Why to do an ADU?
Updated: Jul 21, 2021
"...capital gains of ten of thousands, increase in equity and thousands of dollars in passive income monthly"
Hi guys this is The Guru from The ADU Guru and today we're going to talk about why to do an ADU. Just first let explain what is ADU? Or what is accessory dwelling unit? ADU or accessory dwelling unit is an additional unit that is being added to the primary residence. You can have ADU in single family and multifamily houses. For more information about rules watch our other episodes single family and multifamily family guidelines.
Now before we start quick disclaimer it is not a legal or investment advice, I am not a lawyer, CPA, or an assessor.
Ok let us get right to it! there are three reasons why people build an ADU.
Capital gains of ten of thousands, increase in equity and thousands of dollars in passive income monthly.
So, lets dive deeper to each.
1st reason – Capital Gains.
What does it mean capital gains? Capital gains are the increase in value above the invested amount.
For example, if you bought a stock for a 100$ and the market went up to 110$ you've 10$ in capital gains once you sell it.
So now let us take a classic 1970 four beds three baths. 2200 sqft livable space and 420 sqft 2 car garage. This house is selling for 1m dollars.
Or 454$ per sqft. As you can see the price per sqft include only livable sqft and a garage is not a part of it.
Now let us say the owner decided to convert the garage to JADU, Junior ADU and build 800 sqft ADU from scratch in the back yard. So instead of a garage, now you have 420 sqft 1bed 1 bath apartment and those square footage are now considering a livable space. and by multiplying the size of the garage or 420 sqft times the cost per sqft we will get an addition of $190,000 increase to the value of the house.
And the same goes for the new Construction ADU. Here we are adding 800 sqft which is enough for 2bed 2 bath. And here you are looking on a potential increase of 363 thousand dollars. Again 800 sqft time $454 per sqft. And it could be even more! Why more?
Because the 420 sqft of the garage conversion and the 800 sqft for the ADU are fully remodeled and brand new while the rest of the house was built in 1970’s. So, the price per sqft for the JADU and the ADU will be higher. It is true that we might lose small portion because now the house does not have a garage and a smaller back yard, but unless street parking problem it will not be important.
So let say that you, the owner, are looking to sell tomorrow. You can pocket in capital gains 553 thousand dollars minus the cost of the constructions which might be worth tens or even hundreds of thousands of dollars more with the JADU and ADU then without.
There are two other methods to calculate the expected increase in the house value and you can check them out in the video “the three ways to estimate a value increase due to ADU.” that will be uploaded soon!
2nd reason – Increase in equity.
How? Because now you added to the value of your house a sizable chunk. So, by going back to our 1million dollar house with the addition of 553 thousand dollar increase value due to the ADU. Now the house is worth 1.55 million. And let us say you owned 20% before the construction value 200 thousand dollar. Now, if the construction cost less 442 thousand dollars you own more than then 20% equity that you started with. And even if the equity is the same. Now you own 20% from 1.55-million-dollar house and before you owned 20% from 1 million dollars. Significant difference, isn’t it?
3rd reason – Rental income
In ADU Guru we like keeping the best for last. Why? Because even if there will be zero increase in value and your equity stays the same. Due to the passive income stream, making an ADU still make sense.
So going back to our example of the house with the 1 bedroom 1 bath JADU Garage conversion and the 2 bed 2 bath ADU.
At the day that this video was made the average rent for 1 bedroom in los Angeles is $1,995 a month, 2 bed 2 bath is rented for $2700, and it is going up every year. personally, I will not be surprised to see the price of rent double or even tripled in 10 years or less.
To see the ROI for a 10-year term for an ADU watch our video “The real ROI for an ADU over 10 years” that will be uploaded soon!
That means that this home can make $4695 every month! Now unless you have all the money to do the project stacked under the mattress. You say that all sound great but how will how produce all the money for this project.
This is where The ADU Guru comes in, we help homeowner to find a reliable and trustworthy contractor that can offer NO MONEY DOWN program. So, your monthly payment will be lower than the expected income. And that is your first major step towards financial freedom.