of construction costs and potential site-related challenges. It’s a proactive step that helps avoid costly surprises during construction and ensures that the ADU is designed with a full understanding of the site’s topographical nuances.

A Building Verification Survey (BVS) verifies that the ADU is accurately placed on-site in relation to the property lines and in accordance with the approved plans. The BVS is a follow-up field survey conducted at the installation of the foundation to verify the ADU’s location. In order to complete a BVS, note that a Boundary Survey must first be conducted to locate the property lines.

A BVS is a specific requirement that some cities place on projects that propose a new structure. Some cities require building verification surveys in all cases, while others require them when the ADU is within 1′ of a setback.

Thank you for the mention of our article.

This duo in Riverside has figured out how to make JADUs happen with LLCs in their jurisdiction. From what I hear, they have done hundreds. 

https://www.triplexmillionaire.com/

ADU Builder here, I know you were especially wanting to hear from us :) I'm down in San Diego and hope to offer a perspective of value, as we don't serve your area and I've devoted my life to ADUs for the past four years. We've designed, permitted and built over 100 ADUs (every one of them is on our website so you can see what we've actually done).

I do have to challenge (and chuckle at) the statement: "Any builder can build an ADU. They are just smaller houses. Nothing special about the construction aspect, just the zoning and regulatory part of them...."

This is akin to saying, "any attorney can handle your criminal trial. There's nothing special about the license; it's all in the trial preparation and strategy..." Would you entrust your criminal defense to a real estate attorney or a divorce lawyer?

So while the proper expertise is vital in a successful ADU project... yes, please do question the tiny house start-up companies, or anyone touting themselves as "ADU experts" without the evidence to back that up. You'll immediately be able to tell who has real expertise, and who just bought a franchise. ⚓

Here's what to ask (beyond the obvious questions you can google that you should ask every contractor):
-How many ADUs have you permitted and built? Where are the pictures of the completed projects?
-How will you plan for the utility connections required for my project? How will you know exactly what is required upfront? How do you plan enough lead time for the utilities?
-What was the most costly inspector requirement that you pushed back on and it turned out it wasn't required?
-What is your warranty policy and how do you handle warranty claims?

And in the end, what is your time worth? Do you want to learn the ins and outs of ADU law, local energy codes, and inspection requirements? How much visibility do you want into the fully loaded cost of the project upfront (vs. finding out through change orders)? The answers to those questions will help you determine how DIY you want to go, and how much you can leave up to chance.

I can't post links here, but for more, please google:
"Why you need an experienced ADU builder" - case examples where cities asked for tens of thousands of dollars of work, or flat out would not have allowed an ADU project, except for knowing when to push back

"ADU sitework & utility costs: 10 hidden costs" - dozens of costs you need to account for on your ADU project that I promise you haven't thought of and no one else will tell you about

"How to find ADU builders" - compares DIY route vs. other options, plus more on what to look for in a good contractor

Adding a note here in case others are looking for resources on this topic. We successfully permitted and are in the process of building a bonus ADU project. There are a number of restrictions to be aware of that were not evident until we actually took a homeowner through the process, saw the documents required etc. Full content on our blog, but here is an important section:

What are other key points of the Affordable Bonus ADU Agreement I will need to sign?

It's important to highlight several key restrictions that apply to the Affordable ADU:

1. No Related Renters: The Affordable ADU cannot be occupied or leased to the owner, any relatives (by blood or marriage) of the owner, anyone employed by the owner, or anyone connected to any entities involved in ownership of the property.
2. Student Dependents: The Affordable ADU may not be leased to student dependents, as defined in the U.S. Internal Revenue Code, unless their taxpayer guardian resides in the same unit.
3. Property Ownership: Individuals or households that own real property are not eligible to occupy or lease the Affordable ADU.
4. Liquid Asset Limitation: Eligibility is restricted to persons or households whose liquid assets do not exceed 110% of the annual Area Median Income. Liquid assets include cash, savings, marketable securities, etc., but not inaccessible retirement funds.

@Jay Patel what a fun time capsule experience! Four years ago we were just building our first half a dozen or so ADUs, and now we are up to 128 in progress and completed. With all that experience has come a very solid understanding of costs, and I'm sorry to report that it's all gone up. WAY up. This is mainly for two reasons:

1) Labor & material costs: the California Construction Index has gone up 38% since 2021. What cost $250K to build would be around $350K. While we don't do remodel work (e.g. garage conversions), I've heard from contractors who do that the typical range for all-in costs is ~$100-120K.
2) ADUs are not as wild west: in the early years, we saw inconsistent application of requirements for things like upsizing water meters & lines, soils reports, surveys, electrical panels, stormwater management (all depending on property specifics & jurisdiction). So now there are many, many more additional costs that we have to budget for. If you google "ADU costs San Diego," you should notice (after the paid links ;) ) our very detailed blog that breaks down what to expect into even more cost buckets, as well as dozens of additional costs to look out for.

To your specific question about the detached garage with water & electricity... again, remodels are not my specialty because we just do detached new construction. The requirements are also going to be different for conversions. But I would expect that having water & electricity there could save $10K in sitework/utility costs.