The ADU Effect in San Diego
For the past several years, ADUs have been treated like the golden ticket of real estate development and every real estate professional, podcast, and article is ready to explain why they will change your life.
The pitch usually sounds something like this:
Build an ADU. Add income. Increase the property’s value. Solve the housing crisis. Retire early.
It is not entirely false. But it is not entirely true, either.
What we are beginning to see in the San Diego market is a noticeable change in how buyers, sellers and brokers talk about ADUs. The excitement has not disappeared, but the automatic assumption that an ADU is always the highest and best use of a property is starting to wear off.
There is a reason we are seeing more listing descriptions specifically advertise:
“Three units, none are ADUs.”
That is not an accidental detail. It is becoming a selling point.
When “ADU” Stops Being a Buzzword
ADUs can be a great tool. They allow owners to add housing, generate rental income and improve the usefulness of underutilized land. In some cases, they are absolutely the right development path, especially when zoning does not allow for an additional by-right unit.
The problem is that the industry has started treating them as a one-size-fits-all solution. At nearly every investor meetup, someone will tell you that the answer is to convert the garage, build another unit in the backyard or squeeze one more structure onto the lot. The conversation tends to focus on how many units can technically fit rather than whether the finished property will actually appeal to the next buyer.
Those are two very different questions. We’ve even run analysis on multifamily properties, that if made back into 1 home, would have a higher ARV than the multifamily product that was created.
We have now called on listings where the agent immediately emphasizes that the additional units are not ADUs. We have also heard about buyers falling out of escrow after discovering restrictions tied to a newly constructed unit.
The unit may look and function like an apartment, but its legal designation can affect how it may be rented, occupied or used.
For some investors, those restrictions are irrelevant. For others, they can materially change the property’s income potential and day-to-day usefulness.
Flexibility Has Value
Short-term rentals sometimes get a bad reputation, particularly in discussions involving tenant protections and housing availability.
But the practical reality is that we live in San Diego.
Family and friends visit year-round, whether we invite them or they simply inform us that they have already booked their flights. When my in-laws visit, it is considerably less of a burden because we can put them in one of our short-term rentals. Everyone has their own space. Everyone has a bathroom.
Most importantly, everyone still likes each other when the visit is over.
A separate unit might be used for visiting family, a home office, a caregiver, adult children, a traveling nurse, medium-term housing or a traditional tenant. Depending on its legal designation and location, it may also provide other rental options.
A flexible unit gives the owner choices as their life and the market change.
An ADU can still provide several of those options, but not necessarily all of them. That distinction can become important when evaluating long-term resale value.
Many Two-to-Four-Unit Buyers Still Want a Home
There is a tendency to analyze every two-to-four-unit property as though it will be purchased by a spreadsheet.
In reality, a meaningful portion of the buyer pool plans to live at the property. San Diego’s home prices are out of reach for many residents, but purchasing a property with units that offset cost makes it much more obtainable for first time homeowners or residents looking to reduce their mortgage payment.
These buyers may be using VA financing, FHA financing or a low-down-payment conventional loan. They are trying to combine homeownership with rental income to help offset the mortgage.
They are investors, but they are also residents.
And residents care about things that do not always appear in an architect’s maximum-unit-count analysis.
They care about parking.
They care about storage.
They care about outdoor space.
They care about whether the property feels like a home.
When a garage is converted into an ADU, the property may gain a rentable unit but it may lose secure parking, storage, a workshop and space for bicycles, surfboards, tools and everything else San Diegans somehow accumulate despite pretending to live a minimalist coastal lifestyle.
Then there is the financial reality.
When mortgage rates are elevated and rents are flat or increasing only modestly, the long-term rental income from a smaller unit may not offset the mortgage as dramatically as the buyer hoped. If the development also eliminated the garage, reduced parking and left almost no usable yard, the buyer may question whether the additional rent is worth what the property gave up.
No parking means the property may not feel functional.
No garage means there may be no storage.
