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Knowing when to and how to turn your garage into a room is a game-changer for building home equity. In our published article about rising ADU house hacking trends, we explained why accessory dwelling unit apartments are exploding in popularity and how they can increase your home’s value. 

Although many are eager to jump at the chance to build an ADU, we shouldn’t assume it will yield the most value. 

Sometimes it makes more sense to convert your garage into an extra room. And I know, this is less sexy because it doesn’t offer the same passive income opportunity. But, if done right, it can radically transform your living space into the perfect dream home for your target demographic. 

But also, forget target demographics. Knowing when to turn your garage into a room can make you forget about ever selling. It can offer you the space and comfort you need for generations to come.  

We are going to explain the considerations of both options in terms of budget needs. And then, we will give example scenarios that will help you determine which option will offer the most return.  

How to Calculate Costs for Turning Your Garage into an Apartment 

When deciding between if you want to turn your garage into an apartment or room, you have to consider all the cost factors. Looking up the average costs per square footage isn’t enough. Although it’s a good starting point, these estimates will not help you make an informed budgeting decision. And it’s because there are key ADU design considerations that drastically swing the price in either direction.     

The first design consideration is total living space. If you are only working with a single car garage, you have to install the same appliances you would for a double. This includes the plumbing and electricity for a kitchen, bathroom, and cleaning appliances. 

If the living space is not enough, it may require expanding the foundation or adding a second floor above the garage. Both of these options add other material costs like roofing, concrete, and lumber. And if these options require more electrical and plumbing, the added labor costs will be more expensive per hour. 

Sometimes these design decisions are worth the added costs because of the high housing demand. If you live in an area like Los Angeles and most places in southern California, then there is enough of a housing shortage and price squeeze to make this investment worth it in the long run.

But if your ROI objectives are less about building passive income, then there might be a better alternative to increasing the overall value of your home.   

It is also important to calculate the permitting costs and the indirect permit requirement costs. For example, different cities have requirements on the space between the edge of the property and the ADU garage. Most require 4 feet set backs. Moving the edge of the garage to meet those requirements can be very expensive. 

But you also want to keep in mind that the minimum size requirement is 150 square feet. So if you need to shrink the total square footage to accommodate for set back space, you need to make sure total square footage is above 150 sqft. Check out our ADU resources page for more info.

And check out our post on garage conversion permitting for more information on the permitting process.

How to Calculate the Cost of Turning a Garage into A Room

Non-ADU garage conversions have fewer city and design requirements. So, depending on the size and location of the garage, turning a garage into a non-ADU room can cost a lot less and may fit your budget.

Even though the non-ADU garage conversions cost less, the return on investment is harder to calculate. And the reason is that the return is contextual to the specific solution that the garage conversion provides. 

For example, if your house only has one bedroom, turning your garage into a second bedroom adds more value by changing the home classification. Room additions have diminishing returns, though. For example, going from a one-bedroom to a two-bedroom adds a lot more value than going from a five-bedroom to a six-bedroom. The reason is simple supply and demand. 

If you look at population trends, most areas see a decline in the number of children per family unit. As a result, demand for houses with four bedrooms and up is going down. 

Now, if you are turning a single car garage into a spare room, then the most significant cost considerations are flooring materials, windows and doors, and electrical and heating. But, if you are turning a two-car garage into a master bedroom, then you will most likely need to factor in the cost of a master bathroom as well. Either option, though, will still be less expensive per square foot than an ADU conversion.    

How to Compare Value of Garage Conversion Options

So now that you have a basic overview of cost factors for garage conversions, the big question is, how do you determine which option will yield the most value?

Non ADU value calculation:

Any added square footage to your home adds an average of 30% in resale value, but all of this is dependent on what the added space accomplishes for your home. A bedroom can be a safe bet, but its potential value can vary depending on your neighborhood. If you have a one-bedroom, research the average cost of a two-bedroom in your neighborhood. But also look for other buying obstacles that the extra space in the garage could solve. 

For example, if your kitchen and living room area is too small for a dining table, knocking down the wall between the living room and the garage could transform any home’s most important selling point. The ROI of this option is harder to quantify through a google search, but one of our experts could give you an informed estimate.  

Using the garage to expand your kitchen or living space can also provide more natural light. It is widespread and even recommended to keep the garage door opening when you turn your garage into a room or apartment. The first reason is that it makes it easier for future homeowners to turn it back if they wish. But secondly, it is an excellent source of natural light.  

