The strategy
Rather than buying a finished rental at full price, the investor bought a modest, dated property below its potential and planned two value events on the same lot: renovate the front house, then build a new unit in the unused backyard.
The numbers
| Step | Cost | Value created |
|---|---|---|
| Buy the property | $180,000 | — |
| Renovate the front house | $40,000 | Valued at ~$255,000: about $35,000 of forced equity |
| Build the ADU | $174,000 | Appraised at $230,000: about $56,000 of equity at completion |
| Rent | — | $1,950/month from the ADU; $3,750/month combined |
How it was financed
The renovation raised the front house’s value, and the investor borrowed against that new equity to fund the ADU — at a 5.5% rate that reflected the market at the time. Today’s rates will differ; the sequence is what travels.
What to take from it
- Two value events on one lot: forced appreciation from the renovation, then equity created again when the ADU was finished.
- The ADU’s rent was about 1.1% of its build cost — comfortably past the 1% rule.
- Equity from the first step funded the second, so the investor didn’t need new cash for the build.
- Plan on appraisals conservatively. ADU comparables can be thin, and a refinance returns only what the appraisal supports.