No private outdoor area, which is coveted more than square footage in San Diego, means the owner’s unit may feel less like a home and more like the manager’s unit at a very small apartment complex. That affects demand.
Parking Still Matters
Looking at current listings and speaking with agents throughout San Diego, one issue continues to come up: properties are getting dinged for a lack of on-site parking. That matters for resale, but it also matters for day-to-day rental performance.
On-site parking remains a major selling point for tenants, particularly in neighborhoods where street parking is already limited. A unit without a dedicated space may take longer to lease, attract a smaller tenant pool or need to compete more heavily on price or with concessions.
The impact is not always limited to the new unit. If an ADU replaces a garage or existing parking, the project may reduce the desirability of the other units on the property as well.
The development analysis should not stop at:
“How much rent will the new unit produce?”
It should also ask:
“What happens to the rentability and marketability of everything already there?”
More Construction Does Not Automatically Mean More Value
You have to determine how buyers will value the additional income. Then you have to determine whether an appraiser will give the improvement similar weight. Then you have to explain the legal use, rental restrictions, parking situation, utility configuration and permit history.
You also have to understand how a new unit changes how lenders look at your property. We’ve done valuations for 4 units that only increase by $100,000 – $200,000 as a 5 unit property. The financing is different. Assuming new constructions adds similar value can be a reality check at your exit.
But, new construction certainly has value. Additional income has value. Buyers do not automatically pay a premium simply because a structure is new or because the total unit count increased. The market still looks at location, rents, bedroom count, parking, privacy, outdoor space, utility separation and overall livability.
The price to build an ADU also does not necessarily equal the value it creates immediately.
That is highly area-specific.
In some neighborhoods, strong rents and limited housing inventory may support a meaningful increase in value. In others, the construction cost may be higher than the immediate resale value added by the unit. That does not automatically make the project a bad investment. A long-term owner may recover the cost through years of rental income and appreciation.
But investors should not assume that spending $300,000 on construction means the property is now worth $300,000+ more.
If five units have been crammed onto a lot that comfortably functions as a three-unit property, the buyer pool is not necessarily going to reward the developer for winning a game of architectural Tetris.
In some cases, the additional density may actually narrow the buyer pool and push it into a lower price per unit analysis.
EXAMPLE from Quarter 2 2026 in 92104
5+ multifamily average price per unit: $312,000
2-4 residential average price per unit: $577,000
(Based on these general metrics)
Priced as a 3 unit: $1,731,000
Priced as a 5 unit: $1,560,000
Start With the Zoning, Not the Architect
One of the most common mistakes we see is allowing an architect to decide the development strategy before the owner fully understands the property’s zoning and available alternatives.
We have heard the same story from multiple investors: “The architect said an ADU would be quicker than a by-right unit and have fewer fees.”
Sometimes that is accurate. Sometimes it is not.
From our personal experience, the process can take just as much time as other development paths, but it is correct that certain fees and infrastructure expenses are still more significant. That does not mean the project is not worth pursuing. It simply means those expenses need to be treated as real line items rather than unpleasant surprises that appear halfway through construction. Before defaulting to an ADU, owners should investigate what the property already allows by right.
Start with the City’s ZAPP portal.
Review the base zone, overlays, allowable density, setbacks, height limitations, parking requirements and other property-specific constraints. Determine whether additional primary dwelling units may be permitted before deciding that an ADU is the only, or best, option. The goal should generally be to understand the property’s by-right potential first, particularly when that path could create units with greater long-term flexibility.
Then evaluate the ADU path. Not the other way around.
What the City Said About Converting an ADU To a By-Right Unit
I recently spoke with San Diego’s Planning and Land Development Department about converting an ADU into a regular, by-right dwelling unit.
The answer was essentially:
Possible—but how and where it was constructed matters.
The biggest hurdle is usually setbacks. ADUs receive more lenient setback treatment than standard primary dwelling units. A structure that was perfectly legal as an ADU may not comply with the setbacks required for a conventional unit.