One of our clients recently combined their garage with a kitchen remodel. And they kept the garage opening! The added natural light in the kitchen and living space completely transformed the aura.

ADU value calculation:

If you want to calculate the potential resale value of a home with an ADU on it, then you will want to think like a real estate developing investor. Since your property would be zoned for two separate rental units, you will want to calculate the total amount of rental income your property could generate.

Then you will want to factor in interest rates to calculate a mortgage cost that would offer an investor 5-10% in profit. If that price is more than what you calculated for the room addition, then an ADU conversion may offer more resale value.

Once you have calculated the potential added value of each option, you need to subtract the cost estimate to come up with a return on investment. We can help with all of these steps. And we even recommend that you shop around to be confident that you have the best investment strategy. Our contractors and designers love to think outside of the box to provide the best results. Give us a call for a free consultation!

NEXT ARTICLE

How to Use New ADU laws to Make Passive Income With Rental Property

RELATED LINKS

The Ultimate ADU Resource Center

How to Get a Permit for Garage Conversion in Los Angeles

California ADU and Garage Conversion Builders and Resources

 

House Hacker Disclaimer

*Nothing in the Site or article about the California house hacker constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. UC&R is not a fiduciary by virtue of any person’s use of or access to the Site or Content.

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alifornia Back-House House Hacker, it’s a mouth full.

RELATED ARTICLE: When to Turn Your Garage into a Room vs. an ADU

With nationwide house prices up 24% since march 2020 and a 3.8 million housing shortage, there is unprecedented demand for these creative living arrangements. And millennials, with only 4% ownership in real estate, are using that demand to hack their way into home ownership. By renting out the garage of their first home, they are finding the passive income they need to afford 30 year mortgage payments.

But the rise of the house hacker isn’t just a zeitgeisty trend, it has the potential to permanently reshape how we value our homes. And as general contractors in Los Angeles, we have a insight on how homeowners can best build equity for future generations.

(ADU) Back-House or Granny Flat Defined:

ADUs defined in California are simply homes under 1200 sqft on the same property as the main house. Many call them granny flats because they historically used them for housing elderly family members. If the ADU is attached to the house, it can’t exceed the lesser of 600 sqft or 50% of the main house square footage. And in order to be considered an ADU the unit needs a kitchen, bathroom and outside entrance.

House Hacking Defined:

House hacking has been around for a while. Rising house prices and years of stagnated wages have driven working-class people to hack their way into affordable homeownership. House hacking is simply renting a portion of your property – for any purpose – to offset the cost of your mortgage. Listing on Airbnb, renting to a friend, or leasing solar panels to the city are examples of this trend. But renting the space where you once kept your car as a separate unit is a new development. And it is because of new legislation in California.    

How new California ADU Laws and Covid-19 Set the Stage for an Emerging House Hacking Market

It is no secret that California is in a housing crisis. Over the past decade, Californians built less than half of the homes needed to keep up with population growth. So, in 2019, legislators decided to do something drastic to address this problem. They reduced barriers and made the approval process for constructing ADUs in single-family or multi-family residential zones a lot easier. This bill was a big deal because Californians illegally renting out their converted garage could now apply and get the tax incentives.

But that wasn’t all. These new ADU Laws helped a flood of first time homeowners make passive income with rental property. Now the majority of our business is building and sectioning spare rooms and back sheds into ADUs.

The Covid-19 recession sent many people looking for more affordable housing and additional streams of income. And These ADUs or granny flats were a solution to both needs. But even though this uptick in ADU construction started from necessity, more are using ADUs to grow their real estate portfolio.      

How The House Hacker is Driving House Buying Trends

The housing market is hot. Between CNBC segments about Game Stop Redditors and Bitcoin, you’ll hear talks about absurd bidding wars and rising housing prices. There is a lot of speculation that private equity firms like BlackRock are to blame for the rising costs. But, many fail to realize that corporate investment only accounts for 20% of the housing market – which is a decline from its high of 29%. And it has been consistently within that range since 2000. The vast majority of home purchases are coming from individual buyers with 1-10 properties.

Who are these buyers, and why are so many willing to get into these bidding wars? Like Game Stop, It could be that many are part of or influenced by the house hacking internet sensation.

