[Editor's Note: This guest post was submitted by physician financial blogger and Los Angeles resident, the Darwinian Doctor. It's a timely post considering that earlier this week we ran 12 Reasons California is a Terrible Place for Doctors to Build Wealth. Darwinian Doc's parents had a small amount of money saved up for retirement but still had a chance of making it work for them until the death blow of moving to California to be closer to Darwinian Doc and family. When you try to stick it out in California, you've got to come up with creative ways to overcome the consequences of negative geographic arbitrage. Here's The Darwinian Doc's solution to solving both his childcare problem and helping out his parents. We have no financial relationship.]
“Just Support Us When We're Older”
When I was in high school, I was always surprised that despite living in a rental house, my parents still somehow found some cash to pay for my music lessons and other extracurricular activities. Clearly, if we had enough to pay the tutors, we couldn’t be in such dire financial straits, right?
Whenever I asked my mom about money, she would joke and reply, “Just support us when we’re older.”
As I went through college and then medical school, I often ended up being the one to fill out the forms for financial aid. I realized that unless my parents had a secret stash of gold bars under the floorboards, they had very little saved for retirement. I also realized that my mother hadn’t been joking at all about likely needing financial help later on.
How to End Up at Retirement Age With No Retirement Accounts
After a brief foray into the dry cleaning business, my dad spent the majority of the 1980s as a commercial real estate broker. That work dried up in the recession of the early 1990s, starting an increasingly grim decade of austerity for my family, complete with a repossessed house and all the awful money stress that comes along with stuff like that. My father tried to keep us going by starting a construction business, and eventually, my mom went back to work as a hair stylist to make ends meet.
Needless to say, during this time my parents had little ability to consider retirement planning. The majority of their time was spent just trying to make ends meet. There was no 401(k) account, no employer match, nor was there any inheritance coming.
In recent years, I’ve learned that this situation is very common. Studies have shown that nearly half of working-age Americans have no retirement savings at all! In 2013, the average American working-age family had only $5000 in retirement accounts.
A Crash Course in My Parents’ Finances
After I left for college, my parents’ money situation seemed to get better. The real estate business picked back up, and they seemed more comfortable. My mom was able to stop working again. Over the next decade, they retired and moved to Nevada for the low cost of living. But I still had no real clue about the particulars of their financial health.
It was the birth of my first child that started to open the door to the murky area of my parents’ finances. Shortly after he was born, my mom decided that she wanted to move to Los Angeles to be closer to her grandchild.
My wife and I were ecstatic at the thought of free childcare, so after a few months, my mom made the move. Leaving my father to temporarily fend for himself in Nevada, she took up residence in a studio apartment by our home. After my wife went back to work, my mom shared childcare duties with our nanny. My wife and I paid for her studio, which was around $1200 a month. My mom usually traveled back to Nevada over the weekends to make sure my dad was getting along okay in her absence.
After another year or so, my dad sold their house in Nevada and came to Los Angeles as well. They moved from the studio to a larger apartment near our house where the rent was about $3000 a month. It was by no means a fancy apartment; this was just the going rate in our area of Los Angeles at the time.
We offered to pay for half of their rent, which prompted, for the first time, a frank discussion about their finances.
I learned that even with splitting the rent, my parents didn’t have enough cash flow to cover their rent and living expenses in the long term. Although they were much better off than those dark days in the 1990s, I learned that the vast majority of their retirement portfolio consisted of:
- A condominium (rented)
- Cash from the Nevada house (in CDs)
- Social security
The total cash flow from these assets yielded just over $1500/month.
My Wife and I Inadvertently Doomed Their Meager Retirement
On one hand, my parents both helped immensely with childcare, and my son (and now sons) benefitted enormously from their loving care. On the other hand, by luring my parents from their cheaper existence in Nevada, I doomed the sustainability of their retirement.
In Los Angeles, the expensive rent, food, and utilities alone would eat through the value of their portfolio in about 10 years. And if one of them became sick and needed to go to a care facility? Their assets would be gone in a few years at most.
