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Microcommunities or ADU’s (accessory dwelling units) are small homes built on existing lots to generate rental income. There are many advantages to investing in this type of real estate in comparison to traditional rental properties. The properties are cheap to build and therefore provide a more accessible way for beginners to invest in real estate. The initial investment can be reduced even further with leverage since these properties can still be financed with traditional mortgages. ADU’s can be built for as little as $50,000 so with a typical 25% down payment an investor can potentially buy an ADU with an initial investment as low as $12,500. ADU’s also offer tax advantages to those who invest since they allow for the full value of the investment to be depreciated while traditional real estate investments must remove the land value from the depreciable value of the property. ADU’s also have a unique ability to appeal to renters that are looking for privacy and autonomy on a budget since it is the least expensive way for them to rent a freestanding home. ADU’s can also provide a symbiotic relationship between outside investors and distressed homeowners because the investors can fund the development of an ADU on the homeowner’s lot and paying them for the land lease while providing the investor the opportunity to invest in ADU’s on a larger scale. The low investment requirement of ADU’s also allows investors the ability to steadily increase the number of units they own so returns can be compounded more frequently resulting in a much higher overall yield. Investments that compound yields more frequently result in a higher effective yield and ADU’s take advantage of this in real estate markets. Consider two investors that both want to buy 10 units of rental property valued at $1,000,000 with $750,000 in debt as a 20-year fixed rate mortgage with a 5% interest rate and $250,000 in equity. Assuming that both investors initially achieve a 10% yield from annual net rents and will buy new properties identical to the ones they own as soon as they are able to using only the cash saved from their investment returns. The only difference between the two investors is one buys only 10-unit buildings and the other only invests in individual ADU’s meaning the 10-unit complex investor is only able to acquire one additional 10 unit building after 6 years 4 months while the ADU investor is able to invest in another 1 unit ADU every 2 – 8 months allowing returns to compound more frequently. After 10 years the effective yield of the 10-unit complex investor is 10.524% and 16.738% for the ADU investor. The only premium earned from compounding is 0.524% for the 10-unit complex investor and 6.738% for the ADU investor after the 10% bet yield is taken out. The investor with ADU’s also owns 45 units after 10 years while the other investor just owns 2 10-unit complexes. Two subdivisions currently looking for investors for ADU communities are Clarkston and East Point. These communities are a little different than the traditional backyard ADU’s since they are entire neighborhoods of small homes and therefore offer more flexibility and scalability for investors. These subdivisions also meet the need for affordable housing in Atlanta and already meet the zoning requirements to build these homes. Interested investors must act quickly to get involved as impact investors because funding is being raised quickly. If you or someone you know is interested in becoming involved with this early stage investment opportunity, please contact Evergreen Investments. An alternative to investing in an ADU community is backyard cottage units. As of now the development of these units is limited to lots with single family homes that have been rezoned as R5 lots which is the typical zoning for duplexes. One advantage of going with a backyard cottage ADU is that the utility connections already exist so they will not need to be developed which reduces development costs. The carrying cost of the unit is also not a factor in these units because they are in homeowner’s backyards, so vacancy and development times are not as much of a problem. Homeowners can also benefit from accelerated appreciation their properties if they are located in neighborhoods with rapidly increasing property values. The ADU will likely experience the same rate of increase in value as the home allowing investors to target subdivisions with the highest property appreciation rates. If you are interested in exploring eligible lots for backyard ADU’s and development opportunities, please contact Evergreen Investments. Evergreen can also help you plan continued investment of returns to help investors of all experience levels to build and grow a portfolio of ADU’s.

Discover the 3 Deadly Mistakes that Consistently Lead to Poor Returns When Investing in New Real Estate Markets

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Discover the 3 Deadly Mistakes that Consistently Lead to Poor Returns When Investing in New Real Estate Markets

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