There are many risks associated with investing in an Accessory Dwelling Unit (ADU). This article will lay out and describe some of the risks involved.
Many people that have ADUs rent them out and make a little bit of money from renting them. The American Dream has always been owning your own home, but what about owning your own apartment or rental unit? When you are considering purchasing an accessory dwelling unit (ADU) there are great benefits an d some disadvantages as well. We will talk about both here today.
The first major risk is going over budget. This should not come as a surprise because we have already discussed how much more complicated these projects are when compared to a normal house remodel. You need to take all the added costs into consideration before purchasing a property with an ADU on it. I will go over these costs in more detail later, but some of the main things you need to know are that permits can run $300-400 dollars, and toilet conversions for renters (which are required by law in certain counties) can cost around $200 per unit. These are just examples of potential added costs that you most likely don’t have when doing a normal remodel.
When purchasing an existing home with an ADU included in the price, there is always risk associated with how well the previous owners took care of both parts of the house (the primary residence and the ADU). If there is any damage to either part, it will be your responsibility from day one! This could include things like water damage if there is an issue with the plumbing on either end. It also includes things like termites or pests that could be living in the walls. Therefore, it goes without saying that you should hire a home inspector ADU contractor to come out and do a thorough inspection before making any offers on homes with ADUs included.
If you are deciding to build an ADU on land you already own near a house you already own, it is still important to consider financial burdens as well. Also, not having the time needed to dedicate building another dwelling on your property can be a risk of investing in an ADU.
Another risk factor to consider when purchasing an existing property is the possibility of mold growth inside of your apartment (if there isn’t already). The moisture from a leaky roof or some other problem could result in mold growing inside of your walls and ceiling, which can cause health problems for you as well as potential legal action taken against you by homeowners insurance companies if they deem it too dangerous. Mold removal costs thousands of dollars and can actually make the mold problem worse if it is not done correctly. Mold problems are common in homes with ADUs, because of the moisture that gets trapped inside of walls (where there is no ventilation) when air conditioning units are installed in the windows.
If you have ever owned a house, then I am sure at one point or another you have had to deal with water damage and all its aftermath. Did you know that replacing sheetrock inside of an ADU can cost $8 – $10 per sheet? This means that if your home has 5 sheets of sheetrock on each side, which is very common for houses built around 1900, the cost could be as high as $600 just to replace interior walls alone! It also means that if you must pull out anything like flooring, cabinets, or even your furnace in order to take care of the water problem, then there will be a bunch more money involved in the project.
It is common for homes in certain regions of the country (usually away from major cities) to experience some sort of infestation or mold inside their homes. Sometimes this happens over time, and it was not obvious at first when you bought the home that it had these issues, but usually once they are fixed, they show up quickly! If this happens before you purchase an ADU, make sure you hire someone to investigate exactly what is going on and then get them back out after any repairs are done so they can give you a clearance to occupy the space. Mold can spread very quickly and will cause your tenants a lot of discomfort, as well as destroy all their belongings if it is not dealt with in time. If you are purchasing an existing home that already has an ADU on it, make sure you can walk through both the main house and the ADU while wearing a mask to inspect for mold at least once before closing on the deal. This way you will have a good idea of what to expect if and when you do find mold.
The last thing anyone wants to deal with is family members that won’t leave. This could be because the relatives are cranky old people, or they may be kids who continue living in the ADU even though they are adults. If this is the case then there’ll be more cleaning up after them than just changing light bulbs from time to time! When dealing with problems like this, it’s best just to walk away from your investment and start looking for something else. The reason many investors avoid purchasing an existing property where someone is already living (whether it’s legal or not) is because of all the headaches that inevitably come along with it.
After all is said and done, the prospect of becoming a landlord will not be for everyone. It requires you to hire competent people to help with inspections, repairs, etc., and keep them on your payroll year round so they can respond quickly whenever things break down or need to be fixed. If you do not have at least 4-5 months worth of expenses in the bank, then you may want to get another job before taking on this type of investment. As a landlord there are plenty of big risks involved with just about anything that could go wrong if something isn’t working properly inside your rental properties.
If you are determined to purchase an ADU strictly as an investment property then make sure you do everything possible to protect yourself from liability. This means getting liability insurance from a good company that has been around a long time. You also will want to get an HOA or some type of legal arrangement in place so you can force your tenants to follow the rules inside the ADU (keep it clean, turn off lights, etc.). A simple $10 fine every month is something that would be very easy for them to deal with if they have children running around.
The most important thing for you as an investor to remember is that it’s not worth the risk! Be smart and make sure you don’t overextend yourself financially when purchasing an ADU for investment purposes. You need to think of real estate investing almost like a game: Can I afford this? Will my costs for maintaining/upgrading this be worth it? Will its use as an income property pay off in the long run? Sometimes you will find yourself asking these questions and then realizing that you cannot answer them properly because of a risk factor involved with the purchase. It’s important when doing any type of business, real estate or otherwise, to know exactly what the risks are and how well prepared you are in dealing with those risks before putting your money (or other people’s money) at stake.