Developing An ADU: Do You Dare?
Attention: House hackers, investors, millennials, first time home buyers… Have you thought about developing a house with an ADU, an accessory dwelling unit, with the idea of maybe living in part of the home and then renting out a separate part of it as a little apartment?
I did make a video about this, but the audio’s kind of poor (new microphone in the car didn’t work as well as I had hoped) but you can get the gist of it by reading the article below.
HOUSE HACK CASE STUDY: How Can You Turn Your An Existing Home Into An ADU?
I have a client who’s from Microsoft who is young and ambitious. He doesn’t want his first house to be just an expensive place to live, he wants it to be an investment. So he came to me with a plan for developing an ADU.
One of the strategies he had in mind to launch his investing journey was developing a single family home into a property with an accessory dwelling unit – like a separate apartment in the basement.
What Is An ADU (Accessory Dwelling Unit?)
We have been researching some of the options for how you can actually develop an ADU, which is an accessory dwelling unit, or a DADU, which means a detached accessory dwelling unit. A DADU is kind of a tiny house or a cabana, or a she-shed in the backyard that has everything that you need to live in like an efficiency apartment up to something larger… I’ve seen 2-bedroom ones, even. Note that some cities DO put an top-bound on the size of your DADU… they don’t want the “accessory” housing unit to be larger than the original house!
Where Around Seattle Does It Make Sense To Build An ADU Apartment?
Renton was one of the areas that we were looking at for this potential ADU project and we ruled it out, and I’ll tell you why in a minute.
We also looked at Bothell.
We were looking at these north end of the lake and south end of the lake locations as a way of getting into Bellevue, both these communities good commuting access to Bellevue – near my client’s job, but without being on the East Side of the Lake, where real estate tends to be prohibitively expensive, at least for the budget that we were working with here.
We were trying to keep the project under $700,000, so we were trying to find something that would be affordable, and close to Bellevue, Renton is one of the more affordable communities with a large rental population and older, less expensive homes that could potentially be fixed up or remodeled following the plan we had in mind.
We Found Renton To Be Limiting
So, we looked at Renton and what we found was that the city of Renton does not allow you to develop an accessory dwelling unit, which is a separate apartment, like a mother-in-law space or a finished basement as part of the existing building.
They do allow you to have a detached accessory dwelling unit – which would be an entirely separate building – but those are not cheap to build. You have to get a new foundation, roof, walls, siding, new plumbing, new electric. So, a lot of people end up doing a construction loan in order to build something like that. As the city representative told me on the phone, it may be half the space of building a house (in terms of square footage) but it is not half the price.
Will Your Lot Size and Set-Back Requirements Allow Additional Buildings?
Another challenge to building a DADU is that you have to have a lot that’s big enough for it – both for the building itself, and in some cases for the tenant’s parking as well. You’ll need to find out whether your proposed building is too close to the neighbor’s or the fence or property line and plan for how they are going to access the property.
If you have a very narrow road frontage on your property, it may be difficult for the tenants to park and get to their door or building. They could walk along the side yard or something to get back there, but it may be somewhat awkward.
Will Ready-Made Blueprints Solve Your Development Problem?
In order to support new development, the city of Renton is trying to make this easier by providing ready made blueprints – pre-approved architectural drawings for various DADU layouts. The city of Seattle provides something similar as well. They have eight or 10 different plans that are ready to go that range from building a 430 square foot, one bedroom efficiency units, up to a thousand square foot unit.
Renton Is Trying To Encourage DADU’s … In Their Own Way
If you use one of the plans provided by the city, you don’t have to pay an architect to develop your DADU building plans. They’re also trying to encourage people by waiving their fees until 2023 (this is in Renton), they’re waiving all of their licensing fees and impact fees. And they’re trying to… All the work that they need to do as a city to approve your building plan, they’re not going to charge you for.
They’ve spent a couple of years reducing it, offering half of the fee and that type of a thing, but they were still not getting as many new building starts as they wanted. So now, they’re experimenting with not charging a fee at all and see if that helps the project move forward.
One Big Catch That Makes This Difficult For Investors To Implement
One catch, and I think this is a big reason why building ADU’s and DADU’s hasn’t been more popular, is that in many cities in the PUget Sound, the owner needs to permanently live in the property.
So let’s say I have a split level house. I live on the top, I developed the bottom as a separate apartment and it’s working great, but eventually, I want to have kids… I want to live in a different area… I have a different job… Whatever… I don’t want to live there anymore! What can I do???
According to many local municipalities, I cannot rent out that top floor and have it be a two-rental house and leave. The cities do not want to have “just” tenants in the building. If you’re going to have an ADU, you also have to have an owner occupant onsite.
I’m not sure how heavily this is enforced – or if it’s enforced – but if you’re going to be putting that much money into something, it’s good to know what the rules are because if the neighbors complain or something goes wrong, you could get in trouble and you could be stuck doing it that way.
So, cities: Listen to me if you want to increase your housing density: Get rid of that rule and I think you’d have a lot more people who are interested!
Is Bellevue, WA Investor Friendly?
