Case Studies — Real Deals, Real Numbers

Learning from Actual ADU Projects

Theory is useful. Numbers are better. This chapter walks through four ADU deals — three successes and one that didn't work — with full financials, timelines, and lessons. These are composite case studies based on real project data from ADU investors across multiple markets.

Every deal below can be modeled in RISE. We've included the key inputs so you can plug them in and see how the numbers play out under your own assumptions.

Case Study 1: Garage Conversion Flip — Phoenix, AZ

The Deal

An investor purchased a 3BR/2BA single-family home in a B+ neighborhood in Mesa, AZ (Phoenix metro). The property had a detached two-car garage that was oversized and underused. The plan: convert the garage into a 1BR/1BA ADU (480 sq ft), rehab the main house cosmetically, and sell the entire property to a buy-and-hold investor.

The Numbers

Acquisition & Construction:

Financing:

The Sale:

Returns:

Timeline

What Went Right

• The garage was already on a concrete slab with electrical, which reduced conversion costs significantly.
• Phoenix has a streamlined ADU permitting process — permits came through in 5 weeks.
• The investor sold to a buy-and-hold investor who valued the two-unit income stream, not just comps.
• Cosmetic rehab on the main house was minor — the house was in solid condition.

What Could Have Gone Better

• The contingency ($6,800) was fully used due to a required sewer lateral repair discovered during plumbing rough-in.
• The property took 6 weeks to sell — the investor had budgeted for 4 weeks, adding $5,000+ in carrying costs.

Key Lesson

Garage conversions are the lowest-cost ADU strategy, but plumbing is the wild card. Sewer lateral condition and distance to the main line should be inspected before closing.

RISE Inputs (Fix & Flip Mode)

• Purchase price: $340,000
• Rehab budget: $118,000 (combined main house + ADU + permits + contingency)
• ARV: $595,000
• Hold period: 7 months
• Financing: 85% of purchase, 100% of rehab, 10.5% rate, 2 points

Case Study 2: Ground-Up ADU Hold — Sacramento, CA

The Deal

An investor owned a 3BR/2BA single-family home in the Tahoe Park neighborhood of Sacramento. The property had a large backyard (7,200 sq ft lot). The plan: build a detached ground-up ADU (640 sq ft, 2BR/1BA) in the backyard, rent both units, and refinance into a DSCR loan.

The Numbers

Construction:

Financing (Construction Phase):

Rental Income (Stabilized):

Operating Expenses (Monthly):

DSCR Refinance:

Ongoing Returns:

Wait — This Deal Is Negative Cash Flow?

At 7.25% on a 30-year DSCR loan, yes. This is the reality of California in a higher-rate environment. But here's why the investor still did the deal:

1. Equity creation: $225,000 invested in the ADU created $220,000 in additional equity ($740K appraised – $520K pre-ADU value). Nearly dollar-for-dollar.
2. Capital returned: The DSCR refinance returned $25,000 of the $37,850 in cash invested. Net cash in the deal: $12,850.
3. Tax benefits: Cost segregation on the $225,000 ADU construction generated ~$45,000 in accelerated first-year depreciation. At the investor's 32% marginal rate, that's ~$14,400 in tax savings — more than the cash left in the deal.
4. Rate buydown option: When rates drop, refinancing at 6% would swing cash flow to approximately +$200/month.
5. Long-term play: Rents increase annually. At 3% annual rent growth, the property is cash-flow positive within 2 years even at 7.25%.

Key Lesson

Not every ADU deal is a home run from day one. In high-cost markets, the value proposition is often equity creation + tax benefits + long-term appreciation — not immediate cash flow. The investor needs to be honest about this and have the reserves to carry a negative or breakeven property in the short term.

RISE Inputs (DSCR / Rental Mode)

• Property value: $740,000
• Monthly rent: $4,550
• Loan amount: $555,000
• Rate: 7.25%, 30-year fixed
• Taxes: $550/month; Insurance: $175/month
• Vacancy: 5%; Management: 10%; Maintenance: 7%

Case Study 3: BRRRR with ADU — Atlanta, GA

The Deal

An investor purchased a 3BR/1BA single-family home in a C+ to B- neighborhood in East Atlanta. The house needed moderate rehab, and the 6,000 sq ft lot had room for a small detached ADU. The plan: rehab the main house, build a 1BR/1BA detached ADU (400 sq ft), rent both, and BRRRR.

