Why I am building a rental unit on my property

Blog Post Image
Real Estate

I bought my Los Feliz home over 20 years ago. I never imagined that I would live in my house for 20 years, much less that it would increase in value by 400%. But today, I find myself in a position where my personal net worth is primarily in the house I live in. The challenge I face at this point in my life is that I need to generate income for my retirement and for this asset class, there are just a few limited ways to achieve this. Having so much in real estate equity limits my choices as to how to leverage this portion of my wealth to improve my quality of life and make the most of the time I have left.

I could sell the house, pocket the profit (after the IRS taxes my profit above $500,000), and put the money in the stock market, buy a rental property, or other investments that could provide additional income or wealth growth. But I like living in my house and my neighborhood, and truthfully do not want all my money in the stock market or in even lower appreciating assets. Also, I would have to find a new place to live and could never find a place in Los Angeles that I could buy or rent at my current mortgage, taxes and insurance costs.

But thanks to a new state law that became effective January 1, 2017, I can build a rental unit on my property and earn a monthly income for as long as the rental market exists in Los Angeles. These rental units on a single-family residential property are called accessory dwelling units (ADU’s). They can be attached to your home, or detached and can replace your garage in certain areas.

My home is a corner lot, adjacent to a fairly busy street. My house faces east and fronting a more traditional quite residential street. My garage is at the rear of my lot facing south opening on the busy street. Although the location is not ideal for the quiet enjoyment of my backyard, it is absolutely perfect for an ADU. This location allows me a unique opportunity to give up the back quarter of my lot to an ADU without having the tenants actually enter the area of the property I use. For the last 10 years, the garage has been used almost exclusively for storage.

So I have the ability for this kind of investment, and the right location, but it also financially seems like a wise investment. Based on my budget, and my projected monthly rent, I believe the amount invested will be fully repaid in just over 6 years. The addition to my property will also likely increase the value of the property, maybe not as much as the full amount invested but it will certainly increase my equity. I have wanted to own rental property for a while and this is a relatively easy way to enter the rental business.

One final factor is also at play with this decision. I have been active and engaged with the housing crisis we are facing in Los Angeles. I have learned a lot about the factors that have contributed to the rising rents and have concluded that lack of supply is the single most significant factor in the development of this crisis. I have advocated for more housing supply in various ways, but by actually adding to the housing stock in LA, I am putting my money where my mouth is.

I have, no doubt, considered the cons. I will have to manage a rental property and have tenants living very close by. And with tenants comes the potential for significant problems; from late night calls about plumbing problems to the worst-case scenario of hostility and non-payment of rent. Also, I am building a small house from the ground up, and the potential for cost overruns and delays are high. Even under the best circumstances, I will not likely see any rental income until 2020. Also, this type of investment is not liquid. If for any reason I need the money I have tied up in real estate, it could take months and I may have to sell at price less than I would like.
But all the arguments against are outweighed by the benefits I believe I will gain from this course of action. So, stay tuned if you are interested in ADUs, I plan further updates as I travel along this journey.