Investor Cost Benefit Analysis

Tenants love backyards, but they usually aren’t very willing to pay much of a premium for one.  If you told your tenant that the house rents for $2,000 a month and the backyard for $600 per month, they’d laugh at you and not rent the backyard and likely not your house, either.  Yet, the backyard IS worth that and sometimes more in certain zip codes.  So, is building an ADU in your backyard worth it?

The Costs

Let’s look at the costs.  Austin ADU Builders turnkey platform is $300,000 for an 1100 sq. ft. second unit.  You can then condo the property for another $5,000, allowing you to sell each unit individually, or leave it as is.

The Value Add

So, what kind of value do you add?  In the northern and southern central zip codes (78757, 78752, 78745 and the central eastern area east of I 35), this 1100 sq. ft. house can sell for $450,000 to $475,000.  If you get into the 78703, 78704, 78705 zip codes, you would be looking at close to $600,000 for one.  

You can add roughly $150,000 to $300,000 in value to your property through building an ADU.  You will likely diminish the value of the main house somewhat but that isfairly small, usually on the order of $50,000 on the upper end.  I’ve had situations in which the value of the main house really changed little to nothing and in some cases increased.  Moreover, the addition of the second unit typically affects the rental value of the first unit little to none.  Again, tenants like backyards but they won’t pay for them.  You don’t normally see these kinds of returns with just buying a rental property.

Rental Returns

But what if you want to rent it?  Again, in the northern and southern central zip codes, I see $2200 to $2400 per month in rent, even higher the more central you get.  That produces $27,600 in rent at the mid point.  Your property taxes will increase but not as much as you might think if you don’t condo the property.  I’ve seen $2,500 in annual property tax increases with my properties.  Insurance increases another $1,000.  That produces free un leveraged cash flow of $25,100.  That’s an 8.3% cap rate on a residential rental.  That is at least twice as high as you would get buying a new property and renting it.  Let me repeat that. A return TWICE as high.

Finance It

Let’s say you want to finance it.  Put $60,000 into the project and finance $240,000.  On a 30 year note, that is roughly $1,111 per month or $13,332 per year.  So, with 80% financing you cash flow $13,306 per year on $60,000 invested for a 22% cash on cash return. 

Can I demonstrate any other way that this is a rock solid investment?  If you still don’t believe me, I will pay to condo your property and purchase your back yard/new B unit from you and you take no risk, just cash out.