How Much Does it Cost to Build an ADU?
January 1, 2023
The cost to build an ADU can vary widely depending on a number of factors, including the size and design of the ADU, the materials used, and the location of the property. According to a report by the National Association of Home Builders, the average cost to build an ADU in 2019 was $152,000, while a 2021 report by HomeAdvisor showed that the average cost to build an ADU in the United States was $72,214.
Other sources suggest that the cost to build an ADU can range from around $150 to $400 per square foot. This means that a 500-square-foot ADU could cost anywhere from $75,000 to $200,000 or more.
Here are some of the factors that can affect the cost of building an ADU:
Size: The larger the ADU, the more it will typically cost to build.
Materials: The cost of materials can vary depending on the quality and type of materials used. For example, high-end finishes such as granite countertops or hardwood flooring can increase the cost.
Location: The cost of labor and materials can vary depending on the location of the property. Building an ADU in an area with high labor costs or building restrictions, for example, may be more expensive.
Site preparation: If the site requires extensive excavation or grading, this can add to the overall cost. By the same token, if the site is an existing structure, such as a garage or an exisiting attached space, it may signficiantly reduce costs.
Permits and fees: Permit and impact fees can vary depending on the location of the property.
Existing utilities: If the ADU needs to be connected to existing utilities, such as water, sewer, and electricity, this can add to the overall cost.
According to Bankrate, which breaks down some of the different ADU types by cost, basement and garage conversions are the most cost effective, at $10k-$30k, while an attached addition will cost $40k-$125k, and a detached structure will $100k+. Adding a bathroom to any of these, if not existing, will set you back another $30k.
To reduce time and costs, it is worth looking at off-the-shelf, pre-approved plans that many municipal building departments provide, as well as prefab units from Adobu, Mighty Buildings, and the like, as these can be delivered to your home in a very short time frame, and often these companies will handle utility hookups, permitting, and provide financing in house.
It's worth noting that while building an ADU can be a significant investment, it can also provide long-term benefits such as rental income, increased property value, and additional living space for family members.
Should I purchase a home with an un-permitted unit?
Should I purchase a property with an un-permitted unit?
January 5, 2023
Long before accessory dwelling units (ADUs) became a hot buzzword in California Real Estate Investing circles, homeowners across California, especially in urban areas such as San Francisco, Oakland - Berkeley, and San Jose, were adding additional units to their properties, either for themselves, their families, for extra income, or all three over time. Sometimes these were permitted by the local building authorities, but more often, due to government bureaucracy and restrictive zoning covenants, these were done without the benefits of permits oversight from local governments. As such, these un-permitted units can vary widely in condition with respect to building codes.
There are many multi- and single- family properties in the Bay Area that have un-permitted units. These may also be known as illegal units, illegal accessory dwelling units (ADUs), or un-permitted units. Some Realtors may also not explicitly use these terms, instead placing a disclaimer such as “buyer to verify legality of extra unit” or “buyer to do due diligence on unit count” in their listing descriptions.
Firstly, it's important to note that un-permitted units can come with significant risks and potential liabilities. For example, if the unit is not up to code, it may pose safety hazards for tenants or violate zoning regulations, which could result in fines or legal action. Additionally, if the un-permitted unit is discovered by local authorities, you may be required to remove it or pay penalties.
Secondly, if you're planning to finance the purchase of the building, lenders may be hesitant to lend on a property with un-permitted units, as it can make the property more difficult to sell in the future.
That being said, purchasing a multifamily building with an un-permitted unit may also come with some benefits. For example, the additional unit could provide an additional stream of rental income, which could increase your return on investment. Additionally, if you're able to obtain the necessary permits and bring the unit up to code, it could increase the overall value of the property.
Ultimately, whether or not you should purchase a multifamily building with an un-permitted unit will depend on your specific circumstances, risk tolerance, and goals. Before making a decision, it's important to thoroughly research the property, consult with professionals such as a real estate agent, attorney, or inspector, and carefully consider the potential risks and benefits involved.
In our next post, we’ll be discussing the process for obtaining permits for an un-permitted unit and bringing it up to code. Stay tuned!
Legalizing an Un-Permitted Unit
Legalizing an un-permitted ADU
January 20, 2023
Legalizing an un-permitted unit can be a complex and time-consuming process, but the difficulty level can vary depending on a number of factors. Here are a few considerations that may affect how hard it is to legalize an unpermitted unit:
Local Regulations
The difficulty of legalizing an un-permitted unit will depend on the specific regulations and requirements of your local government. Some areas may have more lenient rules for legalizing un-permitted units; in fact, as of this writing, Oakland, San Francisco, and Berkeley all have unit legalization programs or amnesty programs as of this writing, while others may have strict requirements or may not allow it at all.
Building Code Compliance
Not all un-permitted units were built equal. I’ve seen un-permitted units where you it was 100% built to code, and others with 6’ ceilings. If the un-permitted unit was not constructed to meet building codes and safety standards, you may need to make significant renovations or upgrades in order to bring it up to code. This can add to the difficulty and cost of the process. For example, if there are no egress windows in a basement unit, or the ceiling height is under 7’, these conditions may result in very significant costs for upgrades.
