4 Reasons for Investors to Add an Accessory Dwelling Unit

Today, it’s imperative to get creative with portfolio additions. Perhaps adding an accessory dwelling unit to the single-family dwellings in your portfolio is the right move for you. An accessory dwelling unit, ADU for short, is a secondary dwelling unit with a kitchen, bathroom, sleeping, and living space on the same tax lot as a primary residential dwelling. The ADU can be detached, above a garage, attached, or within the primary unit. Basement and garage conversions are great examples of bonus spaces that can instead be converted into income-generating ADUs.   Cities all over the country are experiencing a shortage of housing, driving up housing costs for both the rental and ownership markets. Cities rely on property owners and developers to develop the much-needed infill housing. Many cities, especially on the west coast, are reducing barriers to develop ADUs, creating new opportunities for investors that own single family homes and duplexes, to build them.   For investors who prefer the long game, ADUs have an excellent track record of providing reliable income and lifestyle flexibility. Here are four reasons why.  1. Versatility Very few homes have the versatility of an ADU. Unlike primary homes that are typically 3-4 bedrooms, ADUs are typically studio or 1-bedroom units. This is attractive to 1-2 person households who wish to live in residential neighborhoods rather than a commercial apartment complex.  Multigenerational household living is on the rise in both the rental and ownership markets due to housing costs. The need for adaptable 1-story infill housing units that works for different age demographics, has never been more evident.   An ADU can provide for common household needs, such as guest quarters, home office, housing for in-laws or friends in transition, or possibly as a short-term rental. Many small-scale investors start out by adding an ADU to their primary residence and renting it out.  Financially savvier even still, an investor may move into the ADU and rent out the primary residence, potentially covering the full cost of the mortgage for the property. This particular “house hack” is a life-changing financial move for many young property owners, setting them on the course of financial freedom and the wealth production that can come with property ownership.  2. Increased property value Building an ADU is no small task. Design, permitting, and construction costs add up. However, over time, the ADU will pay for itself, some in as little as 3-5 years, depending on the type of ADU that is developed.   ADUs have more advantages than disadvantages once they’re built and performing, especially in urban infill neighborhoods, where walkability to amenities is plentiful, and renters typically pay higher rents. ADUs tend to make the most financial sense to develop on more expensive infill properties where the land values are highest since they are being developed on ‘free dirt’ you already own. Other rental housing development requires land acquisition, and that dirt is typically the most expensive part of housing development.  Consistent rental income, and two livable units are a great combination for buyers, and they are willing to pay higher prices for a home that can meet various lifestyle needs over the course of ownership. Hiring a real estate agent that understands the value of ADUs is crucial, more and more real estate agents are tuning in to the ADU trend and stand ready to help. https://www.aduspecialist.org/registry

3. More affordable than buying a new rental property Building an ADU can be an excellent alternative to purchasing another investment property, particularly in high-priced markets where a deal is hard to find. While a newly built ADU can cost upwards of $300k in some markets, a duplex in the same market might start in the $700k’s and require 20% down to purchase. The rents in the duplex may not be at market rate and legislation may impact the rate in which those rates can be increased. A newly developed unit on a property already in a portfolio can fetch market rate upon completion, a strong case for building new.   Living in the ADU and renting out the primary dwelling offers the opportunity to to receive a higher monthly rent, creating a pathway to paying down mortgage and construction costs at a faster rate. If the jurisdiction allows for both the ADU and the primary dwelling to be rented out, as is the case on the west coast, the return on investment is likely to be high.  4. Making an impact Rental portfolios have social and environmental impacts.  In its Making Room: Housing for a Changing America exhibit, AARP illustrated the type of housing that currently exists compared to the household sizes that are most common in the United States. There is a great disparity between the number of smaller households and the appropriate size homes. Cities desperately need more ‘right-sized’ housing units to serve smaller households, and investors have an opportunity to create housing that is in high demand with a strong tenant base. Building an ADU can also provide jobs and support the local economy. Hiring local architects, designers, builders, and tradespeople supports the local economy with jobs and housing.   Care to make an ecological impact?  Residential buildings comprise 22% of the greenhouse gas emissions in the United States.  An 800 sq ft ADU built to basic code uses less energy than a 2,200 sq ft high performance house, due to the reduced heating and cooling loads. Building small saves occupants money in utility bills, making the dwelling more resilient and reliable. Smaller dwellings, and especially internal conversions, use fewer material resources and can rely on the original dwelling to provide part of or all of the building envelope, one of the most resource intensive aspects of a new build.  

