House Hack: Buy a Home That Has An ADU or "In-Law Unit”.

A strategy for house hackers. A policy for lawmakers. Building on SB1069, AB2299 to accelerate ADU housing development.

House hackers are great at finding clever ways to get their homes to pay for themselves. That's why they’re getting excited about ADUs and "In-Law Units" in California. Although ADUs are still rare in most California cities today, these secondary homes are becoming recognized for their strong potential for ROI and their positive benefits to communities. With new statewide laws SB 1069 and AB 2299 going into effect last year, many Californians are starting to wonder:

'ADUs, "In Laws".. What's the difference?'

Though these obscure terms are commonly interchanged, the difference is really very clear. ADUs are fully legal second housing units permitted on single-family properties, while, ironically, nearly all "In-Laws" are technically not lawful at all. (They mind as well be called Out Law’s for that matter.) This is where the house hacker finds their open opportunity. When buying a home that has a second "in-law" unit, but still needs to be permitted, the seller is able to dispose of an unknown problem that they'd prefer not to deal with, while the house hacker gets a design and remodel project with a bit of risk that they are likely to turn a tidy profit from; A clear opportunity for a win/win situation.

As more people start to see the value in homes that have an existing ADU or "in-law" unit, awareness and interest has grown in the market from all participants. Buyers and sellers, are seeing better deals, and real estate professionals who work in this market are becoming better positioned to help. Planning and zoning offices are also improving their systems to make them more automated and friendly to homeowners. In turn, the information about regulations that define this market must be better understood. This is where the house hacker earns their keep. By knowing all of the zoning and permitting requirements of a specific city, they can recognize value and make savvy investments in homes that have a lot of ADU “potential”.

Owner-Occupancy: The ADU Bottleneck

Un-permitted secondary in-law units exist on nearly 15% of single family parcels in the East Bay Area and are relatively common throughout California. By California law, millions of single-family homes are eligible to add some form of ADU, whether detached units in a large backyard in Fremont or a in a converted garage by the beach in San Diego. It’s hard to beat the returns a house hacker can generate from an ADU, so why haven’t larger scale developers and investors joined in the market?

One major reason is that most cities require that the home or the ADU be owner-occupied. This is intended to protect the character of neighborhoods by shutting out large scale real estate investor/developers who could buy up whole city blocks at a time and effectively double their housing density, changing the fabric of entire neighborhoods in the process. This leaves a special niche opportunity for the house hacker and also sets the stage to expand the ADU solution through measured relaxation of the owner occupancy requirements for ADUs statewide.

Solutions to Accelerate ADU Investment/Development

Over time as the difference between un-permitted in law units and fully legalized ADUs will become more understood in home valuation and financing models. This will also balance out the value that house hackers are able to generate from these currently, widely undervalued real estate opportunities.

We believe that reducing the owner occupancy requirement for individuals who commit to legalize un-permitted second in-law units that are existing, provided other stipulations like they will rent out the units at market rate or they will commit to resell the unit to an owner occupant within a specified time period could dramatically accelerate the development and financial opportunity in the ADU market in California.