Need feedback on building ADU to rent

[Bikesy]

Hi Team,
Long time reader but it’s been a while since I’ve posted.  I’m looking for feedback regarding the construction and rental of an ADU (accessory dwelling unit) on my property.  Some current stats below:
Age: 33 MFJ (wife is SAHM with our 3 kids)
Income: 125k-150k (Has been 50-100% higher the last 3 years due to stock grants but don’t want to count on that going forward.)
Assets: 350k retirement, 100k taxable (this will increase by 40k in January with RSU vest), 410k primary residence
Liabilities: 310k mortgage @ 3.375 30yr (just refinanced)
Net Worth: 550k

About Current Property and potential ADU: 

Our current lot is 2 acres and we can legally build a 750 sqft ADU.  Our house is positioned on the front corner of the lot so there is plenty of space on the other side of the property to build.  The unit would have its own entrance and would feel like a separate property completely.  We live in a MCOL/MHCOL area (vanilla 3/2 would cost 300k and rent for 2k).

Projected cost for ADU: 100-120k (I’m confident we could be at or under this, my family has been in residential construction in the area for 50 years and has many connections in the industry)

Projected rent: $1,400/month (most 2/1’s at this price point in the area are old and out of date, could potentially get more like $1,600.  I’m leaning towards a long term renter vs. Airbnb.  Our property is in a small “rural” neighborhood that is surrounded by the rest of the city which makes it a very desirable location.  (10 minute walk to all the bars, shopping, restaurants you could want).


A couple specific questions/comments:
-   Our county just passed legislation that eases restrictions on ADU’s to address local housing shortage issues, so the property could be legally rented.
-   With a typical rental property if you want out, you sell and move on.  We consider our current residence our forever home so we could not easily separate from the situation if we wanted.  How would this impact your decision?
-   Having the rental so close to our current residence should make self-management much easier.  Would you see this as a major plus?
-   How would you go about paying for this?  I wouldn’t be opposed to putting down a large chunk but I don’t want to empty our cash reserves.  Ideally we’d put down 25% or so and finance the rest.

I appreciate any advice/feedback.  Thank you!

[Another Reader]

What type of tenant would you get with a 2/1 in 750 sf?  Are you offering parking?  Is there private access?

I have briefly looked at numbers in my HCOL city.  It might pencil out if I could do a 2/2 in 1,000 sf.  Otherwise, even the very high rent does not support the cost.  I would get a different class of tenant, a small family that would be likely to pay a premium for a larger second bedroom and that second bath.  Those people would stay longer and pay the premium rent.  However, the City is stuck on a maximum 2/1 in 800 sf, so until they change their minds, it's a no go.

[seattlecyclone]

Are you allowed to subdivide your property below two acres? That could give you more flexibility to build something a bit bigger as a primary residence rather than under ADU rules.

[Bikesy]

Are you allowed to subdivide your property below two acres? That could give you more flexibility to build something a bit bigger as a primary residence rather than under ADU rules.

Unfortunately I don't believe we would be able to subdivide under current rules.  The lots in our neighborhood are either 4 acres or 2 acres, so dropping below 2 acres would make the property an odd ball which our county doesn't like.

What type of tenant would you get with a 2/1 in 750 sf?  Are you offering parking?  Is there private access?

I have briefly looked at numbers in my HCOL city.  It might pencil out if I could do a 2/2 in 1,000 sf.  Otherwise, even the very high rent does not support the cost.  I would get a different class of tenant, a small family that would be likely to pay a premium for a larger second bedroom and that second bath.  Those people would stay longer and pay the premium rent.  However, the City is stuck on a maximum 2/1 in 800 sf, so until they change their minds, it's a no go.

There is already a private access to the part of the property in question and there would be plenty of room to park although I would more than likely not build a garage.  I guess I was anticipating a young married couple or even a single.  750 sqft would be a fairly small 2/1; however, my thought was that a 2/1 allows a lot more flexibility for a married a couple that may want an office or even space for a child eventually.

[feelingroovy]

We bought our house with one of these. It is a 768 sq ft apartment built over a 2 car garage. We use the garage for ourselves.

Ours is 1/1 but there is an office. We have had couples, singles, two roommates, and single parents. Tenants care a lot about parking and laundry facilities. It's very attractive to people to have an apartment without shared walls. It attracts quit people.

It is definitely easy to manage. We have had other rentals before and this is so much easier. Partly convenience, partly just that people who are willing to live next door to the landlord tend to be easier tenants.

[terran]

If that's really the sticking point, I'll bet there are things you could do to make a 1 bathroom feel more like a 2 bathroom while staying within the letter of the law. Put a door between the toilet and the rest of the bathroom like some hotels. Maybe even have a sink in there. Have a big "his/hers" double sink. Heck, you could probably even have a shower and a tub while still counting as a single bathroom.