Solving the Problem
Wracked with guilt, I debated the situation endlessly with my wife. I wanted a solution that improved my parents’ quality of life, while not completely derailing my own desire for financial independence. We eventually came up with a few options to stabilize my parents’ living costs:
#1 Allow my parents to move in with us
This option was a non-starter. My wife told me in no uncertain terms that we would likely end up divorced if my parents shared a roof with us. Getting a divorce would violate the “one house, one spouse” rule of financial wellness, so we moved onto the next option.
#2 Buy a nearby duplex and have them live rent-free in one unit
It turns out that duplexes in Los Angeles, like single-family homes, are crazy expensive. We would have had to take on another sizeable mortgage to purchase an LA multifamily property, even if we used my parents’ cash for a downpayment. This made us uncomfortable, and to top it off, we realized that the rent from the second unit alone wouldn’t come close to covering the costs of the new mortgage. Charging my parents rent would defeat the purpose of this option, so we decided against this as well.
#3 Move to a house with a larger lot and build an accessory dwelling unit (ADU) for them on our land
We ended up choosing this option. We moved to a property with a larger plot of land of about a third of an acre and expanded our garage to an ADU (accessory dwelling unit). An ADU is just a fancy term for an in-law suite or granny flat. It has all the essentials, including a bathroom, kitchen, and sleeping space.
While Los Angeles has historically made the process of legally building an ADU about as easy as placing an IV in a screaming 2-year-old, recent changes to state laws have made the approval process much easier. In California, there is now the general recognition that increased utilization of existing land to create more housing units is a good way to ease the housing crisis.
The Accessory Dwelling Unit (ADU) Solution: A Win-Win
We took bids, got over the sticker shock, and then forged ahead with our plan to make a fully permitted ADU. Our priorities were speed and quality of construction, as well as minimizing legal risk. So we went with a licensed and bonded contractor who would obtain all necessary permits from the city.
We took out a low-interest personal loan from my parents for $150k and paid for the rest out of our savings. The construction was about $175k by itself, and the appliances and fixtures cost another $25k. We didn’t want to pay for a designer or full-service architect, so my wife and I selected and purchased everything from the dishwasher to the flooring. This was significantly more annoying and time-consuming than I thought it would be.
I'm surprised that the contractor bid didn’t include things like the HVAC unit, the bathroom tiles, or the oven, but this seems to be a universal phenomenon amongst LA contractors.
The garage before conversion.
Was an ADU a Good Financial Decision?
So this all begs the question: Was this a good investment in addition to being a good long term solution for my parents’ needs?
Let’s consider some of the benefits from this situation (in no particular order):
- Added value to our property
- Free childcare (about 25 hours a week)
- The relationship between my kids and their grandparents
- Economies of scale for utilities, food, and toiletries
When we delve deeper into the numbers, first to consider is the $150k loan we received from my parents. With their blessing, we will pay the personal loan back to them over a 10 year period, plus 3.25% APR, to help improve their cash flow. This is $1466/month.
Finally, considering that we were previously burning through over $36k annually on just their rent alone, my parents simply have to live in the ADU for 5-6 years before it essentially pays for itself.
Looking down the road a few years, I envision being able to get by without a full-time nanny as both kids start going to school full time. After my kids come home from school, they can hang with their grandparents until my wife and I get home from work.
Looking even further down the road, I see a place where my parents can safely age in place. If minor health problems arise, I’ll be able to intervene conveniently and frequently, as they’ll literally be in my backyard.
The specter of more serious health problems that might need a long term care facility haunts me still, but one problem at a time, right?
Conclusion
It took about 6 months from start to finish, but the occupancy permit finally came through. My parents are set to move into the ADU next week and will have 600 square feet of newly constructed living space all to themselves.
The finished Accessory Dwelling Unit.
As long as we all continue to get along, this arrangement should be mutually beneficial. My parents can be deeply involved in the lives of their grandkids while allowing me to help support and repay them for the sacrifices they made to allow me to become a physician.
Of course, I wish they had the means and foresight to have ample retirement savings to support themselves in retirement. They actually ended up better off than most retirees, but the expensive cost of living of Southern California did them in.
