This is the question I get most from analytical buyers who are ready to add an ADU: do I buy in the cheaper city where the lot has room to build, or do I stretch for the pricier city where the rents are higher?
Both camps have a good argument. The cheap-city buyer says rent per dollar invested is higher. The pricey-city buyer says appreciation and tenant quality make up for it. So I ran both as real deals, using the same loan terms and fall 2026 prices and rents from my monthly MLS reports, and solved for the one number that decides it: how much faster the expensive city has to appreciate to win.
The short answer
At today’s rates, the cheaper city with the bigger lot wins on cash flow and on 10-year return, unless the pricier city appreciates about 0.8% a year faster for a decade. If the bigger lot also fits a second ADU, the bar climbs to about 1.5% a year faster. That’s a lot to ask of any city, every year, for ten years.
The pricier city still makes sense for some buyers. I’ll cover who at the end.
The two deals
I picked two real markets from my 2026 ranking of the best OC and LA cities to add an ADU: Garden Grove (#1, big lots and an entry point near $1 million) and Costa Mesa (#10, the appreciation city with the highest ADU rents I track).
| Deal A: Garden Grove | Deal B: Costa Mesa | |
|---|---|---|
| Purchase price | $1,050,000 | $1,900,000 |
| Lot | Room for a detached ADU, plus a second one in 2027 | Room for one detached ADU |
| ADU | 850 sq ft, 2 bed / 2 bath | 850 sq ft, 2 bed / 2 bath |
| ADU cost (all in) | $260,000 | $280,000 |
| Main house rent | $3,900 | $5,500 |
| ADU rent | $3,000 | $4,100 |
| Total rent | $6,900/mo | $9,600/mo |
| Total cost (house + ADU) | $1,310,000 | $2,180,000 |
Where the numbers come from:
- Garden Grove: four ADU homes closed in September between $1,022,000 and $1,200,000, and newer ADUs are renting for $3,200 to $3,800 (October Garden Grove report). I used $3,000 for the ADU to stay conservative.
- Costa Mesa: entry prices start near $1.9 million, and ADUs on current listings rent from $3,500 to $5,750. I used $4,100, the middle of what a 2 bedroom unit gets on the west and east sides.
- ADU cost: the same 850 sq ft budget I broke down line by line in what it really costs to buy a home and add an ADU in Orange County, with $20,000 more in Costa Mesa for higher labor and site costs.
Costa Mesa brings in $2,700 more rent a month. It also costs $870,000 more. The question is whether that extra $870,000 earns its keep.
Test 1: Rent per dollar invested
The first thing I check on any ADU deal is yield on cost: net operating income (rent minus vacancy, maintenance, property tax and insurance, before the mortgage) divided by everything you spent.
| Garden Grove | Costa Mesa | |
|---|---|---|
| Gross rent per year | $82,800 | $115,200 |
| Vacancy and maintenance (10%) | -$8,280 | -$11,520 |
| Property tax (1.1% of total cost) | -$14,410 | -$23,980 |
| Insurance | -$3,600 | -$4,800 |
| Net operating income | $56,510 | $74,900 |
| Yield on cost | 4.31% | 3.44% |
| Price-to-annual-rent ratio | 15.8x | 18.9x |
Costa Mesa earns more dollars. Garden Grove earns more per dollar. Every $100,000 you put into Garden Grove produces about $4,310 a year of net income. In Costa Mesa it produces $3,440.
Property tax is the quiet reason. Under Prop 13 your tax is set by what you paid, so the expensive city charges you an extra $9,500 a year forever just for the higher price. Rent rises over time. That gap doesn’t shrink.
Test 2: Monthly cash flow with a real loan
Same terms on both: 50% down on the house, a 30-year investment property loan at 7.75% (Freddie Mac’s weekly survey had the owner-occupied 30-year at 7.40% on October 8, and investor loans price higher), closing costs of 2.5% and the ADU paid in cash.
| Garden Grove | Costa Mesa | |
|---|---|---|
| Cash invested (down payment, closing, ADU) | $811,250 | $1,277,500 |
| Mortgage payment | $3,761/mo | $6,806/mo |
| Net operating income | $4,709/mo | $6,242/mo |
| Cash flow | +$948/mo | -$564/mo |
| Cash-on-cash return | 1.40% | -0.53% |
Even with $466,000 more of your own cash in the deal, Costa Mesa runs negative in year one. At 7%+ rates, a higher price gets punished twice: once in the payment and again in the property tax.
Test 3: The 10-year total return
Cash flow is only part of the return. Appreciation is where the pricier city makes its case, so here’s the full 10-year picture: cash flow, loan paydown and sale proceeds after 6% selling costs. I assumed 3% annual rent growth in both cities and the same appreciation rate for both to start.
| Both cities appreciate 3.5% a year | Garden Grove | Costa Mesa |
|---|---|---|
| Cash invested | $811,250 | $1,277,500 |
| 10 years of cash flow | $203,900 | $54,300 |
| Total profit | $671,500 | $838,300 |
| Annual return on cash | 6.2% | 5.2% |
Costa Mesa makes more total dollars because it has more dollars in it. But it ties up $466,000 more of your money to earn $167,000 more profit. If you put that $466,000 into a second Garden Grove-type deal instead, you’d be well ahead.
