It’s a familiar story for seniors in every community and neighborhood in California. Empty nest households have paid off their mortgage and their house has become their main asset, but their retirement income falls short of what they need. Making matters worse, their houses may be worth (unrealized profit) many times what they paid for them so house-jealous young people call them rich. Meanwhile, daily necessities chew up all their social security and pensions. Many are forced into jobs when they should be out of the workforce.
One solution with many flavors was born this year when California laws went into effect that require cities and counties to allow ADUs (granny flats, in-law units, garage conversions, and other names) to be built everywhere. Rental income is now a very realistic option for everyone with a home. In essence, every single family lot has the potential to be a triplex. Everyone will imagine different uses for what they can do, but here are three realistic scenarios for seniors who want to age in place for as long as possible.
- Owner creates a Junior ADU for health care aide in a spare bedroom.
- Owner creates a separate ADU for tenants (family or not. Doesn’t matter)
- Owner creates a separate ADU for themself. (modern and handicap accessible) and rents the main house (family or not. Doesn’t matter)
We started with broke homeowners, so how is this going to happen? Good question. At the moment, banks are wrestling with how to underwrite the lending repayment value of seniors with limited income. The typical financing for a house-rich homeowner would be a Home Equity Loan (HELOC). That may continue to be the best way to finance ADUs if society comes up with guarantees that a rental unit is sufficient security for the loan. Banks will need public support and Federal law changes to make this simple.
An alternative is being offered by a new firm in Los Angeles. United Dwelling is offering to build an ADU on your property that they manage for rental income. Eventually it becomes yours. Visit their website to get current details and sign up for a site evaluation…if you’re lucky enough to live in the area they serve.
Whatever the source of the financing, the key for our audience will be that rental from the ADU exceeds the costs of repaying the additional loan. Here’s a simple example:
Homeowner A has a typical 3 bed, 2 bath home worth $500,000, but with no debt.
A Junior ADU can be made from one bedroom and one bathroom by adding two internal doors (to provide lockable privacy) and one external entrance. The Junior ADU does not have to have a kitchen, but may have an efficiency kitchen. The cost for the remodel and permits is $50,000. Payments to retire a $50,000 HELOC in ten years would be around $500 per month. A private studio apartment would obviously be worth more than that in almost any city in California. If it was rented to someone who also was a home health care aide for the landlord, it would serve a dual purpose.
The same homeowner, but with the full ADU option would be looking at spending a lot more money for a lot more house. Let’s assume a cost of $250,000 for construction and permits for an 800 square foot ADU. This could be configured as from one to three bedrooms, but could be a 2 bedroom 2 bath unit suitable for two adults or a small family. In this case the repayment could be over a longer term since it is a true additional house on the property. A 30 year conventional mortgage would have a monthly payment of just under $1,300. The homeowner pays that amount and would be free to charge whatever level of rent was appropriate for their circumstances and prevailing prices. In Los Angeles or the Bay Area, a new unit like that would rent in the $2,500 range leaving $1,000 month of rental income for the homeowner.
Alternatively, in this exact scenario, the owner could move into the brand new ADU and rent the 3 bedroom house for even more than the ADU would have rented for. It also gives the owner the option of having a purpose built ADU for their needs, including no steps, universal design kitchen and bath for handicap access, and other amenities their original house may lack.