The BiggerPockets podcast host Brandon Turner first coined the phrase “House Hacker” on one of his episodes. He inspired and wrote the foreword to the book “The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.”

Now, there is an endless list of authors echoing the exact phrase. But before we dive into the metrics of this trend, we need to look at the dramatic housing market shift.

Housing Market Frenzy  

The US housing market has seen 17% growth over the past year, the biggest since 2013 when the housing market hit its bottom. Redfin is forecasting a record-breaking $2.53 trillion in total home sales for 2021.

Now, many can attribute a large portion of demand to shortages, remote work and a shift back to the suburbs. But that motivation should not account for the frenzied bidding wars we started to see in early spring:

There was a significant pivot in buyer sentiment at the turn of the new year. And this kind of behavior better reflects individual investors instead of remote workers moving closer to family.

Enter the Real Estate Investing Redditors

This exorbitance starts to make sense when measuring the increase of interest in real estate on social media. The most glaring example of this is the subscriber growth of r/realestateinvesting. It is the most popular Reddit thread for ADU house hackers and other real estate investing tips. And the driving incentive behind this community of homebuyers is to maximize profit and ultimately find financial freedom.

This community started to see exponential growth right around the same time we saw an explosion in bidding wars.

This correlation isn’t proof, but it offers a potential clue as to why there is such fierce competition. House hacking lowers the bar to entry in real estate investing. And first time buyers do it by supplementing mortgage payments with ADU rental income. This isn’t a new idea. But like the Robin Hood and the GameStop Redditors, the explosive growth of the online community has inspired a whole new segment of the population to enter in the housing market.

Many of these above asking price offers are likely generated from this real estate investor persona. Stories of success spread like wildfire in a fast-growing market, whether on Reddit or at baby showers. And so does the fear of missing out. Just a quick glance at these Reddit threads shows that amongst the success stories is also frustration over missing the boat. This sentiment compels investors to spend more than they usually would. It’s a story as old as time. And there are plenty of reports of these individual investors paying in cash. This persona is someone who has been in the game for a few years – with a couple properties under their belt. They have hacked their way into building real estate wealth and are now using their profits to pay in cash.

But if house hackers are really behind the spike, then the selling data for houses with ADUs should reflect that. And it does. It is hard to say exactly what the exact percentage of individual investors are at this very moment. But, Before the pandemic, the speed of ADU properties sales grew by 1.8% from the last year. That rate of growth jumped to 26% (22 days faster) by the end of 2020. And according to sources, only about 10 percent of residential clients wanted to include an ADU in their home plans in 2019. Now it is over 50%.     

This data shows that more people want to build ADUs, and more want to buy properties with ADUs on them. And if our hypothesis is correct, this growing trend has its origins in the house hacking internet sensation. 

The Best Strategy for Using Back-Houses and ADUs To Build Equity 

The biggest takeaway from these statistics is that there is a new buyer persona driving trends in the market. And if you are looking to build equity through an existing or new property, you need to keep this persona in mind.

In 2019, 1,000 sqft detached ADUs were averaging an added $470,000 in appraised property value. 2021 is a different ball game. We are in a market where 70-60% of offers are in bidding wars. And, properties with ADUs are selling 22 days faster than they did in 2019. If these trends continue, the market value could be a lot higher than $470,000.

The best strategy, designs ADU house plans to maximize space with the house hacker and first time buyer in mind. If that work studio has a bathroom and kitchen already zoned for renting, then your property becomes a hot ticket.

NEXT ARTICLES

How to Use New ADU laws to Make Passive Income With Rental Property

When to Turn Your Garage into a Room vs. an Apartment

RELATED LINKS

The Ultimate ADU Resource Center

How to Get a Permit for Garage Conversion in Los Angeles

California ADU and Garage Conversion Builders

 

New California ADU laws are a game-changer when it comes to making passive income with rental property. Before passing these laws, the bureaucratic process was a nightmare – and there was little guarantee of approval. And as a result, many well-intentioned homeowners either abandoned their hopes of renting out a back-house or took the gamble of leasing it off the books.

Now, these homeowners have a streamlined process to ensure that their structure is eligible for renting. There are important considerations to make in regards to how you rent these structures. We need to take a closer look at these laws to determine if you are eligible to rent more than one structure on your property and if your zoning permits residents to use these units for Airbnb vacation rentals. 