How To Analyze Demographic Data Before Investing

When it comes to real estate investment, there are many factors that should be considered before taking the leap. Investors often speak of the general economic conditions as their main impetus for investing or holding back. However, this should not be the only criteria that you work under. Demographics should also be very carefully considered. Here are three reasons to analyze demographic data before investing in real estate.

Age and Spending Habits

You might think that a younger, more vibrant population is where the money is, but you may be wrong. Consider the fact that a twenty-something is likely to have student loans, very little savings, and less experience in making sound financial decisions. Not only that but, younger people are less likely to have the funds and stable career that it takes to buy a home.

Financial newsletter writer, Harry S. Dent, Jr. has done some impressive research that reveals that human spending habits follow a predictable path. Most notably, spending on homes hits its peak between the ages of 46 and 50. Therefore, if the demographics show a population in that range, it may be a good indicator of a viable market should you be interested in flipping an investment property.

Jobs and Population Growth

Simply put, if people cannot find a good job, they are not going to be able to buy or rent a home. That also means that the population in the area is likely to decline, rather than grow. Take a good, hard look at the trends in employment in and around the area you are thinking about investing in. Dig into those numbers and look for indicators that the population and job opportunities are changing.

Rentals vs. Owner Occupied

Another important demographic that you need to take a look at is the percentage of rental homes versus those that are owner occupied. If you’re most interested in buying, remodeling and flipping houses, you’re going to want to look at areas where the owner occupancy is higher. Likewise, if you’re looking for an income property, a predominantly rental oriented area may be best.

Although you’ll get some indication of the viability of a rental or flip from that data, it doesn’t tell the whole story. You also want to know what the rental occupancy rate and average rental rate are so you can determine whether or not you can recoup your investment. If you’re flipping, you’ll want to know the average home sales price so that you can manage your investment to make a profit when you sell.

If you’re a real estate investor with questions about using demographic data, investing in properties, or you’re looking for an investment partner, contact us. We’re experts at helping investors find the money they need to invest in properties with promise.

Protect Your Commercial Real Estate Investments from Fire

Protecting a rental home from the perils of fire is a very hot topic today. Commercial insurance will protect you and your lifetime investments in the unlikely event of a fire. Check your policy for fire coverage.

Did you know that every year problems cause more than 28,000 house fires and massive property damage? Most recent insurance studies indicate “Fires” as causing more than $1.3 billion in property damage (National Fire Protection Association, 2003-2007).

1] Flickering lights, buzzing noises, and face plates that are warm to the touch are all signs that a circuit may be overloaded, or wiring may be wearing thin.

2] Listen to Your Breaker — If you are continually tripping a switch and having to reset your breaker box, your house is trying to tell you something. There may be a fixture with faulty wiring or too high an electrical load on the breaker.

3] Review and Replace — Frayed electrical cords, wobbly ceiling fans, and loose face plates are more than mere annoyances. You should routinely inspect your home and replace or repair items in need of attention.

4] Working smoke and cigarette detectors on all levels of your home is an absolute must. Make sure you have a working fire extinguisher, and you know the proper way to use it.

5] Ban natural Christmas Trees, there are 1000’s of fires nationwide every year.

6] Never rent to smokers of anything, aside from the thousands of dollars third hand smoke causes to a property. Just one errant cigarette or joint can burn down your investment property.

7] Outside BBQ, Deep Fryers and Smokers can cause grease fires.

It is important to consider fire safety at every stage of commercial real estate investing.

This article was developed by Winston Rowe and Associates. They are a nation consulting firm that specializes in working with commercial real estate investors.