On September 27, 2016, two new bills (AB 2299 and SB 1069) were approved by Governor Jerry Brown. These new state-wide laws direct California cities to allow Accessory Dwelling Units (ADU), commonly known as “granny flats” or “in-law suites,” to existing parcels zoned as single family residences and multi-unit dwellings.
The New Law
The law is meant to address California’s housing shortage and ease the weight of surging rent and home prices throughout the state. In a nutshell, the law now prohibits parking requirements (and other restrictions) used by cities to prevent ADUs, along with greatly reducing fees to install utilities that can sometimes reach into the tens of thousands of dollars.
Up until now, the new law has had little impact around the South Bay mostly because it is so new and cities are working to update their building codes to comply with the state. Although it may take time to work things out with your city, I believe this is a massive opportunity for existing homeowners throughout the South Bay. Rather than invest in expensive new real estate locally, homeowners have a chance to improve their own properties and earn a large return on their investment.
How to Put It to Use
Let’s say you own a home in Palos Verdes with a detached garage in the back yard of your 9,000 sq. ft. lot. Under this new law, one may be able to rebuild their garage to include a second story unit with a maximum 1,200 sq. ft. If the owner assumes $200 per sq. ft. to build an 800 sq. ft. 2-bed unit ($160,000) plus another $40,000 to build a 2-car garage and a budget of $50,000 for miscellaneous costs (architect, engineer, permits, etc.), then the total cost would come out to about $250,000. A 2-bedroom ADU should easily fetch $2,000 a month. That is $24,000 a year or almost a 10% ROI on your money from day one.
Another example of a clever use of this law would be for a homeowner on the Avenues in Redondo Beach with an alley in back of their home. Some of these houses have a garage in front and also alleyway access in back. Under this new law, the homeowner could build their garage in the alley and convert the existing garage into a junior ADU. Perhaps the new garage costs $50,000 and the owner spends another $50,000 to convert the garage. A studio or large 1-bedroom converted garage on the Avenues could easily command $1,200 per month. That would be close to $15,000 a year on a $100,000 investment. Making a 15% ROI with this small move is insanely good. Why not?
Where else can you invest in South Bay real estate and make that kind of return? Let alone a return like that in any investment arena? And don’t forget, upon construction completion, you could likely borrow against this newfound value in your property and amplify your returns even more.
Not only can current homeowners use this new law, but first time home buyers looking to ease payments on their first home should consider lots that would support an ADU. Here are some great micro areas to start your search:
Westfield Area of Palos Verdes (unincorporated county zoning)
Large estate lots throughout the P.V. Hill
Redondo Avenues with alley access
North Redondo SFRs with large 7,000+ sq. ft. lots
Corner lots throughout the South Bay with detached garages
Manhattan Tree Section with street to alley lots
Not all of these areas or homes will support an ADU, so be sure to hire a local architect to research the new law and how it affects the home or lot with the current city code. Some of them may not even know about the law, so do your homework and refer them here.
If you can get creative as a homeowner or make a savvy purchase as a first time home buyer, then an ADU might be a can’t miss investment opportunity that will literally pay huge dividends from now into the future.