How California Law Defines Accessory Dwelling Units (ADU)

Before looking at what these new laws permit, it is essential to understand how California defines the various types of ADUs:

An ADU is an accessory dwelling unit with complete independent living facilities for one or more persons.

Detached ADU: A dwelling unit that is detached from the primary structure

Attached ADU: A dwelling unit that is attached from the primary structure

Converted Space ADU: Space (e.g., master bedroom, attached garage, storage area, or similar use, or an accessory structure) on the lot of the primary residence that is converted into an independent living unit.

Junior ADU: A Junior ADU is essentially renting out a spare room – with some caveats. Like the converted space ADU, this unit is converted from existing space within a single-family dwelling, but it has a maximum size limit of 500 sq.ft, and it is permitted to share bathing facilities with the primary dwelling. These also require owner occupancy of the JADU or primary residence.

The New ADU Statewide Guidelines

The primary change that streamlined this process for so many Californians came from Assembly Bill 3182. In it, the legislators changed the approval process from discretionary to ministerial. Plain language: instead of someone making a personal decision on your application, the governing body is required to approve the request if all requirements are met. So now, there is no added pressure to justify your reason for the ADU.

To make the approval process even faster, legislators added that the application will automatically be approved if the local agency doesn’t respond within 60 days. In addition to the speed and easy approval process, lawmakers expanded ADU permission to homeowners belonging to an association or living in any common interest development.

Here are some remaining guidelines that Californians should keep in mind:

• Californian cities are required to allow at least one ADU per single-family home.
• Cities are required to charge a utility fee that is in proportion to the ADU size. That fee is reduced if the ADU is constructed in the main house.
• If a converted space ADU is constructed within a half mile radius of a transit stop or car-share, then the homeowner will not be required to include additional parking space.
• Cities will no longer be able to require a 10-foot passageway to the ADU.

• Standing garage conversions no longer need setbacks, but ADU’s built above the garage need a rear five-foot setback.
• The ADU floor cap space for detached units is 1,200 sq. ft, and for attached units, it is the lesser of 1,200 sq. ft or 50% of the house size.

Like in every bill, there are always regional exceptions. So, it is essential to look up your local zoning rules to see if you still qualify. You will also need to make sure that the ADU meets all the appropriate California health and safety codes. Luckily we are pros at meeting all of these requirements and submitting the appropriate permits on your behalf.

Determining the Best Passive Income Strategy For Your ADU

If you live in Los Angeles, there are additional limitations to exactly how to make passive income with rental property. In 2018 they placed restrictions on Airbnbs and vacation rentals. These restrictions make sense when you consider the intent behind the new ADU laws. California is trying to solve the housing shortage crisis. And if these ADUs are being used primarily for tourists, it defeats the purpose of providing more living space for Angelenos. That being said, creating fun and interesting ADUs for vacationers also brings business and opportunity to the city, so they have provided limited ways to fill a vacation rental year-round in LA.

How to Qualify Your ADU for Airbnb in Los Angeles

To list an ADU on Airbnb, you will need to demonstrate that the ADU is your primary residence. Airbnb provides a list of documentation required to meet this requirement. Some Airbnb hosts prefer to list their entire home on Airbnb and use the second unit to stay when guests occupy the Airbnb. Either option, though, still requires that the listing be your primary residence.

Secondly, Angelenos are only permitted to fill their primary residence with Airbnb guests 120 days a year. And the home cannot be subject to the city’s Rent Stabilization Ordinance. This ordinance applies to most non-single family units built before 1978. And most importantly, the area must be approved for residential use. Airbnbing a camper or an ADU not properly zoned is not allowed. 

Despite the 120 day limitation on airbnbing your primary residence, Angelenos can pay an $850 fee to apply for extended renting. They will need to have maintained a valid home-sharing registration for 60 days, have no registration suspensions within the past two years, and have no more than one citation for the past three years.

So if you can demonstrate that Airbnb is your primary residence, don’t live within a rent-controlled zone, and your extended home-sharing application is approved, then you may be one of the lucky few who can use their ADU on Airbnb year-round to make passive income with rental property.

