Perhaps you’ve heard that a Backyard Dwelling can give you positive ADU cash flow from Day One. It’s true, but I can tell you are a bit skeptical… so let’s do the numbers!!
Adding an ADU is the fastest way to create immediate cashflow with an investment property.
You know adding an ADU is smart move. It increases your home resale value, gives you added flexibility to age in place and a security plan should a loved one need a place to live.
And, you know it is smart to do this now, because low interest rates won’t stick around forever.
You are one smart cookie, … but if you have never had investment properties, you might not realize how smart!
I am going to get a bit in the weeds with details on money, rents, and equity, but let’s start with the bottomline.
The Assumptions
I am writing this article in early April 2022. Today’s interest rate for a 30 year mortgage is 4.65% and I found new one bedroom ADUs had rented in Pasadena for about $2400/mo. Similar units rented on Air BnB for $200/night and up.
I am also assuming you are considering adding an ADU in your own backyard. You probably live in a decent neighborhood, one that ranks pretty high for the Ten Features of a Profitable Rental Property
Positive Cash Flow With Zero Money Down
The bottomline- even if you financed 100% of your new backyard dwelling you can expect positive cashflow from the moment you get your keys. And, our backyard dwellings are so darn cute you’ll be overflowing with quality tenants!
Of course, you’ll have even better cashflow if you invest some cash upfront. Here is a chart I did for a recent client illustrating her options:
Don’t forget- your mortgage payments are fixed, but rents will rise for the foreseeable future. A very modest 3% per year rent increase (with 100% financing) raises your positive cashflow to $1338 in just five years. If you use this toward the principle every month your ADU could be fully paid in as little as 11 years.
Short Term Rentals Equal More Cash Flow
If your area allows short term rentals the cash flow gets even better.
A quick survey of Air BnB shows that $200/night is a very reasonable rate for a one bedroom guest house. High demand areas could command much more.
If you book 15 mights a month you are pulling in $3,000 a month for a positive $1296/mo. And you get 15 nights for your own out of town guest, remote work, or simply to get away from the littles.
Rents Are Increasing
It is a decent bet that rents will rise in California, but your monthly mortgage payments are fixed. If you simply increased your rents by a modest 3% each year your positive cash flow increases to $1485/mo in just five years.
Property Value Increasing
Homes with ADUs already in place are in hot demand, attracting more fervor in an already hot, hot market. It is easy to see how ADUs increase a home’s value.
This is not a temporary fad. Our housing shortage is acute and likely to last for many years. At the same time people are looking for space – to house loved ones, as remote work space, or just flexible space as family needs change and grow.
This means a home with a quality ADU will appreciate more than a home without one!
Passive Income – An American Dream
Your ADU DIGGS is brand new, quality construction. There should be little to no maintenance required for many years. And, with smart site design and landscape, both you and your tenants will enjoy peace and privacy.
So- what would YOU do with this extra ADU cashflow? Here are some ideas to get you started!
- Pay off your mortgage early
- Set up an investment plan
- Early retirement
- Retire at a higher lifestyle
- Travel
Bonus Read: The 6 Different ROI Of An ADU
Your Results May Vary
There are a number of factors that can influence your results including how your Backyard Dwelling feels (Is it private? Did you get the optional patio cover?) to the market dynamics in your particular neighborhood.
Get your Free Consultation and we can help you understand the cash flow potential of your Backyard Dwelling. It’s free and we make it fun. Click Here to get started.
READ NEXT: How To Finance Your ADU
