Today, I’m going to turn to the practicalities of building or converting a granny flat, including how much it can cost and how much you can recoup in rent.
The new California laws regarding granny flats, or Accessory Dwelling Units (ADUs), drastically reduced state fees for water and sewer hook-ups and permitting.This means that the cost of building a granny flat in California went down by tens of thousands of dollars.
However, while building a granny flat costs much less than building a single-family home, it is still an expensive prospect. In a recent survey by the UC Berkeley Terner Center for Housing Innovation, granny flat owners reported spending, on average, $156,000 to build their ADUs. Converting an existing structure, like a garage or a carriage house, into a granny flat will clearly cost less than starting from scratch. However, even a garage conversion could cost $30,000 or more.
In addition, a lot of urban areas in California (including throughout San Diego), charge development fees designed to mitigate the impact of new construction on the existing neighborhood. The new granny flat laws, as of now, have not addressed these fees, meaning that homeowners still need to research the fee structure in their area and factor it into their costs.
The market for granny flats is still new in California, and many cities are still working out their own ADU ordinances and regulations. As a result, homeowners may have some trouble getting a traditional loan for the project. Several innovative alternatives have been suggested. For example, ADU Builder in Palo Alto has created a profit-sharing model, in which the builder helps cover construction costs in return for a certain percentage of the profit from the rental of the new unit. Another Palo Alto company, Point, gives homeowners money toward the construction of a new granny flat in return for a percentage of the appreciation of the entire property; in this model, homeowners have 10 years to either sell the property or buy out Point’s share.
Clearly, building a granny flat on your property still involves a big investment and a lot of decisions, even with the new laws making it easier. So how do you know if building a granny flat on your San Diego property is worth it?
First, really think about your long-term strategy. Are you planning to sell your house in the relatively near future and want to maximize its value? Are you planning to stay in your current home and plan to use rental income to help pay your mortgage? Understanding your long-term plan is key in any real estate decision, including whether or not to build a granny flat.
Second, do your research. Home values and rental prices both vary considerably within San Diego, so it’s important to know the trends in your area. Having a granny flat can raise the value of your entire property, meaning a bigger profit when you sell. If that’s your goal, make sure to look into how much comparable homes with granny flats or rental units have sold for in your area. That will give you a better idea of just how much value such a unit might add to your property.
If you’re thinking of a granny flat as a source of long-term income - in other words, as a rental property - look into how much rents typically are in your area. According to RentJungle, as of January 2018, the average rental price in San Diego County hovered around $2,000. Average rent for a one-bedroom unit is around $1700-1800, while the average rent for a two-bedroom unit is around $2200.
However, these numbers can vary considerably from neighborhood to neighborhood. For example, rent in La Jolla is among the most expensive, ranging anywhere from $1800 to $3000+ for a one-bedroom unit. Rent in Golden Hill or Normal Heights, on the other hand, ranges from around $1100 to $1600+ for a one-bedroom unit. Knowing how much you can realistically charge in rent is a key piece of information when you’re deciding whether building a granny flat is the right financial decision for you.
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