Legal & Professional Assistance
Depending on the complexity of your situation, you may need to seek the help of a legal professional and an architect to navigate the process of legalizing an un-permitted unit. This can add to the cost and time required to complete the process.
Overall, legalizing an un-permitted unit can be a challenging process, but it is often worth the effort if it enables you to bring the unit up to code, reduce liability, generate additional rental income, and create additional property value. It's important to thoroughly research the specific regulations in your area, consult with professionals as needed, and be prepared for a potentially lengthy process.
For our next post, we’ll be discussing building an ADU on your property.
What Should I know if I want to build an ADU?
It all begins with an idea.
January 31, 2023
If you're planning on building an accessory dwelling unit (ADU) in California, there are a few things you should be aware of. Here are some key considerations to keep in mind:
Zoning and permit requirements: Before you start building an ADU, you'll need to check with your local government to see if your property is eligible for an ADU and what the zoning and permit requirements are in your area.
Design and construction: You'll need to hire an architect or designer to help you create plans for your ADU that meet local building codes and zoning regulations. You'll also need to hire a contractor or construction team to build the ADU. Many cities also have off-the-shelf plans, which are City pre-approved ADU plans that can streamline the permitting process, reducing time and cost.
Cost: The cost of building an ADU in California can vary widely depending on a number of factors, such as the size and complexity of the unit, the materials used, and the location of your property.
Financing: There are a number of financing options available for building an ADU in California, including loans, grants, and other programs. You'll want to research these options and see what you qualify for before starting the construction process.
Rental requirements: If you plan to rent out your ADU, you'll need to be aware of local rental requirements and regulations. For example, some areas have restrictions on how long you can rent out an ADU or may require you to live on the property.
Property management: You'll need to be prepared to manage your ADU and its tenants, which can involve tasks such as finding renters, collecting rent, and maintaining the unit.
Overall, building an ADU in California can be a great way to increase your property value and generate rental income. However, it's important to do your research and be prepared for the requirements and costs involved in the process.
The Effects of ADUs on Property Value and Financing
It all begins with an idea.
February 5, 2023
The impact of an ADU on property value can vary depending on a number of factors, including the location of the property, the size and quality of the ADU, and the local real estate market. In general, however, having an ADU on your property does increase its value, as it provides additional living space and can generate rental income.
In the Bay Area, where real estate values and rents are high, ADUs can generate substantial ROIs, as both property values and rental rates are high, and even if a buyer doesn’t wish to be a landlord, California has the second-highest percentage of multi-generational families in the U.S., generating additional demand for homes with ADUs here.
According to a study by the National Association of Realtors, about 20% of homebuyers said that they would be willing to pay more for a property with an ADU. However, it's worth noting that the exact increase in value will depend on a number of factors, such as the cost of building the ADU, the rental income it generates, and the demand for rental units in the local market.
Financing:
If you are building an ADU(s) and plan to finance it with a loan, the lender will likely require an appraisal of your property before approving the loan. The appraisal will take into account the value of the property with the ADU and without the ADU to determine the overall value.
If you plan to rent out the ADU to generate rental income, the lender may consider that income when evaluating your loan application. Rental income can be used to offset some of the costs associated with the loan, which could make it easier to qualify for financing.
In some cases, homeowners may be able to use the equity in their property to finance the construction of an ADU. For example, a homeowner could take out a home equity loan or line of credit to pay for the construction costs. This can be an attractive option for homeowners who have built up equity in their property and want to use it to generate rental income or provide additional living space for family members.
If you are purchasing a home with a (permitted) ADU(s), 75% of the income (estimated or actual) from that unit(s) can be used to qualify for the loan. Often, this results in a lower net mortgage payment after renting the unit whilst having more purchasing power.
Something that is a huge advantage with ADUs that often gets overlooked is that, while ADU income can still be used to qualify for additional funds, it doesn’t trigger the additional unit in underwriting criteria. This means that a Single Family Home with an ADU is still considered a Single Family Home, a Duplex with an ADU is still considered a Duplex, a Triplex with an ADU is still considered a Triplex, and a Fourplex with an ADU is still considered a Fourplex.
The implications of these classifications is that a Single Family Home with an ADU(s) will still qualify for SFH financing, a Duplex with an ADU(s) will still qualify for Duplex financing, so on an so forth. This underwriting quirk doesn’t matter much if you have 20% down for an owner occupied purchase or its an investment property, but it does matter if you have a 3.5% downpayment (FHA loan) or 5%-20% down payment (conventional loan), as conventional loans require at least 15% down for 2+ units, and FHA loans require self-sufficiency (75% of total rents must be equal to or exceed the PITI payment, which is hard to achieve in the Bay Area) for 3+ units. 5+ units also usually require commercial financing at a significantly higher interest rate with at least 25% down, but an ADU or two may allow you to purchase 5+ units with residential financing in the form of a tri- or four-plex with ADU(s).
It's worth noting that the specific impact of an ADU on property financing can vary depending on the lender, the location, and specific circumstances of your situation. If you are considering financing an ADU, it's a good idea to consult with a financial professional or lender to better understand your options.