The Latest on ADUs
California has made it legal for homeowners to sell their ADUs separate from their house.
The pros of this- you can make money selling off a portion of your property and still keep your main house. The cons- you miss an opportunity to collect rental income from the ADU and you are effectively selling off a "value add". It is not for everyone and I suspect most property owners will opt to not sell their ADU, however they have the option.
That being said, ADUs are incredibly popular. ADUs are not just going up on single family properties, many apartment owners are converting carports or empty space on their property to add ADUs. In Los Angeles City, the desire for ADUs is so high the building department has created 75 approved standard plans for ADUs, which drastically streamlines the permit process and removes a lot of guess work. There is a mix of single store and 2-story options in there. LA Times did a story/ video on 5 things to know about ADUs.
This year the California Housing Finance Agency had a $40,000 grant that was so popular funding ran out in March 2023. Good news- the State is working to allocate more money. Keep your eyes posted on updates of when funding becomes available or sign up for the newsletter. This grant is for pre-development costs such as "site prep, architectural designs, permits, soil tests, impact fees, property survey, and energy reports."
The obvious question for most is, how much does an ADU cost? Well, that depends. The cost of an ADU can vary from $60,000 to $400,000 with many factors such as size, amenities, finishes, if it is a detached ADU v. a conversion, and the current building conditions of the property where the ADU is going.
The upside of this cost is that the ADU will increase the value of the property.
One consideration, an ADU will trigger a reassessment, but it will be based on the value of the ADU so the tax will be nominal per month compared to the market rent it could fetch. However, a tax advantage is that the ADU can be depreciated and property taxes are usually tax deductible.
Last bit of my research, the Federal government has passed a new ADU law that requires mortgage companies to consider ADU rental income when underwriting loans. This helps when seeking financing on a property with an existing loan or when a home owner is seeking financing to build an ADU.
Before building an ADU do your research.
Talk to your CPA about any tax advantages and disadvantages.
Seek out advice from any friends, family or real estate industry folk that have built or managed the building of an ADU. What was the process, cost and timeline?
Look at your financing options such as a second mortgage or HELOC. Keep in mind interest rates need to be factored into the long term monthly cost of an ADU.
Shop around and get multiple bids from vendors such as architects, engineers, and contractors. Also, check their references for any ADUs they have built.
Do market research on what a completed ADU could fetch in monthly income based on its size and amenities.
Research grants, credits, or other rebates to build ADUs, including those for first time home buyers if you fall into that category and purchase a property with the plan to build an ADU.
Research if your city will give the ADU separate utility meters and if not how you can do ratio utility metering, usually there are third party companies that do this.
Research your city's ordinances around ADUs and any housing laws that ADUs may be subject to, such as rent control jurisdiction.
An ADU might not make sense for everyone, but they are definitely interesting. They can be used as a space to house family, a work at home office that feels less "at home", or create a source of income. ADU may cost more a month than it generates in either income or benefit to you, which may make it difficult to justify. But, it is not very often you can add a whole dwelling to a property. As always, do your research.
The information in this post is for general information purposes only. Nothing on this post should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.