Why Build an ADU?

October 02, 2020

In 2018, my husband and I decided to buy our first investment property in the Southern California market. Our goal was to increase our income during retirement.

We had been reading about ADU’s (accessory dwelling units) and learning of the benefits of maximizing your land through AB 68 and AB 881 along with permit fees being cut in half which was a great incentive along with doing our small part to help the CA Housing Crisis.

In reviewing the financials before purchasing the house, we realized the only way to make it financially viable was to build an ADU that we could rent out to help offset the mortgage, property tax, and maintenance expenses. We built an in-depth financial calculator to compare the market rate rent to the cost of what we would spend building the ADU, how long it would take to pay off and when we could start to see income from the unit going towards the principal portion of our mortgage payments, and ultimately, cash flow. Without calculating this and taking into account all expenses; we wouldn’t have felt comfortable moving forward.

While we had done some remodeling projects in the past, this felt major to us but from a contractor’s perspective, converting a garage into an ADU was a small project. For us, it wasn’t a small investment and we needed to have enough cash on hand to pay our contractor and the fees, taxes, and permits.

At this point in time, October 2020, there still isn’t funding available for ADU’s which makes it a major hurdle for homeowners who would expand if they could financially afford to do so. AB 69 is trying to change that and I hope it passes. “The bill would require the program to be developed to provide partial loan guarantees and other credit enhancements for homeowners in order to induce private lenders to issue loans for the construction of additional dwelling units, as specified. The bill would require the state to partner with private lenders with a history of originating federally backed construction loans or loans for accessory dwelling units and require originating lenders to retain a specified amount of risk determined by the Treasurer.”

As we started to talk to contractors, we learned that the quotes were all over the place and without extensive industry experience, the “apples to oranges” quotes were challenging to decipher and compare. Six months of meeting with contractors, concrete pouring vendors and getting bids; we almost decided not to do it. The process was lengthy and we still didn’t know exactly what we would end up spending. TIP: I suggest you pad your final cost 20%. We found an honest contractor that was able to convert a large detached garage into a 2 bedroom/1 bath ADU in just 3 months. It was important to us to be respectful to neighbors and the neighborhood. By law, ADU’s are for long term tenants so we were able to dismiss any concerns about it being a short-term vacation rental. We were able to rent it out weeks after it was ready. It has been rented out for over a year now and we are grateful to be able to provide housing to tenants who wanted to live in a home, a residential neighborhood and have a yard and pets.

Building an ADU is a win/win. It’s a benefit to the tenants and to you as a homeowner. Rental income aside, building an ADU has become increasingly popular for multi-generational families. Whether kids are transitioning from college to living on their own or parents are coming to live with kids; it’s a great solution.

Written by the ADUROI Team, to help you understand if an ADU makes financial sense.

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