When California enacted the SB 9 law for 2022, it opened investment opportunities. That’s why our post explains “How to buy a home and build an ADU in California”.
An ADU stands for Accessory Dwelling Unit which means a small independent dwelling unit on the same lot as a single-family home.
California Senate Bill 9 (SB 9) took effect on January 1, 2022.
SB 9 attempts to combat a statewide housing shortage by allowing homeowners of large single-family residential lots to split the lot and create Accessory Dwelling Units (ADUs).
The maximum ADUs allowed are two duplexes by replacing the original home.
The 4 options to split and develop are explained here.
All the SB 9 requirements to qualify are explained in a prior post as a hyperlink here.
California homeowners must consider the potential profit and increased property value to offset the development costs.
Our post explains how to calculate an ADUs added value.
This post also links to a prior post showing ways to cut costs to build nice-looking ADUs.
It also explains ways to finance the construction costs.
Includes how to determine the rents you can charge.
It explains what tax consequences you must consider.
Finally, you get links explaining how to become a successful landlord in California.
What is SB 9 and How Does it Affect California Homeowners with Large Lots?
When California Senate Bill 9 (SB 9) was enacted in 2021, its purpose was to combat a serious statewide housing shortage. It took effect on January 1, 2022. It allows single-family homeowners with a large lot the split it into two parcels.
“Each parcel must be at least 1,200 square feet in lot size unless the local agency permits smaller lot size per ordinance.”
Several options exist for developing the two lots.
Therefore, These 4 options let you create up to four housing units on your two lots.
Is Buying a California Home and Building an ADU Profitable?
According to Nolo, a legal advice site written by lawyers, it’s a good investment. Especially, if the rental market is “hot” in your area.
First, a California real estate investor must calculate an ADUs added value to the property.
How to Calculate an ADUs Added Value?
Sizing up a housing investment for future added value is tricky. That’s because no one knows for sure how much the added ADU increases a property’s value until it's sold. Real estate values go up and down over the years.
Another consideration is the investor’s financial condition and goals. Here are some important questions that you (as an investor) must get answers to before deciding on such an investment.
1. Is Adding an ADU Legal for the Specific Property?
This is critical. SB 9 established minimum requirements to make a “split and develop” lot legal. Read this blog post from the WeLease Property Management Company blog explaining SB 9 requirements in greater detail.
Beware: Illegal ADUs do not qualify for financing by banks and other lenders. Also, the local government can order the removal of the ADU and a hefty fine for zoning code violations. This becomes a bad investment.
Tip: Hire an experienced local land use attorney to advise you about the legality of adding an ADU on a specific property before investing.
2. If Building an ADU is Legal, is it Feasible?
Locals: How property development-friendly is the local government? Politics always plays an important part in property development. Some areas encourage it while others oppose it.
Parking: Even if it's legal, will you have to add on-site parking for the occupants? This can cut into the development costs and required space for the ADU.
Variance: Some local restrictions may require filing for a "variance” (exception). Beware: variances add to the development costs. Also, you can spend money on a variance application and get it denied.
3. How Much Does it Cost to Build an ADU?
Cut Costs: Detached ADUs can cost as much as a small house. Yet, we published a post explaining how to cut costs and still get attractive functional two-bedroom ADUs. Read our post “How Californians Can Build 2 Duplexes on One Lot in 2022”.
Land Use Permits: Besides construction costs, you must calculate the costs to get a land-use permit for the ADU. This must include your attorney’s fees.
Financing Costs: Unless you have the cash, you need to get financing and pay fees. Besides loan fees, you must pay for an appraisal
4. How Will You Finance the ADU Construction?
Several options you can look into for financing:
Home Equity Loan - Having equity in your home allows you to seek an equity loan to finance the construction and permit costs;
Home Renovation Loan, specifically to renovate your property;
Refinance Cash-Out; and a
HELOC, Home Equity Line of Credit.
Learn more by reading our blog post: “Tips On Capturing Equity In Your Home”.
Estimating your financing costs: Whichever option you choose, you must calculate the lending fees, appraisal, and interest payments to give you an idea of your profit when you sell.
5. How Much You Can Charge Tenants for Your ADU?
You must determine how much rent similar ADUs collect in your area. This will help you to determine your monthly cash flow and if it pays your expenses and leaves you the desired net income.
Consult with a Realtor familiar with local investment properties and residential rental rates. SoCal Lifestyle Realty provides you with just that throughout San Diego County.
Contact us before seeking to buy homes you can build ADUs to save you time and money.
6. What are the Tax Consequences?
You need to look into the property tax increase when adding an ADU. That must be included in your expense calculations.
Also, your rental income is subject to federal and California income taxes. Consult with a local CPA or tax attorney to know the tax deductions and income tax rates based on your total income.
7. Become a Landlord
Investing in a tiny house (or adding three ADUs) and renting them out requires different skills than you possess. Suddenly, you are a landlord. If you want to rent out more than one ADU you need to learn how to become a landlord. This will help you to avoid losing money as a landlord.
Read these informative blog posts:
Better yet, hire an experienced property management company to take the stress off you and save you time to enjoy life. If you own rentals in San Diego County, reach out to the WeLease Property Management Company.
Contact WeLease to learn how they can help you with every type of rental in the greater San Diego area.
How To Buy A Home And Build An ADU In California – Conclusion
Our explanation of how to buy a home and build an ADU In California covers many issues like:
What is California Senate Bill 9?;
How many ADUs can a California homeowner build?;
The 4 options to split and develop a large single-family residential lot;
A hyperlink to our past post explaining all the SB 9 requirements to qualify;
SB 9 ADU development issues like profits and increased property value to offset ADU construction costs;
Learn how to calculate an ADUs added value;
View the hyperlink to learn how to cut construction costs for an ADU;
Learn about the different ways to finance the construction of an ADU;
Learn how to figure out the rental prices you can charge your tenants;
Understand the tax consequences associated with an ADU; and
Learn how to become a successful California landlord.
Want to Buy a Home to Develop ADUs in San Diego?
SoCal Lifestyle Realty can help you find SB 9 qualified homes for sale throughout San Diego County. We can also help you with finding an experienced well-respected property management company in San Diego to handle all your landlord needs.
Contact us before you begin looking for suitable homes for sale in San Diego County to purchase and develop income-producing ADUs.