The next California Gold Rush?
Let’s talk about Accessory Dwelling Units (ADUs). Are they right for you?
You know them as carriage houses, granny flats, mother-in-law suites, or duplexes. The official real estate term for these types of living arrangements is actually Accessory Dwelling Units (ADUs) or Junior Accessory Dwelling Unit (JADUs). The idea is to carve out a piece of a property that creates a secondary dwelling. Typically, it will have its own living area, kitchen, bathroom, and entrance that utilizes the water, electric and heat from the primary unit.
Although this concept has been around for ages, ADUs have recently become more popular as one way to combat the affordable housing crisis in California. And now, the ADU trend promises to become a full-fledged tidal wave thanks to several bills Governor Gavin Newsome recently signed into law. Taking effect on January 1, 2020, this package of legislation is designed to help alleviate the housing shortage and capitalize on the benefits of ADUs, incentivizing their construction and revising older zoning laws. The new legislation permits homeowners, for example, to build small independent structures (usually less 1,000 square feet) on their properties with less red tape.
Recent Growth in ADUs Projected to Accelerate
No doubt, you can expect to see ADUs popping up throughout the state as backyards, garages, and homes effectively become duplexes or triplexes, continuing a recent pattern. According to research conducted by the San Jose ADU construction firm Abodu, permits to build ADU’s in California jumped by nearly 50 percent from 2017 and 2018. That lead the state to grant roughly 7,000 ADU permits last year.
But in the real estate blog, Curbed, Abodu predicted recently that the 2020 ADU total could dwarf that. “There’s no reason Californians can’t build 10,000 ADUs statewide in 2020,” Abodu commented, further forecasting the potential for far greater growth. The firm assessed that “San Jose alone could support 120,000 ADUs, while the entire Bay Area has one million lots that could build an additional unit.”
Pros & Cons of Adding ADUs for added Income
When opportunity knocks, it’s tempting to throw open the door and add more space to create what would appear to be an easily managed rental property. But investor beware. There’s a lot to know before erecting your ADU.
Is it legal?
Before building an ADU, find out if your property is actually zoned for it. In a series of articles discussing the new regulations, law firm Farella, Braun + Martell noted that Assembly Bill 68 (AB 68) adds to recent state laws to increase flexibility regarding ADU development and location. That’s the good news. However, their article states that, “under existing law, local agencies must ministerially approve applications for one ADU per single-family lot if the unit is contained within the existing space of the single-family dwelling or accessory structure, has independent exterior access from the existing residence, and the side and rear setbacks are sufficient for fire safety.” In other words, there may be building codes you’ll have to adhere to regarding fire safety and egress.
Adding an ADU without authorization can cause headaches now and down the road, including refinancing obstacles or fines. If you have any doubt, consult a real estate attorney who’s up on the new laws before proceeding.
Will it be profitable?
Well, that depends on several factors related to your particular property and personal situation. What works in one market may fail in another. And in addition to weighing your investment costs (construction, legal fees, zoning, etc.), you’ll need to consider fixed costs (taxes) versus variable expenses (maintenance and zoning fees).
Are you ready to manage a property?
“Sure,” you’re thinking. “How hard can it be to manage a few rooms?” Well, what you don’t know really can hurt you. Before you get in too deep, talk with real estate agents in your region. Research rentals fees and popular ADU options locally. Meet with people who’ve already built and are managing ADUs. Understanding all the variables of building and maintaining a property, no matter how small, is vital. And remember: All the research in the world can’t guarantee success or predict the unknown.
Consider bringing on a professional real estate ally
If, after considering all of the above, you’re interested in proceeding, but may not want to go it alone, give us a call. Although we’re very selective about who we work with, we’d be glad to discuss ADUs and our approach to helping landlords maximize their assets through conscientious and proactive property management. We’ve been managing investment properties for more than 20 years and have developed a time-saving approach that combines the latest technology with hands-on supervision. We implement protocols that save time and money, while making the tenants feel appreciated. If you’d like to learn more, you can reach me at firstname.lastname@example.org or txt me at 415-812-4450.