As of 2020, the state of California released a new set of laws that now make it possible to add ADUs to multifamily properties. What does this mean for property investors? You can now increase your rental income stream significantly by adding one, two or more accessory dwelling units to your multifamily properties.
Read on to learn how you can maximize your income with ADUs.
Advantages of New ADU Laws for Multifamily
If you haven’t heard about ADUs, then you’re potentially missing out on a big investment opportunity. ADU stands for Accessory Dwelling Unit and were recently legalized in 2017 when the state of California allowed all single-family zoned homes to have an additional dwelling on the property.
Fast forward to 2020, ADUs are now allowed on all multifamily zoned properties. This is a gamechanger for real estate investors because now you can add more rentable units to your property while taking advantage of the many ADU regulations that were previously reserved for single-family homeowners. These laws include:
- Minimum 4 ft setbacks
- Local municipalities must allow at least an 800 sq ft ADU
- Development Impact Fees waived for ADUs less than 750 sq ft.
- No parking required for ADUs less than 0.5 mi from a bus stop
- No replacement parking is required for ADUs created from garage conversions
And even more recently, the city passed new San Diego ADU laws that make it even easier to build.
What are the Benefits of ADUs for Multifamily Properties?
It’s easy to see that there are many advantages to the new laws that make it easier to build ADUs now more than ever. By building an ADU on your multifamily property, you can take advantage of major benefits such as:
1) Additional Rental Income
Adding an ADU to your property means adding another income stream. With average rents in San Diego at about $2,200, who wouldn’t like to add more rental income to their property?
2) Increased Property Value
By adding more square footage and increasing the number of income-producing units on your multifamily property, you are effectively increasing the overall value of your property. The appreciation rates for San Diego real estate average 4-6% year over year. Imagine how much your investment can increase in just a few years.
3) Reduced Development and Construction Costs
ADUs don’t abide by the same rules and regulations as traditional dwellings, which are much more stringent and costly. For example, Development Impact Fees alone can cost upwards of $15K-$20K+ to develop a single dwelling, whereas these fees are completely waived for ADUs less than 750 sq ft. If you’re located in the City of San Diego, there are actually zero Development Impact Fees for any sized ADU.
Another advantage to building an ADU on a multifamily property, is that you can use existing non-habitable spaces to create an ADU. These spaces include garages, laundry rooms, and more. By converting existing spaces, you can save tens of thousands of dollars on construction costs vs a new build. This is a huge advantage for property owners who don’t have available space for a detached ADU.
Now, there is a limit on how many you can have, which we’ll get to next.
How Many ADUs Can I Have on my Multifamily Property?
State law allows detached ADUs and ADUs created from non-habitable spaces on multifamily properties. However, it’s important to note that it’s still up to each jurisdiction to decide on whether they want to allow both on the same property. Let’s review each to understand the differences.
Detached ADUs
California state law allows up to two detached ADUs on any multifamily property. This is why understanding your property’s zoning is key to uncovering the ADU potential for the lot.
Keep in mind that the keyword here is “allows.” Local municipalities can still exercise their own discretion by enforcing development regulations that may limit the number of detached ADUs you can have on your property, which I’ll cover in a bit.
Given these potential restrictions, detached ADUs are more likely to be approved for properties with large lots and plenty of vacant space. For example, a large vacant parking lot on a multifamily property can have a lot of potential for a detached ADU.
ADU Conversions from Non-Habitable Spaces
If you don’t have the space for a detached ADU, you’re in luck. The state also allows up to 25% of the number of existing units to be converted from non-habitable spaces such as garages, laundry rooms, offices, storage rooms, etc. Let’s break this down.
Let’s say you own a 4-unit property with attached garages on the first floor. You can convert 25% of four units from those garages, meaning one ADU. If you have an 8-unit property, you can have two ADUs converted.
City of San Diego – Unlimited Conversions
If your multifamily property is located within the limits of City of San Diego, then the 25% rule no longer applies. As of 2021, multifamily properties in the City of San Diego are eligible for an unlimited number of units converted from non-habitable spaces!
Keep in mind that ADU laws are constantly evolving, so it’s best to do your own due diligence when assessing the ADU feasibility for your property.
