Tell me what's wrong with this: $205k all-in, 640 sq ft detached, $1,750 rent

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 surprised me. So the same improvement that raises the value you're counting as payback also raises the tax that lowers the cash flow. Feels like you can't book both at full strength.

@ledger 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, out where I'm looking a 640 detached would run maybe $140k because impact fees are almost nothing and site work is flat land. Rent tops out around $850. So the yield on cost is worse than yours despite the cheaper build. Cheap construction doesn't help if rent isn't there, which is why I keep not doing this.