Why Real Estate Investors Should Consider ADUs In 2021

Los Angeles ADUs: A Real Estate Investor’s Perspective

Whether you’re a seasoned real estate investor or you’re just interested in earning additional income from a rental property, this article is for you. Now that the ADU laws & restrictions have drastically changed, investors are considering doing garage conversions and building ADUs on their single-family rental properties in Los Angeles. 

There’s a lot to know – everything from deciding on the best options, evaluating costs & revenues, and managing multiple tenants, to picking a floor plan and hiring a contractor. We regularly work with property investors on these types of projects, so we’d like to discuss why building an ADU could be considered one of the best real estate investments in Los Angeles. We’ll also share some of the most important points to consider before getting started.

Here at GreatBuildz, a free service that connects homeowners with reliable general contractors, we get inquiries every day from investors about ADU and garage conversion projects – here are some tips to get you started.

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Converting A Garage Into An ADU

It’s The Easiest, Fastest, and Most Affordable Option For Real Estate Investors

Every real estate investor can benefit from ADUs

The first thing to understand is the potential of an ADU or garage conversion on your specific property. First off, if you have a detached garage behind your home, you likely have the potential to turn that garage into an ADU.  A two-car garage is the right size for a studio or small one-bedroom unit (350-450 square feet). Also, the garage already has a foundation, walls, a roof, etc, so it’s relatively inexpensive and easy to convert it into an ADU.

In order to convert the garage, you’ll need to maintain 2 parking spots for the main house on your property, most likely on an existing driveway (side-by-side or tandem is okay).  Other than parking, Los Angeles doesn’t have any major restrictions for converting a garage to ADU. 

First, You Need an Architect

A small architect or design firm should be able to create your garage conversion plans for around $5000-$15,000 (this should include plancheck at the city building dept.).  In most cases, you’re likely doing very little with the exterior of the garage – just adding a front door and windows.

In addition, there shouldn’t be any extensive structural design as the exterior load-bearing walls are already in place. However, the architect/designer will still need to involve a structural engineer to assess the existing structure and add any structural elements necessary.

Our Greatbuildz contractors have been quoting a budget of $60,000-$100,000 for a complete garage conversion to ADU, including the kitchen, bathroom, etc. You can anticipate the total project to take 3-6 months from start to finish.

Any real estate investor should know about accessory dwelling units

No Garage? No Problem – Build a Detached ADU

If your investment property doesn’t have a garage in the rear, you can consider building a new ADU in the backyard.  Start by ensuring you have adequate space. The city requires a setback of 4 feet from both the side and rear property lines.

Also, a new ADU needs to be either 1) attached to the main home or 2) setback at least 10 feet from the main home (and any existing garage).  Los Angeles allows both one and two story ADUs and up to 1200sf of living space.

With all these options available, a real estate investor will really want to think about the size you want to build based on the costs of construction versus the potential rent.  You have the flexibility to build anything from a tiny studio to a 2 or 3 bedroom ‘home’.

Onsite parking spots are not required for a new ADU if your property meets the parking exemption criteria under the LA city ordinance.

Costs to construct a new ADU can also vary considerably based on size, number of stories, location, access, etc, but will generally range from $100,000-$400,000.  At Greatbuildz, we’re seeing contractors bid between $300-400 per square foot for new ADUs. 

Time is of the essence when it comes to planning an ADU investment. The entire process including plans, plancheck and construction will probably take 6-9 months.

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Return On Investment For ADUs As a Rental Property

Although there are significant up-front costs when constructing an ADU, you get much more in return.  First, you have permanently increased the value of your property, so you can now sell it for more. Additionally, you get a steady stream of income from renting the unit as well. 

Depending on the location, a studio ADU can earn $1,000-$1,500 in monthly rent, a one-bedroom should garner $1,500-$2,200, and a larger 2+ bedroom ADU can get $2,500-$3,000 in rent. Check comparable properties in your area for exact rent figures.

Remember, your ADU is practically ‘new’ as you’ll just have finished building it, so it will be appealing to potential renters. As far as your tenant’s utilities, you can have them pay those directly to the utility company (if you created separate meters) or you can have them reimburse you a set amount every month.

ADUs are great for any real estate investor

How Real Estate Investors Can Finance an ADU

Investors have multiple ways to finance a garage conversion or ADU project.  Obviously, you can pay for it from your own savings. Another option is to finance your construction by taking out a hard-money loan, which often has a short payback period (6 months – 2 years).  Finally, you can secure a home renovation loan, usually up to $100k, from a company like Lightstream or SoFi.

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Considerations When You Have Two Tenants On One Lot

Another important factor to consider with an ADU or garage conversion on your investment property is privacy and outdoor space for each tenant.  Now that you’ve built an ADU in the backyard, you’ve ‘compromised’ your main house because 1) there will now be another tenant in their backyard, 2) there is less usable backyard for their use and 3) they will have no garage to use in the case of a garage conversion.

Convert a garage for passive income for a real estate investor

You can’t solve for all of these issues, but there are things you can do to optimize your property for future tenants.  First, consider installing a fence that separates your two units while also creating private access to each front door as well as private outdoor space for each.

In the case where there is no garage for the main house, make sure they are allotted 2 parking spots on the driveway and install a large shed in the backyard for their storage needs. Finally, be cognizant that your main house might not get its ‘optimal’ rent because of your ADU, so consider this in your cost-benefit analysis.    

Investing In Rental Properties With ADUs In 2021

Recently, some new California state laws have been enacted that should have an impact here in LA shortly, especially for real estate investors.  Let’s discuss a few important ones.

First, the state has said that you don’t need to be the owner of a property to pull an ADU permit.  So, a real estate investor could rent a garage or ‘backyard’ to someone and allow them to build an ADU on the property (with no money out of pocket from you). A few companies have jumped on this idea, like Rent The Backyard.

ADU for a real estate investor

Other new state laws now prohibit HOA’s from restricting ADU’s in their neighborhood. Cities are also prohibited from imposing impact fees on ADUs up to 750sf. 

Finally, and maybe most interesting to investors, there are new laws that allow property owners to have both an ADU and a ‘junior’ ADU on their property.  A junior ADU (JADU) will be limited to 500sf and will likely need to be ‘part of the footprint’ of the main house. These new laws are very recent and it will take some time before it’s totally clear exactly what LA will allow, so make sure to talk to your local Building Department about their specific policies.

Before buying an investment property in Los Angeles, we hope you consider the opportunities presented with these new ADU regulations. If you want to learn more about the process and costs of building an ADU or garage conversion on your property, please check out my other blog posts below. Whether you’re a real estate investor or a curious homeowner, we can help.  When you’re ready to take the next step and talk to a contractor or designer/architect about your specific ADU project, please feel free to call one of our friendly Greatbuildz staff at 818.317.3567 or at www.Greatbuildz.com.

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