Unexpected family expenses can easily derail your journey to FIRE (or moFIRE). But by paying upfront to stabilize parental living costs with something like an ADU, you can get back on track.
Do you have an accessory dwelling unit as part of your home? How have you used it? How have you helped out non-financially independent parents? Comment below!
That’s a tough situation. If my parents didn’t have a secure fixed income, I have no doubt we would be in a similar spot.
Good for you for getting creative and figuring out a way to accomplish all of your goals in a way that won’t completely derail your journey to FIRE.
TPP
Hey TPP, thanks. Now that it’s all finished, I’m really glad we did it. My parents seem happy and it’s much easier for them to help with the childcare. The journey to FI is a marathon, after all. I consider this more of a stumble than a detour.
— TDD
Thankfully you and your parents have a great relationship.
Your story highlights for me one of our family traditions that I’ve come to appreciate….my grandparents would say “we don’t want to be a burden”, and they weren’t. My parents, although with relatively little to start with, managed to care for themselves (and still living independently at age 91/83).
As I told one of my kids…”the best gift my parents gave me was providing for themselves so they didn’t need my help in later life. I will give you the same gift….”
Good job on coming up with a creative and successful solution.
Thanks Planedoc. It’s a blessing to have financially stable parents and grandparents.
As for the relationship between me and my parents, thankfully it’s been a good one in recent years. Since the move, we’ve all been on our best behavior. I think we all realize that it’s in our collective best interest for this all to work out for the best. Fingers crossed that it’ll continue to work out!
— TDD
I love this. Been thinking of perhaps doing this in Los Angeles too.
Our garage is huge.
May I know what is the final cost you have to pay for this ? I am ready for any sticker shock ! LOL
Hi Irine, sure — all in, it was about $200,000. We made some higher end choices on the fixtures and added in a little hardscaping as well. So the construction, permitting, and architect fees were about $175k, and about $25k ended up being the rest (HVAC, kitchen, toilet, washer/dryer, flooring, etc).
— TDD
Not trying to be snarky, just exploring the situation but why wasn’t you and your family moving to Nevada listed as an option (with an explanation for why it would be dismissed)?
Hey Fun,
It’s a good question! The answer is that the order of events decided this for us. First, my wife and I started having kids and got/maintained jobs in the Los Angeles area, then my mom decided to spend part time here as well. Next, my dad decided to sell the house in Nevada and moved here as well.
We didn’t have a formal discussion about their finances until they had already made the decision to come here to Los Angeles.
Although in theory we could have all decided together to uproot and move somewhere cheaper, it didn’t really seem like an option. The Dr-ess certainly would have protested, and I was a couple of years into a job that, though not perfect, makes me pretty happy.
So we decided to look for solutions to make it work here in Los Angeles, rather than the more drastic solution of moving us all somewhere else.
— TDD
Did I see that correctly? $200,000 for 600 square feet of living space? That seems insanely expensive, but I don’t live in California either. Did you ever consider doing any of the work yourself to reduce the cost?
Hey FunkDoc, it seems insanely expensive to me too, but after I got a few bids, I just realized that higher cost of living increases the cost of everything, including construction. When I thought about it, the workers who are pouring the concrete also are paying for higher rent, food, and more costly gas. So their pay is likely higher than other areas. This all trickles down to the client.
For such a big job, I didn’t consider doing the work myself. I’m handy, but not *that* handy! The contractor basically turned my garage into a one bedroom house.
Also we were in a bit of a time crunch. For every month that we delayed, we were tossing away over $3000 in rent. So using a team that could complete the project in 6 months, rather than a year, was a priority.
— TDD
Moving was not an option? Was it considered? Any siblings to share the burden? HCOL areas are a luxury. Paying for your parents retirement in a HCOL is a huge expense. Child care is expensive. The author just adopted two more. He can offset their costs for a few years using them to help with the kids but this is going to be a major expense going forward. I would be nervous about setting them up in a situation they can not afford without your help. There are a lot of people who live on SS alone just not in LA. You already built the structure so it is a moot point. I wish you the best.
