To Build or not to Build: Adding an ADU to our Property Portfolio

I have been mightily distracted for the last month, so this blog has received about 1/4 of my usual attention. In times like these, I try to keep up with The Ledger and Big Scratch but the meatier posts get somewhat neglected. I mean, hell, I didn’t even publish the Church of FI last month even though I wrote it. This is what has me distracted.

Should I build an Accessory Dwelling Unit (ADU) in my backyard?

I overlaid a generalized footprint for both a one-story and a two-story ADU on a Google Earth image of my property. The 700 square foot unit would sit behind the garage, with a 3′ setback from the side property line and a 5′ setback from the alley.

From what I can surmise from the interwebs, a two-story dwelling might be cheaper to build due to the smaller footprint. I would love to keep my costs around $100,000 or less. I designed both the one-story and the two-story plans.

I am not an architect or an AutoCAD user. These amateur drawings took me 3-4 weeks (although I did about 12 versions).

One-story ADU plan

The one-story plan has about 683 square feet of living space. It would have two bedrooms near the back of the property. The living area would have south-facing windows to utilize passive solar energy and a woodstove. I have place a full size bed in bedroom 2 and a queen size bed in bedroom 1 for scale, as well as some standard size furniture in the living area.

This design is southwestern with archways in the closet and hallway openings. The main downside is that it has limited storage (kind of important in small units). In addition, a lot of concrete work would be required and the natural light would be limited due to the shade from the garage.

I would keep the roof line simple.

Here is my 3-D rendering of the structure.

Two-story ADU

The two-story ADU plan would have a footprint of 500-530 square feet. The difference is adding a closet off the back entrance to square off the footprint. This option might be more economical due to keeping the design simple.

The second floor provides an additional 265 square feet of living space, reserved for bedrooms.

Although the concrete cost would be less, we would have to install stairs which can get quite pricy (I think). We would have significantly more storage under the stairs and in the optional hallway closet near the back door.

The roof line would be a bit more complicated.

I do like the look of this design. The optional closet will go where the current cutout is. Plus, check-out all that southern exposure!

We would utilize the southern sunlight by setting the unit within the yard and not directly behind the garage. Both first floor and second floor south facing windows could help keep the electric bill down during the winter.

Notice both plan have an optional hot tub. Pretty sweet, right?

What about the numbers?

The driving force for this project was all about the attempt to lower our overall expenses during retirement. Currently, I still have about four years of work left. If we could cut another $5,000 – $10,000 off our annual expense requirements by either purchasing or building another rental property, that could make our retirement plan safer and more flexible.

With the addition of an ADU, we create a plan with lots of options.

Potential property inventory:

Colorado (primary residence) 3-bedroom, 2 bath single family home

New Mexico (rental property) 2-bedroom, 2-bath single family home

Colorado (ADU) 2-bedroom, 1-bath home

 

I have created six (6) potential rent/live scenarios and tabulated the resulting financials.

Each scenario (except the last one) has us living in one property while renting out the others. The first two scenarios are the options is we did not build an ADU, but kept our current inventory.

Scenario 1 keeps us living in our Colorado house and renting out the New Mexico house. Our rental income is approximately $8,000 per year and keeps our income needs from other sources (i.e., work income or passive income in retirement) around $34,000.

This is not a bad position to be in and our current retirement plan would cover these expenses at a safe 3.5% withdrawal rate.

Scenario 2 is our current flex-plan just in case the shit really hits the fan. It allows us to move back to New Mexico and rent out the Colorado Primary. It would lower our income needs to $24,000.

Scenarios 3-6 all of our options if we build the ADU. We could live in any of the properties and rent the other two. Note that our overall annual expenses would increase. This is due to the refinance loan we would take out to finance the build. It would add about $500 per month to our current mortgage. Considering we could rent the ADU for $1,000 – $1,400 (according to a local rental property manager), it would lessen our current mortgage burden by at least $500. A new property would probably need very little maintenance for a few years.

Each scenario lops off a significant amount of burden from our annual income requirements. If we chose to live in the ADU, we would need $11,000 less passive income per year. Those kind of numbers really add up over time.

The Downside

We haven’t made a decision on whether or not to pursue this build yet. The biggest hang up is the fact that we would have people living in our backyard. It is a hard thing to give up your personal space. Mr. TJL does not seem entirely on board yet.

The other difficulty is that building a house requires a lot of effort and time. If you aren’t willing to give up both of these things, then it takes a lot of money. We will do a bit of work ourselves but will need to hire a contractor or manager to make sure everything is to code and done properly. I hope to find a balance here.

I don’t really have a good idea of what this project will cost. My estimates are between $100,000 and $115,000, but I tend to be overly optimistic. It is a good idea to tack on an additional 15% plus taxes.

Once I have an architect review and improve our plan, I will work with a contractor to get initial bids and then brainstorm to get the project within our budget.

Next up: making a decision.

What do you guys think? Should we go for it?

 

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4 Responses to To Build or not to Build: Adding an ADU to our Property Portfolio

  1. Mr. SSC says:

    That’s exciting! Having looked at LOADS of house plans lately, I’d say you could probably find a set of plans really similar to what you want. It would save cost from an architect designing from the ground up. I’ve literally looked at 500+ house plans over the last 3 weeks and we’ve narrowed it down to 2 and our top choice, with mods. The architects we talked to range from $2.75/sq ft for custom to $1.50/sq ft for custom, to $1/sq ft for mods to an existing plan. Granted, your plan is small sq ft wise, but still savings where you can find them add up.

    We googled house plans and then scoured different websites. Most have pretty good search functions so you can narrow it down to sq ft you want and bedrooms/bathrooms etc…

    Just a thought. It looks like it would give you a lot of flexibility in your financial plan though. I say go for it, but maybe that’s because we’re starting that same process, lol.

    • ska@thejollyledger.com says:

      I have been obsessing over online plans for a month now too! Something about most of them felt generic. Plus we have a very specific site to work with considering code restrictions. We met with a contractor this weekend and that project is a bit out of our financial comfort zone. We are still brainstorming ideas. It might just be my method to keep my attention off of work.

  2. K says:

    Have you considered building a tiny house as your ADU, rent it out either as a permanent dwelling or AirBnB, and in which you could then live while traveling in retirement?

    • ska@thejollyledger.com says:

      I have considered a tiny house briefly. I think I would have zoning problems, but more importantly we are not as enamored with the tiny house as the rest of the world. By the time it is all said and done the numbers work better with a garage apartment or ADU. Plus our family would fit comfortably in 700 square feet. 200 not so much. Our town has also put a moratorium on short term rentals. We really have a much greater need for permanent dwellings around here.

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