The Numbers

Acquisition & Construction:

Financing:

Rental Income (Stabilized):

DSCR Refinance:

Note: The DSCR of 1.16 is below the typical 1.20–1.25 threshold. The investor got the loan approved at 1.16 by accepting a slightly higher rate (7.0% vs. the 6.75% available at 1.25 DSCR). Some DSCR lenders will go to 1.0 DSCR with rate adjustments.

BRRRR Results:

Monthly Cash Flow:

Another Negative Cash Flow Deal?

At the surface, yes. But this investor self-manages (saving $275/month) and uses a lower maintenance reserve on the freshly rehabbed property (saving ~$100/month), bringing real cash flow to approximately –$353/month. Not ideal, but the investor accepted it because:

1. Equity position: $475,000 value with $356,250 in debt = $118,750 in equity on a $22,465 net investment.
2. Rent growth: Atlanta rents have grown 4–6% annually in this submarket. At $2,900/month combined rent (6% increase), the property is near breakeven. At $3,100 (two years out), it cash flows.
3. Capital recycled: $45,500 returned to deploy into the next deal.
4. Tax benefits: Depreciation and cost segregation offset the operating loss and shelter income from other properties.

Key Lesson

The BRRRR doesn't always return 100% of capital — especially in today's rate environment. The question isn't "did I get all my money back?" It's "what's my return on the capital I left in the deal?" In this case: $22,465 in equity controls $118,750 in equity — a 5.3x equity multiple. When rents grow and/or rates drop, this deal becomes a cash-flow machine.

RISE Inputs (DSCR / Rental Mode)

• Property value: $475,000
• Monthly rent: $2,750
• Loan amount: $356,250
• Rate: 7.0%, 30-year fixed
• Taxes: $350/month; Insurance: $125/month
• Vacancy: 5%; Management: 10%; Maintenance: 8%

Case Study 4: The Deal That Didn't Work — San Diego, CA

The Deal

An investor purchased a 2BR/1BA single-family home in City Heights (San Diego) planning to build a detached ground-up ADU (500 sq ft, 1BR/1BA) in the backyard, rent both units, and hold long-term.

What Went Wrong

Problem 1: Impact fees were higher than expected.

The investor budgeted $8,000 for fees. Actual fees came in at $24,000 — including a school impact fee that had been waived the previous year but was reinstated. The fee waiver expiration was public information, but the investor relied on outdated data from a fellow investor instead of calling the city directly.

Problem 2: Soil issues required an upgraded foundation.

A soil report (which the investor didn't order during due diligence) revealed expansive clay soil. The foundation had to be upgraded from a standard slab to a post-tension slab, adding $18,000 to the construction cost.

Problem 3: The contractor underperformed.

The GC was licensed but had limited ADU experience. The project took 8 months instead of the quoted 5 months. Three failed inspections (framing, electrical, plumbing) added time and correction costs. The investor's bridge loan had a 12-month term, and by the time the ADU was complete and rented, there were only 2 months left on the loan.

Problem 4: Rents came in lower than projected.

The investor underwrote the ADU at $1,800/month based on listings in the area. Actual market rent (what tenants would sign a lease at) was $1,500/month. The listing data was aspirational — those units had been sitting vacant at $1,800 and eventually leased at $1,400–$1,600.

The Numbers

The Outcome

With a DSCR of 0.98, the investor couldn't qualify for a standard DSCR refinance. Options:

1. Lower LTV refinance: Took a DSCR loan at 65% LTV ($461,500), which returned less capital — leaving $95,000+ in the deal.
2. Sell the property: Listed at $710,000. After transaction costs, would approximately break even — 10 months of work for zero profit.
3. Hold and wait: Kept the property, refinanced at the lower LTV, and planned to refinance again when rents increased or rates dropped.

The investor chose option 3 — holding with $95,000 in dead equity and negative cash flow, waiting for market conditions to improve.

Lessons from This Deal

The Painful Truth

This deal wasn't killed by the market. San Diego is one of the best ADU markets in the country. It was killed by four avoidable mistakes that compounded. Each one alone would have been manageable. Together, they turned a profitable deal into a capital trap.

If the investor had modeled the deal in RISE with realistic assumptions — actual fees, a soil contingency, conservative rents, and a longer timeline — the deal would have shown a marginal return that didn't justify the risk. The investor would have walked away and found a better deal.