Hi Lordosis, thanks for your thoughts.
We didn’t consider moving to another state, despite the obvious benefits of geo-arbitrage. For better or for worse, we’ve decided to make it work in LA. It also all happened fairly organically — the Dr-ess and I built our lives, then my mother decided to move here to be close to her grandchild. Next my dad joined her, and then we found ourselves in a financial pickle and had to turn it into… relish? Not sure if I did that metaphor correctly.
— TDD
Other future considerations, that may be super expensive in Ca… I went thru this living in NYC metro area:
Long term health costs for aging parents. Good in home nursing can be hard to find, and can be pricey. If assisted living facility usage becomes necessary, the non insurance costs can be astronomical, especially in the coastal urban areas. We went thru that for MIL with dementia. The monthly bill came in around 10,000 (including a locked dementia ward). The care was excellent and she lived for 5 years there, thats 120K per year!!. Luckily for us and them, her deceased spouse (hard working surgeon emigrated from middle east) had amassed 2 M retirement nest egg which covered it… with $ to spare.
I cant imagine the emotional and financial strain and struggle this ordeal would cause without proper planning.
Hi DRG, future health care costs are the biggest risk factor for my parents. I’m taking a breather now that we have their living situation stabilized, but this issue is already looming large in my thoughts. It’s going to take a lot of planning (and saving) to insure against that risk, and to be honest I haven’t figured out the best strategy going forward.
They will both have Medicare as of this year, which is great, but as you pointed out, it’s the possibility of long term care or assisted living that can quickly bleed any bank account dry.
I’d love anyone’s thoughts on the matter.
— TDD
If they move to assisted living, you could rent the ADU to defray the costs.
Hey Graceis, thanks for the suggestion — this was one of the advantages we considered when building the ADU. No matter what happens long term with my parents, we’ve created an asset forever. Having more cash-flowing rental real estate is always good.
— TDD
Great post. I imagine this route will likely be in the near future with one side of the family. I know they have some savings, but money is just “one of those topics” they avoid discussing. But we have our suspicions the nest egg isn’t enough. They’ve struggled with monthly budgeting before, teetering between extravagant spending, to having a dismal “woe-is-me” mindset. Lack of help from other siblings also a factor.
Sounds like a tricky topic with many moving parts… The best course for your own professional and family life, a grandparent’s desire to enjoy retirement and be close to children/grandchildren, having enough living space between two generations, etc.
Thanks a lot SM. This all came to a head when we were finally forced to have “the talk” with regards to my parents’ finances. Without clarity, we probably would have just puttered along with my parents depleting their funds on rent until the situation was even more dire.
Although difficult, perhaps at some point it might be a good idea to start gently inquiring about their retirement plans and more importantly, their expectations for assistance.
Good luck!
— TDD
Interesting post.
A lot of us “mid-career” or middle-age doctors are feeling “the squeeze.” Yes, we make a great living. But do we have enough money to provide for ourselves and our future along with the futures of our kids? Maybe.
But add in helping with the current and future costs for our aging parents and even our generous budgets will feel the strain.
These situations all have variable and personal factors that make it tough to generalize how to handle all those costs.
We need more examples like this one of how one doctor handled one difficult situation with balance and compassion while avoiding financial devastation for themselves and the ones they love.
Well done! Thank you, Darwinian Doctor, for sharing this personal story and for writing about it so well. Thank you WCI for providing a platform for physician sharing like this. It was desperately needed.
P.S. If your parents ever feel bad about their accommodations then remind them that the “tiny house” movement is quite trendy and they are part of it.
Haha, thanks WealthyDoc. I do worry about the cramped nature of their accommodations. It’s been made much worse because they’ve stuffed it to the brim with much of the furniture they had stored from their Las Vegas house. Their decor is out of proportion and very pack-rat chic right now.
We’re going to do a big garage sale this month, and I think the ADU will feel more spacious afterwards.