How to Determine The Number of ADUs to Build on Your Property

The new ADU laws require that cities allow at least one ADU per single-family property. This change does not mean that local city agencies cannot allow more than one. But each county and city have different guidelines. For example Los Angeles, Orange County, and Ventura County each permit different numbers of ADUs with specific exceptions. It also means that you can still apply for another ADU if you already have a secondary dwelling unit on your property from before 2019.

So if you are looking to maximize your rental income and your local zoning agency permits more than one ADU, building multiple ADUs might be a good strategy. Since California no longer requires occupancy on the property, you could convert a single-family home into a triplex and rent all three units.

If your goal is less about maximizing rental income and more monetizing your property at your discretion, then it may make more sense only to build one ADU for an Airbnb. Or you could do a hybrid of the two options. Either way, it is important the new construction ADUs are designed to maximize space, increase curb appeal and make the property attractive to future buyers.

We are experts in thinking through all of these details and helping you make a decision that best meets your needs. Contact us today, and we will connect you with one of our ADU designers that can answer any question and get you a quote right away.

info@ucanrinc.com | 310-500-7234

 

PREVIOUS ARTICLE

The Rise of the California Back-House House Hacker

RELATED LINKS

The Ultimate ADU Resource Center

How to Get a Permit for Garage Conversion in Los Angeles

California ADU and Garage Conversion Builders

 

With both housing shortages everywhere and housing prices too high, people are looking for a unique solution to their housing needs. So, if you’re someone with extra space to spare, that’s where we come in to help you! By transforming your extra space or adding on, it could be a way to generate a little extra rental income. 

This space transformation is called an Accessory Dwelling Unit (ADU). ADUs can be a great solution for homeowners looking to make some extra revenue and for the renter looking for a quality, affordable housing solution. 

If you’re not familiar with what an ADU is or how they work in Los Angeles, we’ll break it down for you as well as explain the process, including already pre-approved plans available for Los Angeles. 

What Exactly is an ADU, and Why is it a Good Idea? 

An ADU by definition is a smaller, independent residential dwelling unit located on the same lot as a stand-alone (i.e., detached) single-family home. Thus, ADUs can be built from scratch or converted from an existing structure on the home, such as a carport, garage, basement, attic or other dwelling or a separate stand-alone living structure. If you are looking to convert the space, you can also “Add-On” to fulfill the conversion metrics, such as a kitchen and bathroom, etc.  

This classification is important because it means you can build extra living space that can be considered separate from your main house. Previously, in Los Angeles and California as a whole, there were several restrictions regarding the size, capacity, and placement of these structures, making them not viable in many areas. 

As of 2021, the restrictions have relaxed to allow many more ADUs to be built. What does this mean for homeowners? You can now build or transform your garages and other spaces into fully livable spaces for in-laws, children, renters, or guests as full living quarters. 

Thus, previously categorized as “secondary suites,” they could now be modified or lived in without as many restrictions. 

As a bonus, homeowners generally experience increased home resale value and property’s assessed value by having an ADU. 

How to Get Started Building Your ADU and Finding Pre-Approved Plans 

The very first step is similar to any home addition or renovation. You’ll want to schedule a consultation with a contractor like Unlimited Construction & Remodeling to discuss what you would like to build or renovate, what could be possible for your space, what permits you’ll need and what options are available, timeframe for the project, and budget.

Whether you have an idea or already sketched your thoughts, our team of architects and engineers will draft the design plans, work with the city on proper permits, and bring the best construction or remodeling options for your desired space. 

The good news is that many plans are now coming out that are pre-approved. Some examples through LADBS include: 

• • Pre-approved studios as small as 200 square feet
  • Larger multi-room structures on one story (up to 1,200 square feet)
  • Two-story structures with multiple options (no taller than 25 feet and 1,200 square feet)

This simplifies the building process and can get your ADU built in much less time. In our approach, we work hand-in-hand with our clients and ensure that the homeowner approves every square inch before starting any project.

The Benefits of Using Unlimited Construction and Remodeling to Build Your ADU 

When you set out to build an add-on to your home or a stand-alone ADU for your friends and family, you want local contractors who know the area, understand the laws and regulations, and who can get the job done quickly and efficiently. 

We bring the expertise with the high-touch service for your construction and remodeling needs. We look forward to mapping out the plans for your ADU, and best of all, we’ll be there with you from start to finish so that your new space turns out just the way you want it. 

Contact our team today for a free estimate at info@ucandrinc.com, 310-500-7234, or send us a message.