Bring The Cash Flow To You With An ADU

An excellent way to meet your desired cash on cash returns

What Is An ADU?

"ADU" stands for "Accessory Dwelling Unit." It refers to a secondary residential unit that is located on the same property as a primary residential unit. ADUs are also commonly known as "granny flats," "in-law suites," "backyard cottages," or "secondary suites." They are self-contained living spaces that have their own kitchen, bathroom, and sleeping areas. ADUs can take various forms, such as a converted garage, a basement apartment, a standalone small house in the backyard, or an addition to the existing house.

Benefits Of An ADU

Accessory Dwelling Units (ADUs) offer several benefits to homeowners, communities, and the overall housing landscape. Some of the key benefits include:

1. Increased Housing Options: ADUs provide additional housing units within existing neighborhoods, which helps to address housing shortages and provides more diverse housing options for various demographics, including young professionals, students, seniors, and small families.

2. Affordable Housing: ADUs can serve as relatively affordable housing options compared to traditional single-family homes or apartments, making housing more accessible for individuals and families with varying income levels.

3. Multi-Generational Living: ADUs allow families to live together while maintaining a level of privacy and independence. They are often used to accommodate aging parents, adult children, or other family members.

4. Rental Income: Homeowners can generate extra income by renting out their ADUs, helping them offset their mortgage payments or other housing-related costs.

5. Property Value: ADUs can increase the overall property value of a home. The additional living space and potential for rental income can make a property more attractive to potential buyers.

6. Community Density: ADUs can help increase housing density without significantly altering the character of a neighborhood. This can support more efficient land use and infrastructure utilization.

7. Sustainable Living: Smaller living spaces in ADUs often result in lower energy consumption and reduced environmental impact compared to larger single-family homes. Additionally, repurposing existing structures (like garages) for ADUs can reduce the need for new construction.

8. Support for Aging in Place: Older homeowners can downsize from their main residence and move into the ADU while renting out the primary home. This allows them to stay in their familiar community and maintain social connections while generating income.

9. Preservation of Architectural Character: ADUs can be designed to match the architectural style of the main house, preserving the aesthetic character of the neighborhood.

10. Local Economic Benefits: The construction and maintenance of ADUs can contribute to local economic activity, including job creation for contractors, architects, and other professionals.

11. Utilization of Underutilized Spaces: ADUs can make use of underutilized spaces on a property, such as basements, garages, or backyards, maximizing the potential of existing land.

ADUs In California

In recent years, significant changes in ADU laws have been enacted, providing a new era of favorable regulations for homeowners. Notably, bills like AB 68 and AB 881 have abolished many local agency restrictions, creating a state-wide environment that supports homeowners. I have compiled a comprehensive list of pivotal alterations introduced by these laws, simplifying and making ADU construction more cost-effective.

Property owners are now allowed to include up to two additional units on their premises. Previously, single-family lots were limited to one ADU, but AB 68 mandates that municipalities approve the following:

For single-family lots: One attached or detached ADU, up to 1200 sq ft, and one JADU up to 500 sq ft. For multi-family lots: Multiple ADUs connected to existing multifamily structures, along with two detached ADUs.

Stringent criteria related to size, lot specifications, and setbacks have been relaxed. The new laws prevent municipalities from imposing limitations on minimum lot size, ADU lot coverage, floor area ratio, and similar constraints. Now, an ADU can be constructed with a minimum of 800 sq ft, a height of 16 ft, and 4-foot side and rear yard setbacks.

The requirement for owner occupancy has been eliminated. You are no longer obligated to reside in either the primary dwelling or the ADU itself. This change facilitates landlords and investors in constructing ADUs on rental or investment properties, thereby expanding housing opportunities.

Homeowner Association (HOA) limitations have been overridden. Following the passage of bills in 2019 and 2020, local HOAs are prohibited from unreasonably obstructing ADU or JADU construction or usage. This includes the ability to rent or lease an ADU on a single-family residential lot.

The process of obtaining an ADU permit has been expedited. Local agencies are now mandated to approve or decline permit applications within 60 days of receipt, cutting the previous processing time in half.

Two forthcoming bills, SB 897 and AB 2221, promise added advantages for homeowners:

SB 897 will raise height limits to 18 ft for detached and 25 ft for attached ADUs, offer retroactive permitting for ADUs constructed before 2018, and clarify constraints set by prior ADU laws to prevent exploitation of them. AB 2221 will streamline permitting by establishing specific timeframes for local agencies to approve or deny permits, permitting detached ADUs to include attached garages, and prohibiting local agencies from imposing front setbacks.

Why ADUs Are So Good

Given that Accessory Dwelling Units (ADUs) are integrated into existing properties, their value hinges significantly on the locations where they are established. The location serves as a pivotal determinant of cash flow potential and feasible rental rates. For instance, if an ADU is constructed in both Sacramento County and Placer County, the construction costs might be comparable, yet the rental rates across different cities within those counties can vary considerably.

Furthermore, certain cities offer better environments for ADU development. Take Loomis, for instance—a highly sought-after locale characterized by expansive plots and ample open space. Loomis properties often boast multiple acres, in stark contrast to Sacramento's typically smaller lots. The advantages of Loomis extend beyond higher rental rates; the ease of construction, enhanced privacy due to larger lot sizes, improved parking options, and a greater likelihood of permitting larger ADUs all contribute to its appeal. Building a junior ADU of around 500 sq ft might be the norm in Sacramento, whereas Loomis offers the potential for constructing a spacious 1200 sq ft ADU, akin to a small house.

Applying economies of scale, it's evident that investing in a substantial 1200 sq ft ADU, especially when combined with a sizeable property and privacy, is a smart decision. The underlying lesson is that instead of searching for homes in areas with favorable cash flow, you have the opportunity to bring cash flow to your chosen location. Typically, cash-flow-positive areas are synonymous with more affordable, lower-end regions. However, due to the relatively affordable cost of ADU construction and their consistent returns, they emerge as an excellent choice. Notably, ADUs often adhere to the elusive 1% rule—a benchmark that is rarely met in today's real estate landscape in Sacramento and Placer County.

In essence, the strategy of constructing brand new ADUs, tailored to your financial objectives, within a location of your preference, presents itself as an astute approach.