— TDD
Good job. We live in SLO and did the same ADU in our smallish back yard with a previously non-permitted pool house (pool filled in by previous owners) of 560 SqFt. Completed a one wall remodel and lived in it 10 mo during remodel of main house (1949 built originally). Enjoyed the ADU living experience just fine and were on site for both jobs 8 yrs ago. Agree that CA building costs are way different than the heartland (we spent even a bit more that you due to the complete tear down) but the weather is nicer here than most places 24/7. All parents are now deceased, so we use the ADU as my wife’s home office (psychologist) with combination gated entrance and a guest house when we have visitor’s. Not considering using ADU as a rental when she retires, but may be able to house our caregivers there when and if we end up with that functional need.
The grand parenting is a win-win in so many ways.
Good on ya! If you come up for air, stop by.
Hey Rehabdoc! The ADU really does give tons of flexibility and utilizes your existing land to its fullest.
It’s an interesting situation being an anonymous blogger. It seems like there are a lot of kindred spirits here in SoCal.
I anticipate I’ll make an exception eventually for local bloggers and host some get-togethers or something like that, but I might have to wear a mask with my site logo… you know, to protect my identity.
— TDD
Good choice TDD. NPR just ran a piece on ADUs this week too.
Currently we subsidize a nearby condo 5minutes away for our parents too, just like you did. They like their independence while they are healthy and able to do their ADLs. One day we too may go ADU or garage conversion.
Does it stink to be in a HCOL? sure. But that’s our choice not to be in BFE and they came along for the ride.
I don’t view our parents subsidy as a setback for my own FIRE. It’s been a part of our plan all along.
Thanks for the thoughts, StarTrekDoc!
I like your approach of seeing your parental subsidy as part of your FI plan.
Likewise, it’s worked into our monthly budget, and part of the reason why my monthly expenditures are so darn high! But really it’s a privilege that I can help my parents like this. They certainly sacrificed to give me advantages during my education.
So contributing to their expenses is something I’m happy to do. Luckily as a physician, I can afford to do it while at the same time pursuing all my other financial goals.
— TDD
Very interesting post and thanks for being so detailed and transparent with it. This is one of those topics that is rarely discussed but super important. Like any financial topic, this should be addressed early and often with the spouse so everyone is on the same page. Author did a great job of that and provided some great perspective on how to do it.
The topic of parental support is something my wife and I have discussed a lot. My mom is married and doing well in Florida. Wife’s parents are still married and doing very well financially and health-wise.
My dad and his wife, on the other hand, are in what sounds like a similar situation as your folks were. Several mixed factors involved, but definitely some poor financial decisions (refinancing home, buying too much home & land in the country, using EJ as “advisor”). Making matters worse, they want to downsize, but his wife wants to move to another rural area with even higher property values. She even had the audacity to say that I need to help with their next home, which was met with a factual rundown of my current negative net worth. I think my wife and I will stick to just helping advise them on cutting costs and giving my dad a subsidy (only for him and stops when he passes) once I start my private practice gig.
Hello S&D! Love the moniker, by the way.
That’s a tough situation with your father. It’s worse because it seems like there are significant differences of opinion about responsible financial planning.
It sounds like you already opened up communication about the realities of student loan debt. It may have been news to your step mom, but now she knows that doctors aren’t immediately and magically rich after medical school! Hopefully she and your dad will take this into consideration when they’re making up their mind about their next move.
At some point, hopefully before they finalize that decision, it might be good to decide what and how much you’re willing to send their way (if anything). If you let them know, hopefully they’ll use that information to make a smarter choice.
Good luck!
— TDD
Did you consider something like a “prefab” home? For example, I’ve looked at Connect Homes several times and (when the time comes) I’ve considered putting one in my yard as a ADU for my own parents (similar story, moving from midwest to bay area and can’t afford it here). The two smallest models are right around your budget:
http://connect-homes.com/connect-1/
http://connect-homes.com/connect-2/
There’s other companies that do these, obviously, but I was always impressed with the transparency (costs) and ease of use of the Connect website.
Then again, you may have wanted something architecturally similar to the main house?