Imagine being able to increase your rental income without the cost and time of going through a large construction project to create new detached dwellings? Converting existing spaces on your property is probably the most cost-effective way to add new rental units to your property.
Evaluating ADU Feasibility
When evaluating the ADU feasibility for your property, I can’t stress highly enough how important it is to do your due diligence in learning the rules and regulations of the city your property is located in. Since different cities have their own ADU laws, the exact number of ADUs you can have will highly depend on specific development regulations that may limit your project such as:
- Floor area ratios
- Density requirements
- Lot size
- Easements
- Zoning requirements
- Number of existing units
- Lot coverage requirements
The City of San Diego is one of the most ADU-friendly jurisdictions in California. So much so, that the city is allowing more ADUs with a program that goes above and beyond what state law allows! Here’s how.
Affordable Housing Density Bonus in the City of San Diego
The City of San Diego has created a program incentivizing more property investors to provide affordable housing units in order to help curb the housing crisis in our city. Essentially, the density program allows for one additional ADU to be built for every affordable housing unit provided.
There’s potential to get even more ADUs, depending on the type of affordable housing unit you provide whether it’s for low-income, moderate-income, or upper-income on the affordability scale.
So what’s the catch? To enter into the program, the property owner must promise to provide affordable housing for a period of 15 years through a deed-restriction. Although 15 years might sound like a long time, it can still be an opportunity for long-term buy and hold investors.
To learn more about the City of San Diego’s density bonus program, visit the San Diego Housing Commission.
How to Find Multifamily Properties with ADU Potential
As a real estate agent, my job is to find the best deals on the market for my clients and help uncover opportunities that others might miss. I work with many investors who specifically look for value-add potential, and ADUs are one of the best opportunities there are to add value to a property.
If you’re looking to buy a 2-4 unit multifamily property with upside potential, here are my tips on how to get started. When searching for properties, look for properties with the following characteristics:
1) Located in ADU-friendly cities
There are many cities throughout San Diego County that are more ADU-friendly than others. Ask me for a list of the best cities to work with for your ADU project.
2) Garage spaces
Whether the garages are detached or attached, they can potentially be converted using the 25% rule that the state allows. You’ll be saving a ton in construction costs compared to a new build.
3) Backing an alleyway
Properties with alleyway access are great because of the ability to create separate access for your ADU from alley. Alleyways are also great for construction teams to access the back of the property to construct your ADU. Furthermore, many multifamily properties have existing garages that face the alleyway, making these types of properties a no-brainer for value-add potential.
4) Development potential
Understanding zoning is one of the most important skills to have as an investor and as a real estate professional. It’s the key to knowing the value of the land you are buying, and the potential it has for future development.
I can’t count how many times I’ve seen listings with the wrong zoning information listed to mislead buyers. On the other hand, I’ve also seen listings that are under-valued because the seller and their agent didn’t know that the property was zoned for more units.
Why is development potential valuable? In high-growth areas, it’s definitely valuable to purchase properties that have the potential to develop more units in the future. When you consider the number of units that can be developed in addition to ADUs, you can see that the potential for the total number of units built can greatly increase your return on investment.
That’s why it’s important to work with a real estate professional who understands zoning regulations to help you make an informed decision about what you are buying.
5) Near transit areas with high walkability scores
In general, areas with high walkability scores and easy access to transit will attract more renters who will pay a premium to live in these areas. Additionally, the City of San Diego’s density program described earlier allows unlimited ADU bonuses for units built in Transit Priority Zones.
6) Near universities and colleges
Areas near schools and colleges have high demand for student housing. Students will pay higher rents for the convenience of being able to walk to class without the need to pay for costly parking permits on campus.
Ready to Find Your Next Multifamily Deal?
It’s clear to see the many advantages of building ADUs on multifamily properties. I wrote this guide to help investors like you navigate the ins-and-outs of ADUs and explore how you can increase your investment potential by taking advantage of these new laws. My team specializes in finding the best 2-4 unit multifamily deals on the market with the best value-add opportunities.
If you have any questions about multifamily investments and ADUs, contact me today!
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