Before assuming an ADU can simply be relabeled later, an owner needs to determine whether the building would have been permitted in the same location under the property’s underlying zoning.
There are several other issues to consider.
A property in the Coastal Overlay Zone may need to go through additional review again as part of the conversion.
Increasing the number of primary units may trigger common open-space requirements. This becomes especially important when a project moves from four units to five.
Projects with more than two units may also need to satisfy private open-space requirements.
Whether the unit is attached or detached can affect the applicable development standards.
The conversion would also require a formal construction change to revise the approved scope. That means additional design, processing and professional costs.
Fees that were waived or reduced because the structure was permitted as an ADU may become due once it is converted into a regular dwelling unit. That could include school fees and other development-related charges.
According to the department, walls would not generally need to be reopened for any inspections as ADUs carry the same fire and sound requirements. The applicant would still need to process the construction change, revise the scope and satisfy any standards that apply to the new unit designation.
Parking may also become an issue.
Whether the property is located within an applicable transit area can affect whether additional parking is required. A property outside the qualifying area may need to provide parking for the newly classified unit.
That does not mean converting an ADU into a by-right unit is a bad strategy. In the right situation, paying the additional fees and completing the construction change may be worthwhile because of the flexibility a standard unit can provide.
But this is exactly why the development path should be considered before construction begins. If a structure can be built as a primary unit from the start, it may be worth comparing that path against the short-term fee savings and relaxed standards available through the ADU program.
The ADU route may be easier on the front end, but converting it later could require new reviews, additional fees, parking, open space and compliance with standards the original structure was never designed to meet.
The lesson is not that an ADU can never become a by-right unit.
The lesson is that: “We can always convert it later” is not a development plan.
When an ADU Still Makes Sense
This is not an anti-ADU argument.
ADUs can be extremely useful when they are the most practical way to add housing. They may be especially compelling when an owner plans to hold the property for many years, wants reliable long-term rental income, wants to refinance, or has underutilized land or has no meaningful need for broader rental flexibility.
A garage conversion may make sense on a property with abundant driveway parking and additional storage.
A detached ADU may be an excellent addition to a large lot where it does not compromise the primary residence or existing units.
An ADU may also be the only viable path to creating another legal dwelling.
The point is not that ADUs are bad. The point is that options are valuable.
Before building, owners should consider how the property will function not only after construction, but five, ten or twenty years later.
They should think about who will eventually buy it and what that buyer is likely to value.
Will the next buyer be an investor seeking dependable long-term income?
Will it be a veteran using a VA loan and planning to live in one unit?
Will it be a family that wants space for parents or adult children?
Will it be an owner who values a garage more than another compact rental?
Will the property still compete well if rents remain flat? These questions are not as exciting as a seminar titled “How to Make Millions With ADUs,” but they are much more important.
The Real ADU Effect
The ADU effect is not simply the additional rent created by another unit. It is the effect that unit has on the entire property.
What did you gain?
What did you give up?
Did you improve the property’s usefulness, or simply increase its density?
Did you create a more valuable asset, or did you create a property that only works for one very specific buyer?
A well-designed ADU can strengthen an investment.
A poorly planned ADU can remove parking, eliminate storage, reduce privacy, restrict future uses and make the property harder to sell.
That is why the development strategy should be based on the property, the location, the intended hold period and the likely exit. Not on whatever is being repeated at the latest investor meetup.
Use the City’s available tools. Understand the zoning. Explore the by-right units first. Compare the long-term value of flexibility against the short-term convenience of a particular permit path.
Most importantly, build something people will actually want to own and tenants will actually want to rent because squeezing the maximum number of units onto a lot does not mean buyers will pay above the neighborhood average for the privilege.
Build to suit the market, not simply to appease the City.
This article reflects general market observations and a conversation with City staff. Zoning, permitting, coastal, parking, lending and development requirements are property-specific and may change. Owners should obtain written, parcel-specific guidance and consult qualified architectural, engineering, lending, tax and legal professionals before beginning a project.