Hi Danesgod,
My neighborhood is a “HPOZ”, which means it’s under historic protection. It adds another layer of regulations onto any major construction. As you suspected, the ADU needed to conform to the architecture of the main home. Also, we had a very tight space between the property line and the pool. The best way to maximize the space was to convert the garage. That allowed us to keep the “setbacks”, which means how far the walls were from the property line.
For new construction, or if we had knocked down the garage and started from scratch, we would have lost about 50 sq ft of precious living space! This is because they would have forced us to push in one of the walls about 2.5 ft.
The pre-fab products from Connect seem top notch! I think your parents would feel quite lucky to live in one of those units. They seem quite luxurious, and I bet the pre-fab nature would cut out a lot of the annoying architectural and design choices we had to make. It also looks like a similar cost to what we spent.
If your neighborhood allows it, I’d go for it. It’s an easy way to wring more living space out of your expensive land.
— TDD
Hi Danesgod,
My neighborhood is a “HPOZ”, which means it’s under historic protection. It adds another layer of regulations onto any major construction. As you suspected, the ADU needed to conform to the architecture of the main home. Also, we had a very tight space between the property line and the pool. The best way to maximize the space was to convert the garage. That allowed us to keep the “setbacks”, which means how far the walls were from the property line.
For new construction, or if we had knocked down the garage and started from scratch, we would have lost about 50 sq ft of precious living space! This is because they would have forced us to push in one of the walls about 2.5 ft.
The pre-fab products from Connect seem top notch! I think your parents would feel quite lucky to live in one of those units. They seem quite luxurious, and I bet the pre-fab nature would cut out a lot of the annoying architectural and design choices we had to make. It also looks like a similar cost to what we spent.
If your neighborhood allows it, I’d go for it. It’s an easy way to wring more living space out of your expensive land.
— TDD
No ADU, just parental support/ guidance issues. Mom moved to our BFE area and is shocked to pay lower rent and have too much space for that rent compared to SeaTac area. We are 80% of her (nondriver) transport and I give her a lot more stuff now I directly see what she needs (furniture, high end shoes for her braces). Guess I spend under $1000/year on her including gas for the car and her order at our weekly coffee group, since she often buys. Time component is biggest issue; don’t always feel like leaving the house weekends but Mom needs her grocery run, either on my weekend or as a special trip for husband if we’re leaving town for the weekend.
Dad is well cared for in a symbiotic relationship involving my step sister, her mom, and dog walking. When he is gone (presumably before my step mom) my sister can have full responsibility for her mom, I might help by adopting some of SMom’s quilts (gorgeous work, but $300 or so to get the quilting done professionally now they are trying to live within their budget). Will continue to be the one paying for the meals when I visit there, partly since Sis saves me a hotel bill now she’s got a place. We had once planned for them to move in with her but there’s no room for the quilt studio. I could see assisting with an ADU for the quilt studio… now Dad shouldn’t drive his life would really improve if he could walk the dog without getting a ride to Sister’s. Step sisters owe Dad a lot so I’m not feeling like I need to support him nor SMom. Just feel like one SSis is doing a lot more than the other, but that’s between them. My brother and I both sort of retired early to ensure Dad gave up his plan of us supporting him and SMom. (Let alone other sister who thought we oughtta share our wealth with her as well.)
FIL just passed last year, and MIL is doing alright in place for now with insanely helpful neighbors. Don’t think she’s willing to move to BFE like she had first planned, and I can’t blame her. When she can no longer control her own affairs (and will let us take the reins fully) we will move her here and into the posh ADUs/ nursing home complex near us she can well afford now but does not believe she can afford. I’ll deal with MIL living better than Mom when the time comes; MIL saved up for this and has higher standards/ needs than Mom. (But imagining them sharing a home inspires plenty of hilarity for us, their kids.)
Thanks for sharing, Jenn! Seems like you’ve got a good plan in place for them.
— TDD
Creatine problem solving for a toxic wasteland like ours, TDD! Enjoyed your line of reasoning. We are looking ahead at possible scenarios for caring for our parents, and all seem fraught in one way or another. Less financial strain than boundaries. Wishing you and your folks luck in adapting to your new normal. For what it’s worth, the gift you’ll give your kids thanks to the relationship they’ll have with their grandparents is priceless (as are the free unlimited date nights!).
