Adding an ADU Adds Tremendous Value to Your Flip

Having access to more capital will give you the kind of leverage you need to fix & flip and grow your real estate investment business. One way to increase the value and square footage of your investment property is to build an ADU.

An ADU is an accessory dwelling unit with a full kitchen and bathroom, which is an accessory use to a primary residence. An ADU cannot be sold separately but may be used as a rental. More and more homebuyers are also looking for ways to make extra money and having the ability to use the property to earn extra income is a selling point for many people looking to buy homes. California homebuyers, in particular, are interested in earning rental income because the median price of a home is much higher than most other states.

Another benefit of building an ADU on your investment property is to add on to the square footage of living space, as some buyers are looking for additional room for guests or extended family members, sometimes referred to as a granny-flat. As housing has become increasingly expensive in California, more and more families are looking for housing solutions for aging family members. This added square footage can add tremendous value to your flip.

NEW LAWS EFFECTIVE THIS YEAR
A new California state law that went into effective January 1, 2019 is designed to promote the building of ADUs by making the laws more lenient. For example, the new laws now allow ADUs to be built concurrently with a single-family home, opening areas where ADUs can be built to include all zoning districts that allow single-family uses, modifying fees from utilities, such as special districts and water corporations, and reducing parking requirements.

CONSIDERATIONS OF BUILDING AN ADU
New California state laws have made it easier to permit an ADU but there is still a permit application process that must be considered and taken into account when planning your fix & flip timeline.

For example, in Los Angeles and ADU is permitted with a Site Plan Review if:

• The property is zoned R-1, R-2, R-3, R-4, R-A, A-1 and A-2, or another zone where a single-family residence (SFR) is allowed by right with a plot plan (ministerial review).
• Only one legal SFR exists on the property or is proposed to be built concurrently with the ADU.
• You propose to convert an existing guest house, mobile home, or caretaker’s residence to an ADU.
• The ADU is located more than 200 feet from publicly dedicated open space in any Fire Hazard Severity Zone

The ADU must also comply with the Development Standards listed here

In addition to submitting a site plan application to the Department of Regional Planning, you will need to submit the following additional documentation:

• Copies of Building Description Blank/Slip from L.A. County Assessor’s office
• Copies of building permits from L.A. County Building & Safety office

The application process will vary from city to city with different local regulations so make sure you check ahead and see what will be needed.

You will also want to check out the rules for renting out an ADU in the local jurisdiction. Some cities have banned short-term rentals in an effort to limit rentals from some online sites like Airbnb and VRBO. An ADU may not have as much rental income potential in cities that have strict policy against short-term rentals. West Hollywood, for example is very strict and polices short-term rentals. This does not necessarily mean that an ADU doesn’t make sense in these neighborhoods, but you want to ensure that you have accounted for all factors that may limit the benefits of an ADU. However, these ordinances do not prevent long-term rentals.

For more resources on ADU’s visit:
California State Fire Marshal (PDF) – Information bulletin regarding sprinkler system requirements.

California Department of Housing and Community Development (PDF) – Information Bulletin providing clarification and outlining provisions of various residential types, ranging from recreation vehicles and manufactured homes to site-constructed California Building Standards Code dwellings.

ADU Update: Early Lessons and Impacts of California’s State and Local Policy Changes (PDF) – Provides an overview of ADUs as a housing solution for California. Covers recent policy changes at the state and local level, California’s progress to date, and remaining barriers. Written by David Garcia at the Terner Center (U.C. Berkeley), December 2017.