How to Maximize Multifamily Rental Income with ADUs in San Diego


How to Maximize Multifamily Rental Income with ADUs in San Diego

By Sherry Chen, Kappel Realty Group

ADUs, also known as Accessory Dwelling Units, have become very popular in the last few years -- especially in San Diego. Since 2017, when the first state laws were released that allowed the addition of ADUs on single family properties, the City of San Diego building department has processed over 1,700 ADU applications and the number is growing.

It’s easy to see why ADUs have become so popular for homeowners. With a second rentable unit, homeowners can enjoy the benefits of rental income to help offset their mortgages. Additionally, ADUs can significantly increase your property value. But did you know that ADUs are now allowed on multifamily properties as well?

Now, multifamily property owners can also enjoy the benefits of additional rental income by adding more units to their properties. In 2020, a set of new ADU laws were passed that make it legal to add ADUs on any multifamily property throughout the state. If you’re a property investor who is interested in ADUs, then this guide is for you.

In this guide, you’ll learn:

     How many ADUs your property can allow
     Types of ADUs available for multifamily properties
     How to find a deal with ADU potential
Let’s get started!

How Many ADUs Can My Multifamily Property Have?

There are two types of ADUs that state law allows: detached ADUs and ADU conversions from non-livable spaces. Let’s take a look at each type.

Detached ADUs

California state law allows up to two detached ADUs on multifamily properties. However, it’s important to keep in mind that not every property will be eligible for two detached ADUs. The biggest determining factor is the lot size of your property. Most jurisdictions throughout San Diego County require a minimum setback between existing dwellings as well as setbacks from rear and side property lines. Therefore if your lot size is too small, your property may not be eligible for a detached ADU.

ADU Conversions

The second type of ADU allowed on multifamily properties are conversions from non-livable spaces. What does non-livable spaces mean? These are spaces that aren’t meant for living in, such as garages, laundry rooms, offices for property managers, storage rooms, etc. These types of ADUs are ideal for properties that don’t have the excess lot space for a new detached ADU.

Before you get too excited, this doesn’t mean that you can convert every single garage you have into an ADU. There’s a rule to help calculate how many ADU conversions you can have.

It’s called the 25% rule. This rule allows 25% of the number of existing units on your property to be created as an ADU converted from non-habitable spaces, allowing at least one ADU. Now if this sounds confusing, don’t worry. Let’s break it down with a few examples.

Let’s say you have a 4-unit property and two attached garages. Since 25% of four equals one, you can potentially have one ADU created from the garage spaces.

Now, let’s say you have a duplex with a detached garage in the backyard. 25% of two units equals 0.5. Does this mean you can’t have an ADU? No, the state law will still allow you to have at least one ADU created from the conversion of non-livable spaces, regardless of the number of existing units you have on the property.

The Importance of Local Rules and Regulations

We’ve just outlined the types of ADUs and the potential number of each type of ADU you can have on a multifamily property. However, to truly know the ADU potential for your property, it’s important to understand the differences between state law and what your local jurisdiction will allow. ADU laws will differ between city to city and there are many factors that determine ADU feasibility such as:

     Number of existing units
     Allowable density
     Lot size
     Setback requirements
     Floor area ratio requirements
     Lot coverage requirements
     Parking requirements for existing units
     Other building requirements enforced by your local jurisdiction
As you can see, it’s a long list. That’s why it’s so important for you as the property owner, to understand what the ADU rules are before you get started. It’s also important to work with a team that is knowledgeable about ADUs, to help guide you throughout the entire process.

Looking for a Multifamily Investment with ADU Potential?

At Kappel Realty Group, we specialize in working with investors to find the best investment deals with maximum potential. ADUs can be one of the most profitable value-add opportunities  if you know what you’re getting yourself into and if you’re working with a team of professionals who are knowledgeable about the ever-changing landscape of ADUs.

As an ADU-focused real estate agent, I help buyers find and determine ADU potential for both multifamily and single family properties throughout San Diego County. If you’re looking to invest in a multifamily property in San Diego with the hopes of increasing your rental revenue with ADUs, here are a few tips to help you get started. When you’re looking for investment opportunities, here are a few property characteristics to keep in mind:

     Located in ADU-friendly cities
     Has garage spaces that can be converted into ADUs
     Backing an alleyway
     Has development potential and zoned for higher density
     Located near transit or areas with high walkability scores
     Areas near universities and colleges for rental demand 
These are just a few of the characteristics that help with ADU feasibility and help you ensure you’re buying a property in an area with high rental demand. If you’d like to learn more, check out my in-depth guide on multifamily ADUs.

If you’re looking to find your next multifamily deal, contact our team today.

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Veteran owned and operated, the Kappel Realty Group is a team of Realtors focused on educating and assisting real estate buyers and sellers in the San Diego region. Nearly all of our agents have advanced degrees and master’s degrees in real estate or finance and half our agents are military veterans.
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