Should I Buy a Home and Build an ADU?

If you are ready to buy a new home you should consider the answer to this question. “Should I buy a home and build an ADU?”

According to Millionacres, a Motley Fool site, the answer is “Yes” because it “adds value to your property over the long term”.

 

KEY TAKEAWAYS

• The Accessory Dwelling Unit (ADU) is a separate residential building occupying part of the primary residence lot.
• ADU examples include a detached garage with an apartment on top or a guest house.
• Depending on state laws and local zoning ordinances the size and number of ADUs allowed varies.
• ADUs cost money to build and increase the monthly utility bills.
• Yet, the rental income outweighs the costs over time.
• Buying DIY Home Kits and 40-foot steel containers converted into homes are cheaper than using a builder.
• California enacted a new law in 2022 allowing single-family residence owners to split their large lot into two and add up to two duplexes.
• California has 410,000 California lots considered “market feasible” to split a lot and develop up to four housing units.
• San Diego County has 28,500 lots feasible to develop up to four housing units.

 

What Is An ADU?

 

An Accessory Dwelling Unit (ADU) is a secondary apartment or house built on the lot of an existing primary home. An ADU provides the property owner with additional income through rent. Or, houses a family member known as a “Granny Flat” in San Diego. Or, a “Mother-In-Law” in other locations.

ADUs are self-sufficient living units with their own bathroom, kitchen, and energy and water connections.

 

ADU Pros

• An ADU provides extra income from rents;
• You get tax benefits operating a rental property with deductions;
• ADUs add value to your property; and
• An ADU adds more usable space.

 

ADU Cons

• An ADU costs money to build, increases property tax, and adds upkeep and utility costs;
• ADUs used as rentals requires maintenance; and
• An ADU may take up space otherwise useful for another purpose like a garage or storage, or a pool.

 

Got Questions?

 

Explanation of the ADU Pros

 

Let’s explore the Pros of an ADU in greater detail.

 

Increase Property Value and Potential Resale Value

Over time, the amount of money you put into building an ADU becomes small compared to the added value when you sell your home.

Homes with an ADU will attract more buyers interested in the different ways for using the second structure. For instance, professionals needing a large home office or artists wanting a separate workspace. Of course, buyers looking at the rental income will see how affordable your home becomes like helping to pay the mortgage.

 

Rental Income – Short Term & Long Term

An ADU gives you options with the types of rental income. For instance. Long-term rentals offer financial security. Or, short-term rentals help cover home expenses.

 

Private Guest Accommodations

Having a self-contained housing unit for out-of-town guests makes it easier for even extended periods. Your guests will cause less stress on your family by not sharing the kitchen, bathrooms, living room, or moving your children into one bedroom. This results in minimal disruption for you and your family.

Housing elderly parents or grandparents in an ADU gives you and your family time to spend together. Yet, you still maintain your daily schedules. A much better option than paying to put them in a nursing home.

In addition, the guest ADU situated around a communal outdoor space lets you spend evenings outdoors while allowing persons to retreat to their private quarters at night.

 

Low-Cost Housing for Adult Children

A detached ADU is a great place for your adult child to stay near you while attending a nearby college or getting back on his or her feet. It will cost a lot less than buying a housing unit or paying for the rent in a pricier apartment.

This gives your adult child a separate space to gain some independence while saving money. A great step towards helping your child transition from the nest to self-sufficient

 

Separate Space to Work From

Home business in a detached structure gives you more privacy and fewer distractions and interruptions. It’s also perfect for a workshop or an art studio or as a conference room for meeting clients with a kitchen and bathroom.

Working so close to your home saves you commuter time, and parking or public transportation costs.

This will save you money from renting an office.

 

How Much Value Does an ADU Add to Your Home?

 

It depends on the market. In most cases, it will add value due to its income stream. Yet, predicting future value when you may sell your home is difficult to predict.

Real estate and housing markets’ value fluctuates depending on the economy, mortgage rates, and local housing demand.

ADUs add value in other ways. For instance, helping out an elderly family member to live in his or her own home rather than in an assisted living facility saves expensive costs. Also, a young family member may gain from living at home until becoming financially independent.

Thus, an ADU offers value to an adult child moving home after college or an elderly parent. You will save money from not paying for an expensive assisted living facility or buying a separate housing unit.

 

Financing ADU Construction

 

Many options exist to finance an ADU construction which includes:

• Homeowner equity loan or a home equity line of credit (HELOC);
• Renovation loan;
• Construction loan; or
• Prefab ADUs manufacturers offering to finance.

Note: Financing ADU loans may carry a higher interest rate than your mortgage. Like a construction loan for a rental home. That’s why using your home equity loan may become a cheaper option.

 

How Much Will It Cost to Build an ADU?

 

Here is a link to an architect firm in Irvine that specializes in building ADUs. Building an ADU from scratch could cost you at least $150,000 for an architect, building materials, labor, and local permits.

Luckily, one of our Realtors recently published a blog post about the costs of building an ADU.

How Californians Can Build 2 Duplexes on One Lot in 2022

This blog post explains how you can buy prefab ADUs online delivered to your lot from several U.S. manufacturers ranging from under $10,000 to $90,000. It depends on the style, size, number of bedrooms, and materials. Most either arrive pre-constructed or assembled by two adults in three days.

In addition, you must hook up electricity, water, and plumbing to the prefab ADU. Also, you may need to prepare the land for the new structure.

 

California Laws About ADUs

 

In California, decades of local zoning rules created a large number of single-family homes. In the past few years, the state experienced a housing shortage due to a population increase and few apartment units.

California Governor Newsom signed several new laws in 2021 that took effect on January 1, 2022. They intended to increase housing units across the state. The most important one for homeowners is:

SB 9 (Senate Bill 9) allows California homeowners with a residential lot of at least 2,400 square feet to add up to three housing units for extra income.

 

Explanation of Current California Laws About ADUs

 

A very good summary and explanation of the new SB 9 law published by the WeLease Property Management Company in its blog post titled:

How to Develop 28,500 Lots in San Diego County in 2022

Don’t let the title deceive you. It explains the California SB 9 law in great detail including how 410,000 California lots are “market feasible” to develop up to two duplexes on one lot.

 

Should I buy a home and build an ADU? – Conclusion

 

After reading this post, the answer is “Yes” to: “Should I buy a home and build an ADU?”

After finding out state and local laws regarding ADUs and estimating costs, the rental income outweighs the costs over time. Especially if you buy a DIY Granny Flat or a 40-foot steel container converted into a two-bedroom home.

Besides rental income, an ADU increases the value of your property creating greater equity.

Even if you don’t rent the ADU you can use it to house a family member or as a studio, home office, or workshop. Also, it provides privacy and self-efficiency for a house guest.

 

California Encourages More ADUs

 

SB 9 and other recent laws seek to increase housing throughout California. Single-family residency homeowners with at least a 2,400 square foot lot can split the lot into two and build ADUs up to two duplexes.

A recent study estimates 410,000 California lots are “market feasible” for the development of up to two duplexes on one lot. The same study estimate 28,500 lots in San Diego County also are market feasible for splitting a single residential lot in two to add up to two duplexes.

 

Want to Buy a Home in San Diego to Add an ADU?

 

Single-family homes with large lots are common in San Diego County. Buy one and split the lot into two and build a Granny Flat, or a duplex, or two duplexes.

Big Block Realtors can help you find the ideal home with a large enough lot to build ADUs in San Diego County.

Contact us to find out what opportunities exist in the greater San Diego area to buy a home and expand it for greater equity, income, and space for you and your expanding family.

 

 

Steven Rich, MBA – Guest Blogger

 

 

 

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