Are you Ready for Your First Los Angeles ADU Investment?

You have found a great Los Angeles ADU investment. You’ve done the due diligence: location, construction quality, and price all check out. The next step is to make sure that you are qualified to invest in an ADU. First time investors may be surprised when they learn what they can and cannot do. We have put together this list of frequently asked questions to help ADU investors understand the process better. 

Fees:

Can I pay my own title insurance? Owner financing and owner-occupied ADUs are exempt from real estate transfer taxes in Los Angeles County. Since the City of Los Angeles charges a $1,196 per unit to process an application for a building permit, can I get reimbursed for part or all this cost? The short answer is no. In general, the lender will not pay, and owner-financing will not result in reimbursement for these fees. A good rule of thumb is to budget an additional $2K for processing costs associated with your project at the outset.

Each city or county may have different fee structures for your ADU project. You should check with your local jurisdiction prior to beginning construction.

Renting Out the ADU: 

Can I rent out the ADU? The unit cannot be rented for more than 30 days per year to any tenant, unless you obtain an extended-stay permit from Los Angeles Housing + Community Investment Department (HCIDLA). These permits cost $2K and are available for units rented as a primary residence. If the unit being rented is NOT the primary residence, then you will need to complete a full application and pay a $450 processing fee. In addition, if you are renting only 1 of several ADUs on your property, you must not consider more than 50% of your income from rent or other revenue from the property. If you do, HCIDLA will not process your permit application. These are complicated rules, and you should be sure to navigate them thoroughly.

ADU Construction: 

Can we use the ADU as a construction office? Absolutely! It can also serve as a temporary living space if needed during construction (NOTE: failure to register your property with HCIDLA will cause you to lose the temporary living exemption).

What is the timeline for ADU construction? The building permit process can take anywhere from 2-4 months, depending on the municipality. Some jurisdictions are slower than others. Staffing shortages in some areas may also extend wait times.

What permits do I need to start construction? You will need a building permit and a green permit if your property is on the City of Los Angeles.

What should be included in my contract with an ADU contractor? You should include clear language that states the total budget, all fees associated with the project, including contingency amounts (contingency means the amount of money that is set aside for unforeseen issues with your project, such as needing to rebuild a wall after discovering mold during construction). Also make sure to add language that lets you out of the contract if compliance issues cause delays.

For example: If you must extend due to compliance issues and you exceed your budget, then you may cancel the contract without incurring any penalty fees. This way, you avoid paying for work that is not completed and ensures the contractor has a vested interest in getting you into your ADU as quickly as possible.

Do I need an architect? Yes, even if you are designing the project yourself, it is worth hiring an architect to ensure compliance issues are addressed fully and to maximize the efficiency of your build.

ADU Registration:  

What is an RCE number? An RCE (Residential Certificate of Eligibility) number is the permit you receive from HCIDLA, which allows you to legally rent your ADU under certain conditions. The rules vary by jurisdiction, but generally, your ADU can be rented for 30 days or less to a tenant who is not related to you. This permits you to rent shorter-term stays such as Airbnb to help defray mortgage payments if needed. You will need an RCE number in order to apply for a rental permit from Los Angeles County.

How do I register my ADU with HCIDLA? ADUs are currently being registered by HCID in a rolling fashion. You should check the HCID website every few days to see if your property has been posted for registration. Once it is posted, you must complete the RCE process within 14 days. HCID has an online registration system that includes instructions for completing the registration. When you register your ADU, you need to provide a plat of survey showing the unit and its relationship to the primary residence and parking units on your property (in terms of size/shape). If your property is in the City of Los Angeles, you must also show where your building will be located (i.e., lot/block) and provide an RCE Plan (a plan that shows the unit’s function and size). Be sure to print out a copy for yourself so you don’t have to rescan everything again! What is a “plat of survey?” A printout from the county’s Site Data program showing any easements, encroachments or other issues with your property that could affect ADU development. You can request one online through Los Angeles County Assessor/Recorder.

Can I begin work on my property before getting an ADU permit? Yes, if you register with HCIDLA BEFORE you start any construction. Once HCIDLA has issued your RCE number, you can apply for a rental permit from the L.A. County Department of Public Health. The rental permit will let you legally rent your ADU as an “accessory dwelling unit.” If HCIDLA has not posted your property online yet OR if 14 days have passed since they registered your property, you may proceed with construction—just make sure to get a completion inspection with your building department BEFORE you close escrow on the property. You will also want to include a contingency in your contract for extra time and money if you run into any compliance issues during construction that slow the project down.

What is an RCE Plan? An RCE Plan is a drawing that shows where the finished unit will go in relationship to the primary residence and parking units. The RCE Plan can be added to your existing floor plan, although you may need an architect or designer if you are not good at this type of drawing.

Adding the RCE Plan to your existing floor plan can be helpful in working with contractors—they will have something concrete to follow as they build. However, more restrictive jurisdictions like Santa Monica require a separate RCE Plan if you are altering any of the originally approved plans for your property. The process for creating an RCE Plan is like completing the Plat of Survey required by the city before you can submit building plans, although more limited. The RCE Plan is usually less than 1/8″ thick and shows only the finished ADU without reference to how it will be constructed.

If you think you have completed all these things, are financially comfortable enough, and have enough time needed for all the construction, then you are ready for your first LA ADU investment! 

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