Creative Multi-Family ADU Strategies: An ADU Case Study
Recognizing the Opportunity
The new California ADU laws allow for a variety of creative ways for property owners to capitalize on underutilized spaces. Our Echo Park property had a 2 bedroom, 2 bathroom bungalow with a perfect layout to be split into 2 units. By simply enclosing the porch to create a kitchen, and adding a dividing wall in the living area the 2 completely separate units were fully functional. While the property is zoned for multi-family, the rear house is considered a single-family structure and therefore was approved under the single-family 2020 ADU guidelines as an “attached ADU.” This would not have been possible under the previous ADU laws.
Determining the Upside
The 2bed/2bath unit had a market rent of approximately $3,000/mo. Some people might think you’re crazy to do anything other than get that rented immediately, but by splitting the unit into 2, we were able to rent out each new 1bed/1bath unit for an average of $2,250/mo. An increase of $1,500 per month! In addition to that being essentially straight cash flow in perpetuity, that $1,500 in monthly gross income increased the value of the property by over $200,000. Additionally, the property does not offer parking and 1 bedroom apartments are much easier to rent without parking than 2 bedroom apartments.
Recognizing the Value
After completing the project we were able to refinance the property and pull out additional cash via a ‘cash-out’ refinance to have capital ready for our next project. By refinancing instead of selling the property we avoid incurring any tax liability and also retain a great property producing great cash flow.
Will Your Property Qualify? There are 2 Options
Conversion: ADUs can be “converted” from existing, non-living, spaces such as garages, carports, attics, basements, rec rooms, or storages rooms. These converted spaces must be able to be brought up to current health/safety building codes (fortunately the rest of the building does not!). Each property can convert 1 ADU per every 4 existing units with a minimum of 1. If you have a 7-unit building or less, you can convert 1 ADU. 8 units would allow for 2 ADUs, 12 units would allow for 3 ADUs, and so on.
Open Space: If you have open space on your property you can build up to 2 (Yes – 2!) detached ADUs. These units are typically set up in the form of a side-by-side duplex. You can only build 2 new detached ADU units regardless of how big your lot is. These detached units are IN ADDITION TO other spaces that may be converted to ADUs.
What About Parking??
If you convert any existing space – including parking spaces – no additional or replacement parking is required. If you are within ½ mile of transit (bus stop), which most of LA County is, you do not have to provide any additional parking for detached ADUs.
What’s your ADU Opportunity?
We work with homeowners and investors to help them add ADUs to their properties. We take projects from design to completion working directly with owners as the single point of contact to effectively and efficiently get your project to the finish line.
We can also help identify and execute on acquisition opportunities with ADU development potential. Please reach out if you are interested in acquiring properties with ADU opportunities.
