2020 may be a good time to build a granny flat

New state laws eliminate minimum lot sizes and owner-occupancy requirements.

Within the next few years, Californians will realize a gargantuan increase to its housing stock coupled with lower average market rent charges in many parts of the state. That’s because the backyard granny flat (accessory dwelling unit) construction-crush go-go days start Jan. 1.

Necessity is the mother of invention.

For way too long California’s compounding housing headaches have been a dearth of housing units and obscenely high rent prices for the minuscule number of available living quarters.

Throughout California, too much red tape, eye-popping government fees and painfully slow response times to building permit requests further increased project completion costs.

This piled on to the final property prices which already suffered from high land and building costs.

Compounding this shortage further was the failure of housing completions to keep up with California’s growing population demands.

This perfect storm prompted the California Legislature and Gov. Gavin Newsom to do something. Starting in August, the governor signed six accessory dwelling unit or ADU-related bills (three of the six were updates and changes) that will become law on Jan. 1.

There is not much red tape.

Local governments won’t have discretionary review powers, said Greg Nickless, housing policy analyst at the California Housing and Community Development Department. Ordinances can’t conflict with state code, he said. ADU’s only can be denied if water or sewer utilities are inadequate or for traffic and public safety concerns.

How about some new law fun facts?

  1. No minimum lot size.
  2. Owner won’t have to live on site.
  3. Building height can reach 16 feet, even if it means blocking your neighbors’ view.
  4. Owners can build a “junior ADU” within the primary residence measuring up to 500 square feet – even if there’s already an ADU on the property.
  5. Garages can be converted into ADU’s.
  6. Local government must review a completed application within 60 days (previously 120 days).

Does an investment in an ADU make sense?

A 1,000-square-foot, two-bedroom ADU would cost around $250,000 –30% less for a manufactured or modular ADU, according to developers I interviewed. If you were to rent it for $3,185 per month (the average two-bedroom rent in Los Angeles, according to Rent Jungle), it would take about 6.5 years to recoup your cost. Not bad!

If you are going to finance the ADU, it will take longer to recoup the cost of your investment. Given current costs, assume you’d pay $1,486 a month in mortgage, property tax and insurance payments.

If you were to rent it for $2,385 per month (the average two-bedroom rent in Orange County, according to Rent Jungle), you are ahead by $899 per month.

Please consult with your financial advisors for the more granular details.

Jeff Lazerson is a mortgage broker and adjunct professor at Saddleback College. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.


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Jeff Lazerson - Mortgage Columnist since 2011