Fondly,
CD
Hey CD!
Boundaries and personal space were actually significant impediments to the project. It took a while to get the Dr-ess on board mainly for the privacy and personal space issues. Once she saw the raw numbers behind the ADU and I projected out various scenarios for the next 5 years, she saw the merit behind the plan.
Thanks for the good wishes! Childcare from grandparents is a precious gift indeed!
— TDD
We will probably have to help or my wife’s parents as they get older. Their current lifestyle runs higher then their expected social security payments. There was always this assumption that we and my brother in law would lend a hand to them. Hopefully they will move closer! Thankfully my parents are all set.
It is a little bit of an odd set of feelings being able to care for your parents the way they cared for you. A mix of immense gratitude and appreciation for what they did to help get us where we are, happiness at helping them, a bit of frustration that they didn’t figure this stuff out on their own (if they had the means to) and pride that we are able to even help in the first place.
KPeds, I think you captured the emotion perfectly: “A mix of immense gratitude and appreciation for what they did to help get us where we are, happiness at helping them, a bit of frustration that they didn’t figure this stuff out on their own (if they had the means to) and pride that we are able to even help in the first place.”
This is exactly how I feel!
— TDD
Did your analysis include a property tax re-assessment (increase)? Apologies if you have already addressed this aspect.
Hey Quietus,
To be honest, I didn’t consider this particular aspect before we got the project underway. Once the permitting process started, it did trigger an automatic reassessment with the city, and my property taxes rose another $2000 a year. They basically added some part of the cost of the construction to the “improvements” portion of our property value.
Had I known this in advance, I still would have gone for it, since we had a fairly large cash hemorrhage prior to the ADU solution. To take the metaphor further, we “ripped off the bandage” and let it bleed while we sutured the wound… and stopped the bleeding more permanently.
Thanks for the question!
— TDD
When my husband and I moved to start residency we searched and searched for a safe and pleasant home we could afford. My parents are real estate DIYers as a side gig that builds their retirement. So with their guidance we had some good perspective to start with. We finally found the golden egg! It felt like the only home in the city that we could afford in a safe neighborhood. The catch was that it was a short sale and we were short on time. My dad helped by making a cash offer through his retirement account with a plan to owner finance it to us. We got the house! But then as we approached buying it from my dad, the fine print came to light that he’s not allowed to sell or rent property owned within his retirement account to family members. Oops!!! The solution is that my husband and I have DIY renovated the basement into a luxury studio apartment to rent out. This rental income pays the mortgage and 5% return on my dad’s money while my husband and I save and invest the money we had budgeted for house payments. With some sweat equity we’ve hatched this golden egg into the golden goose!
I love this! The real estate podcasts call this “house-hacking”, and it’s a super wealth building strategy.
Congratulations on finding a great solution that keeps all parties happy!
— TDD
This is a very important subject. TDD, thank you for writing it so well with candor and honesty. This topic is about so much more than just money. So glad your wife and you came to an amicable, mature decision that is, at this time, the best for everyone involved. Wish the g’parents and g’kids years of joy and bonding!!
Thanks PFB!
It’s been a few months now and things are working out quite well so far. Fingers crossed that it stays that way!
— TDD
I like how you said that an accessory unit can help add value to your property. My wife and I have noticed that her mother actually does come to stay with us pretty often and we would really love to have somewhere to help her stay. We’ll have to look at getting one of these accessory units because it will help her and allow us to add some value to the property.
Hi Thomas,
Upgrading the garage to a $200k ADU has definitely added value to my property. The question is: How much?
In our net worth tracking, we mentally added on about $100k to the value of our property after we finished construction of the ADU. But like all things related to primary residences, it’s all in the eye of the beholder.
Would a buyer be willing to pay $100k more for our house since it now has a nice one bedroom apartment in its backyard? Maybe!
So like with all things house related, I’d only do the upgrade if it’s something truly useful or desired by your family and your situation. It’s working out great for us, and for now, I’m counting it as a great investment.
Good luck!
— TDD