[Bikesy]

If that's really the sticking point, I'll bet there are things you could do to make a 1 bathroom feel more like a 2 bathroom while staying within the letter of the law. Put a door between the toilet and the rest of the bathroom like some hotels. Maybe even have a sink in there. Have a big "his/hers" double sink. Heck, you could probably even have a shower and a tub while still counting as a single bathroom.

My wife and I have lived in two 2/1's since we've been married and neither one felt like it was a burden.  I will say that one of these had a double vanity and that was a big plus.

[Bikesy]

We bought our house with one of these. It is a 768 sq ft apartment built over a 2 car garage. We use the garage for ourselves.

Ours is 1/1 but there is an office. We have had couples, singles, two roommates, and single parents. Tenants care a lot about parking and laundry facilities. It's very attractive to people to have an apartment without shared walls. It attracts quit people.

It is definitely easy to manage. We have had other rentals before and this is so much easier. Partly convenience, partly just that people who are willing to live next door to the landlord tend to be easier tenants.

Great feedback, we'd definitely have laundry built in and parking shouldn't be an issue.  The area we'd use for the adu is probably .25 acres so there would be plenty of space to park, although it wouldn't be covered.

[bacchi]

First, how will this affect your property taxes? What about a homestead exemption, if any?

This will also affect the cap gains exclusion for the designated land and ADU portion. In other words, .25 acres would be considered "rental" and wouldn't be in the $500k married exclusion for a primary home.

-   With a typical rental property if you want out, you sell and move on.  We consider our current residence our forever home so we could not easily separate from the situation if we wanted.  How would this impact your decision?

You can always make it a guest house later. Or put a teenager in it when they get older.

-   Having the rental so close to our current residence should make self-management much easier.  Would you see this as a major plus?

We live in the ADU and rent the main house. For us, as landlords, it's great. Though we do grouse about their use of the AC ("Can we go in there and turn it up when they're not there?")

Some tenants will appreciate this closeness and some won't. Just be clear about it.

-   How would you go about paying for this?  I wouldn’t be opposed to putting down a large chunk but I don’t want to empty our cash reserves.  Ideally we’d put down 25% or so and finance the rest.

We did a cash out re-fi for a lot of it. It took 18 months so there was time for cash flow to cover some bills too.

[seattlecyclone]

Are you allowed to subdivide your property below two acres? That could give you more flexibility to build something a bit bigger as a primary residence rather than under ADU rules.

Unfortunately I don't believe we would be able to subdivide under current rules.  The lots in our neighborhood are either 4 acres or 2 acres, so dropping below 2 acres would make the property an odd ball which our county doesn't like.

I'd be calling my representatives for a zoning change if I were you. How could a one-acre lot (still rather huge for a home) be considered an improperly high amount of density within a short walk of a commercial area? The mind boggles.

[Bikesy]

First, how will this affect your property taxes? What about a homestead exemption, if any?

This will also affect the cap gains exclusion for the designated land and ADU portion. In other words, .25 acres would be considered "rental" and wouldn't be in the $500k married exclusion for a primary home.

I roughly estimated an extra $1,000/yr on property taxes.  Homestead exemption isn't something I thought about.  Currently I think my homestead exemption is worth about $500-$1000/yr.  I also hadn't thought about the cap gains.  We don't plan to sell anytime soon but something good to keep in mind.

[Bikesy]

Are you allowed to subdivide your property below two acres? That could give you more flexibility to build something a bit bigger as a primary residence rather than under ADU rules.

Unfortunately I don't believe we would be able to subdivide under current rules.  The lots in our neighborhood are either 4 acres or 2 acres, so dropping below 2 acres would make the property an odd ball which our county doesn't like.

I'd be calling my representatives for a zoning change if I were you. How could a one-acre lot (still rather huge for a home) be considered an improperly high amount of density within a short walk of a commercial area? The mind boggles.

Yes its an interesting area.  Most of the houses are from the 70's when the area surrounding was mostly cattle pasture on the outskirts of the city.  In the last 15 years or so the area has blown up around our neighborhood.  Its great for us because we get to have some property without having to drive out of town, and it's been good for property values.  I guess the worst that could happen if we made the request was that they'd say no.  I just looked at the lot lines in our immediate area.  There's approximately 15 lots and they're about 50:50 between 4 acre and 2 acre plots.

[jpdx]

This looks like a solid plan to me. A 2/1 can be quite appealing for a childless couple, even if the second bedroom is much smaller since that can be used as an office or workspace. Since there will be no garage, consider offering a shed or other storage place for tenants to keep their bicycles, camping gear, etc. I know storage was always a major concern for me as a renter.