But right now you basically have to sell the property if you need to leave as the owner occupant. And you’d have to find an end buyer who was interested in having a tenant on their property, which is going to be a much smaller buyer pool. There are a lot more folks who just want to own their dream home and live in peace, than there are investment-minded folks like us who are willing to do what it takes to get ahead using real estate as a vehicle.
I looked called through a bunch of cities doing some research for this guy and another place we talked to was the city of Bellevue itself. Bellevue actually does allow both attached and detached accessory dwelling units. So you could, for example, finish out the basement and make that a separate rental unit, which would be great because that would be so much less expensive to develop potentially.
What Would An ADU Look Like With A Split-Level Home?
Think about split-level home – is this the best type of building for developing an ADU?
You have a bathroom and a bedroom downstairs, you have a rec room and a wet bar or something like that. If you could just have that wet bar convert into a kitchen, throw a couple of appliances in there, assuming that the electric system, could take it, you could be very close. You’d need to seal off a secure entrance from the upstairs and the downstairs. And you’d need to have a way of getting out of the house.
So, some kind of sliding glass door or something down in the lower level as a way to leave… their own private entrance/exit.
Also, it’s important for the bedroom, and this is for all bedrooms, it needs to have a window that’s large enough for somebody to escape out of in the event of fire.
So, that could be a fairly simple remodeling project. Turn the wet bar into a kitchen, there’s already a slider. There’s already a big window. It could be very affordable.
And a place like that I would expect would rent, depending on your location around town, I see them at $1,000/month all over. You could potentially get more if you were in a premium location or if it was especially big.
So What About Bothell?
In Bothell, they have the same rule about owner occupancy so develping an ADU may not work well there if you plan to move out and keep the proeprty as a rental. They want the owner to stay in the property with the tenant. So, this could work well if you plan to be in the property long term. But again, if it’s a stepping stone, which for house hackers it’s often times a stepping stone to getting either onto the next development project or to getting into the Seattle housing market in a way that’s more affordable, and then keeping the property long term as an investment or selling it off.
What Is Your Exit Strategy?
If you’re planning to sell off the home with the ADU developed, it may be desirable to some buyers. A certain segment of buyers, for example, those with a multi-generational housing set-up, may find this particularly attractive. As would other investors, like you! But most buyers want turnkey, simple, no hassles, no problems – and that means not having a tenant in the basement.
So, just something to think about… to note that these cities have that owner occupancy requirement. But I do like the idea of the ADU and developing that as a way to make your home more affordable.
What Makes Sense For You?
In the case of my client who started us on this journey with the idea of developing an ADU actually decided to go a different route and buy a condominium as an investment first. He is going to live there for a few years, and then keep the ADU plan in mind as “Plan B” for a future investment opportunity. This ADU plan can still make sense, but it’s good to know the pros and cons, and how this is different than buying a duplex, triplex, or fourplex as your first owner-occupied investment project.
What About Living With Roommates?
Have you thought about the numbers or evaluated the difference between renting and buying your first home or apartment?
I have another “house hacker” client who is going to be buying a condo as his first place out of school… and invite his roommates to live there with him to offset the rent. This can actually be a very affordable option, as you can buy a condo for around $300K, making rent work out pretty well at about $1200 per person.
And of course, if you are willing to go the official duplex route where it’s built as an apartment, then these ADU limitations don’t apply at all. And if you’re willing to rent out the entire home, that doesn’t apply at all. The only time that there’s caution in that regard is if it’s a condo or a townhouse. Something with the Homeowners Association that restricts, has a rental cap and restricts how many of the units in the development can be rented out.
But for the most part, if it’s just one single family occupancy per unit, either that’s a house, a condo or a duplex apartment type of thing, then you should be good to go and this type of thing doesn’t apply.
So Let’s Make A Plan That Works For You
Are you still interested in developing an ADU or would another real estate investment strategy for Seattle work better for you?
- If you are investment-minded
- If you think you can swing a property in purchase in Seattle (we’ll put you in touch with one of our lenders if you’re not sure…)
- If you are planning to hold on to the property for at least five years
Then it’s worth having a discussion about some of the strategies discussed on this page (or others we may know about. Even if you’re months or years away from being ready to make an investment, we’re happy to talk to you about the process, coach you, guide you, and invest in you. I started investing when I was 23 years old and had my share of ups and downs. Some deals make money and some just broke even.
I’m a third-generation real estate investor and I love helping other folks get into this very lucrative business. I am here to help and want to connect with you and be a small part in helping make your dreams come true! Please fill out the form below and let me know your questions. I can’t wait to meet you and start planning the next steps together.
We Can Help You Get Started Investing & Living In Seattle, WA
So, let me know how I can help. Always here to help serve, educate. I like these kinds of projects. They do take a little bit more work, but we’re not afraid of hard work. This is how we get jobs done, how we make money for our clients, right?
So, Emily Cressey here with HomeProAssociates.com, check out our other real estate investor videos. And also we’ve got some great neighborhood tours and different videos if you’re new to the area and trying to learn where you might like to live. So, make sure you check those out and I’ll see you on the next one. Thanks!