Tell me what is wrong with a $205k all in detached 640 square foot ADU renting at $1,750

The three-to-five-year break-even claim you're quoting almost never means cash recovery of construction cost. It usually means one of two things: the operator is counting the appraised value increase as recovered capital, or their all-in was $90k to $120k, often a garage conversion where the shell, foundation and roof already existed. Your $205k detached build with a panel upgrade and a new sewer lateral is a different animal and your 7.3 percent on cost is a reasonable outcome for it, not a failure.

Line items I'd push on. Property tax is the one you flagged and dismissed. Most jurisdictions reassess the added improvement value, and a $200k improvement can add real annual tax depending on your state's assessment and any caps, so get the assessor's treatment of new ADU construction in writing before you finalize. Your $400 operating number also has no capital reserve for the unit's own roof, water heater and appliances, which on a 640 sq ft unit is maybe $150 a month if you amortize honestly. Utility separation is the other one. If you don't sub-meter water and electric, you're absorbing a tenant's usage habits, and retrofitting a separate electric service after the fact costs more than doing it during the panel upgrade.

Your 8 percent contingency is thin for site work. Sewer laterals and soil conditions are where ADU budgets blow up, and the discovery happens after you've committed.

The risk you haven't raised is rent concentration. One unit at $1,750 means one vacancy is 100 percent vacancy, and the HELOC payment is variable. A rate move plus a two-month turn is the scenario that hurts, and it's the one your yield-on-cost framing hides completely.

The reassessment point is the one worth sitting with. The same improvement that raises the value counted toward payback also raises the tax that lowers the cash flow. Both effects cannot be booked at full strength at the same time.

@hannah_west29 what's the lot doing otherwise? If the 640 unit uses up your buildable area under the size cap and setbacks, you've spent the parcel's one option. Around me the ordinance allows one ADU plus one junior unit, and people build the detached first and discover the coverage limit kills the second. Worth knowing before you pour a foundation.

For contrast, take a market where a 640 detached would run maybe $140k because impact fees are minimal and site work sits on flat land. Rent tops out around $850 there. The yield on cost ends up worse despite the cheaper build. Cheap construction does not help if rent is not there, which is why this type of build rarely pencils outside a narrow band of markets.