Close to Home: California’s untapped supply of housing

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Plenty of unoccupied housing already exists, even in the most expensive coastal cities and towns of California. That housing is connected to water, sewer and power, and it is located on existing public streets. Up until now it has been wasted housing cars instead of people.

New state laws regarding accessory dwelling units went into effect in January, taking nearly all discretion out of the hands of municipalities. The net effect is to make highly profitable conversion of hundreds of thousands of garages into apartments easy, quick and cheap throughout California.

The cost of converting garages into apartments is less than $50,000 per unit. The value of a 400 square-foot apartment, depending on the rent it commands, is between $100,000 and $200,000. With such a large difference between cost and value, and such an attractive loan-to-value ratio for investors, thousands of apartments can be developed as quickly as desired in any or every city in the state.

Builders and remodelers capable of converting garages to apartments exist in every market in the state. Investors structured and capitalized to buy large numbers of standardized five-year garage conversion leases can be quickly assembled. Realtors and property managers can deliver property owner agreements in bulk for reasonable fees built into the leases. The business model is analogous to the launch and growth of PACE financing, which pays for certain residential upgrades through property tax assessments. However, this market is far larger and will accelerate faster than PACE did.

Using the city of Santa Rosa as an example of fairly typical communities in the state, there are about 60,000 homes in the city, roughly 40% of which are investor-owned. Most have 400 square feet of garage space suitable for conversion to an apartment. The market incentive is substantial. At 25% penetration, focused only on the already rented homes, in just this one moderate sized community, the emerging real estate asset to be built is $1 billion.

The key to solving California’s housing shortage is to bring large developers, home builders, Realtors, banks and real estate investment trusts into doing garage conversions by the tens of thousands, instead of waiting for individual homeowners to create granny units by the onesies and twosies. Cities that catalyze fast, high-volume accessory dwelling unit development by large-scale real estate players will see immediate benefit from newly available housing, lower rents, reduced commutes and stronger tax bases.

Equally important, garages represent a massive unused housing resource available to existing homeowners. Once the large Realtors, home builders, banks and property managers have demonstrated the profitability of accessory dwelling units, and entered the field at volume, then the average homeowner who may want to help solve the housing affordability problem for others can choose with confidence among strong, established, competing companies. The experience of United Dwelling in Los Angeles points to plenty of homeowners wanting to help solve California’s housing cost crisis, finding that the jump in their asset value is really just a bonus, as you can see here:

Alan Strachan of Santa Rosa is a former director of Social Advocates for Youth.

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