Garage Conversion - why that car in your garage is costing you $1,100 per month
Your car, that clutter, and whatever else you have in your garage is costing you $1,100 per month by not utilizing the space as a rental unit. What would you do with that kind of monthly income? Perhaps use it to pay your monthly mortgage and give yourself some breathing room. Sound good so far? We’re just getting started. Whether we’re calling it a garage conversion or an accessory dwelling unit (ADU), imagine being able to convert your garage space into a rental unit with little to no cash out of your pocket; we’ll show you how!
First let’s talk zoning, permits, and legal blah blah blah considerations
An Accessory Dwelling Unit (in this case, a garage conversion) can be built on a 1) residentially zoned property that 2) has an existing single-family residence. You will be required to obtain a building permit to ensure that your new garage conversion meets all the zoning, building, health, and safety codes. Don’t let that stop you, and don’t be discouraged by the layers of legal jargon you’ll run into either. There are plenty of architects and builders out there who can help you. Our team at ADU Plus Inc. has streamlined the entire process and can do the project for you.
SB 1069 & AB 229 are key policies that paved the way for building ADUs in California. The innovative strategies laid out in these policies completely changed the game in favor of homeowners by making it easier (and legal) to build additional units on our properties. Because CA is running out of land to build on, leading to the housing crisis, it makes sense to create more rental units in the market by incentivizing homeowners to convert their garages into livable space--the incentive being rental income.
Don’t have enough space to build a granny flat, a second home, or an in-law suite then convert your garage. Thanks to the new laws, many requirements are now relaxed, making building rental units on the property we already own possible. For example, parking restrictions are no longer an issue as long as you’re within 1/2 mile of public transportation, or you can show that your car can be parked in tandem somewhere on your lot.
In the past, converting your garage was nearly impossible. Not anymore. Relaxed rules, less costly permit fees (in some areas up to 90% less), quicker review process for permits, and with the garage structure already in place, why would anybody pass on this opportunity?
Let our team of pros help you understand the process and the value of creating a rental unit on your property. We can help you each step of the way.
From design to completion, your garage conversion should take four months or less, depending on the time involved in the County’s process to review and award permits.
Do the math
Imagine renting your new rental unit for $1,100 per month; even with little to no money down, your finance payments would be around $350 per month, making this a must-do project. Even though that $350 expense is one that you wouldn’t have if you hadn’t built this ADU, you also wouldn’t have the extra $750 income at your disposal.
By converting your garage into additional 'liveable' square footage to the property you're also increasing your equity. If you can convert your garage for $175 a square foot, but the average value of homes in your neighborhood is worth $400 a square foot than you're gaining instant $225 equity per square foot through the ADU project. If, for example, your garage is 400 sqft (20' x 20') then that's $90,000!
You literally cannot afford to ignore this opportunity and not do this.
Your garage conversion is a significant investment (like when you purchased your home) that will continue to generate passive income and immediately raise the value of your property. We recommend saving your cash and consider financing.
Most homeowners take advantage of the many lending packages out there: cash-out refinance, a home equity line of credit, VA, or even a 203(k) construction loan. Regardless, you’ll have the option of spreading your monthly payments over 30 years. We’re seeing interest rates as low as 3.5% right now, and that means the rental income your garage conversion generates will be more than enough to cover the financing.
There is certainly nothing wrong with using your own liquid cash, but if you have the opportunity to generate revenue without using your own cash then perhaps give it a serious consideration. Additionally, because your garage conversion (ADU) will be wrapped into your mortgage, the interest payments are tax-deductible--another reason we recommend financing your ADU project.
We've illustrated below how a garage conversion can actually pay for itself with the rental income that it generates, while also reduce your mortgage by $750:
Determine your budget
Garage conversions are relatively inexpensive. Whether you have the cash readily available or the ability to finance your ADU project, don’t break the bank just because you can. Determining your budget is an important step. Here are few thoughts to consider:
What is the current rental rate in your area? You’ll want to know the prices for a comparable-sized unit? You may find that the average rental rate in your area for a studio or a 1-bedroom is $1,100 (maybe even more). Whatever the amount, this is the amount to keep in mind as you decide what type of garage conversion you want to build. What do you have to develop to earn the maximum rent? Think about your potential renter. What would they want, and what would they be willing to pay? This is important to know in order to maximize your return on investment with your ADU.
Consider your current monthly mortgage payment. How much is it? Since you’ll be borrowing more money to do this garage conversion, you’ll want to know how much your overall monthly expense will increase. In the example above, the garage conversion created an added monthly cost of $350 per month. You’ll also want to know the interest rate of your current mortgage compared to the new mortgage? We recommend that you refinance the existing mortgage into the new loan if interest rates are lower than what you currently have.
Things to consider when converting your garage into a livable space
Garage conversions are usually the easiest ADUs to build because the framing is already completed (compared to building from scratch). Essentially you are trading one useable space for different use. There are a few things you’ll want to consider at a minimum:
Foundation: Ensure a level foundation-most garages have a slight grade, so liquids slide away from the house.
Flooring: You’ll need to have a finished floor. Sorry, that oil-stained concrete isn’t going to attract good quality renters.
Windows: Add a window or two for natural light and air circulation. In some areas it’s also required.
Insulation: Insulate the walls and ceiling. Not all garage walls are insulated.
Heat: Having controlled heat is an absolute must. You can extend central heating or install a wall heater.
Lighting: We figured this didn’t need to be mentioned, but know that you’ll have to add at least one wall-controlled light switch.
Electrical: Install enough outlets, so no chord has to extend more than six feet.
Water heater, furnace, laundry area: If these items are in the garage, help your future renters out and cover them by adding a non-load bearing wall.
Entrance: You will have to ensure private access into the new rental unit as well as a door leading into the main house. (The door entering the main house never has to be used, but for the unit to be an ADU that entryway must exist.)
Is a garage conversion ADU right for you?
Many factors that should be considered if converting your garage into an Accessory Dwelling Unit (ADU) is right for and your family. One thing is for sure, funding the construction costs of building your ADU should never be a reason to say no. The rental market is hot, and it's almost guaranteed to have a renter the day you advertise your new rental unit. Let our team of pros help you determine the feasibility of converting your garage into a money-making machine. Whatever your long-term vision is, whether going on yearly vacations or having financial freedom, do yourself the favor you deserve and take advantage of the new laws that created what will soon be known as the ADU boom. And let our team of pros help you achieve those dreams.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.