The fair comparison is the annual return on cash, and on that, the cheaper city wins by a full point.
The number that decides it: break-even appreciation
So how much faster does the pricier city need to appreciate to catch up? I solved for it.
| Garden Grove scenario (3.5% a year) | Costa Mesa needs to appreciate |
|---|---|
| One ADU | 4.3% a year for 10 years |
| Two ADUs (second added under AB 956 in 2027) | 4.95% a year for 10 years |
Costa Mesa has to beat Garden Grove by about 0.8% a year, every year, just to tie the one-ADU version. That’s possible. Coastal Orange County has outrun inland cities in some stretches. But it has also lagged in others, and you can track how uneven it is in the FHFA House Price Index. Betting on a steady 0.8% edge for a decade is a forecast. The yield gap is something you can measure on the day you buy.
Why the bigger lot matters more after January 1, 2027
The second row of that table is where lot size stops being a nice-to-have. Starting January 1, 2027, AB 956 lets many single-family lots add two detached ADUs instead of one. State ADU rules are summarized on the California HCD ADU page.
Add a second, smaller ADU to the Garden Grove lot (about $210,000 to build, renting for $2,400) and the deal changes:
| Garden Grove with two ADUs | |
|---|---|
| Total cost | $1,520,000 |
| Total rent | $9,300/mo |
| Yield on cost | 5.23% |
| Cash flow | +$2,866/mo |
| Annual return on cash, 10 years | 7.1% |
That’s almost the same rent as Costa Mesa, $9,300 versus $9,600, on $660,000 less cost. This is the real answer to the question. A big lot in a cheaper city isn’t one deal. It’s an option on a second building that the expensive lot doesn’t have.
Two more things help the cheap-city lot:
- New ADUs aren’t rent capped. New construction is exempt from AB 1482’s rent cap for 15 years, so the rents on every unit you build can move with the market.
- Lenders count the rent. Fannie Mae has guidelines that let ADU rental income help you qualify in some situations, which matters more when the property has more units.
Where the “cheaper city” logic breaks
Cheap and big doesn’t win by default. It loses when:
- The comps are thin. If an appraiser can’t find ADU sales nearby, your finished property may not appraise for what you spent. That’s why Garden Grove and Lakewood rank high and cities like Cypress and Buena Park need more caution.
- Rent growth is capped. Santa Ana is cheaper still, but its local rent stabilization limits increases on the main house. I run that math in what Santa Ana’s rent cap means for your ROI.
- The lot only looks big. Setbacks, easements, a shallow sewer lateral or a maxed-out electrical service can make a 7,500 sq ft lot buildable for one ADU, not two. Check it while you’re in escrow, before contingencies expire.
- The rent assumption is wishful. A cheap city only wins if the ADU actually rents. Pull real comps first using this ADU rent guide by square footage.
When the pricier city is the right call
I’d point a buyer toward Costa Mesa-type cities when:
- Cash flow isn’t the goal. You have high W-2 income, you can carry a small monthly gap and you want the property that’s most likely to hold value in a downturn.
- You may live there later. A home you’d want to retire into or hand to your kids is worth more to you than the spreadsheet shows.
- You plan to hold 20+ years. The longer you hold, the more any appreciation edge compounds and the less year-one cash flow matters.
- You know the short-term rental rules. Costa Mesa bans short-term rentals, so every number has to work on long-term tenants. I cover that in what Costa Mesa’s STR ban means for ADU investors.
There’s also a middle path. Lakewood gives you LA County lots with rear garages to convert and 3 bedroom ADU rents of $3,500 to $4,000 near the cheap-city price, which is why I wrote about why Lakewood has the most ADU potential in LA County.
FAQ
Is it better to buy in a cheaper city with a bigger lot or a pricier city with higher rents for an ADU?
At fall 2026 prices and 7%+ rates, the cheaper city with the bigger lot usually wins. In my Garden Grove vs Costa Mesa comparison, Garden Grove had a 4.31% yield on cost against 3.44%, positive cash flow against negative, and a higher 10-year annual return unless Costa Mesa appreciates about 0.8% a year faster.
How much faster does an expensive city need to appreciate to beat a cheaper one?
In this example, about 4.3% a year versus 3.5% for one ADU, and about 4.95% a year if the cheaper lot fits a second ADU under AB 956. Run your own deal, because the gap depends on the price spread and the rents.
Do higher rents make up for a higher purchase price?
Usually not at today’s rates. Costa Mesa brought in $2,700 a month more rent but cost $870,000 more, which added about $3,000 a month to the mortgage and $9,500 a year to property tax.
What lot size do I need for two detached ADUs in 2027?
It depends on the city’s setbacks and the lot’s shape, not just the square footage. Many 6,000 to 7,500 sq ft lots can work, but have the site checked during escrow.
What’s a good yield on cost for an ADU property in Orange County?
In fall 2026, roughly 4% to 4.5% for a house plus one new ADU in inland Orange County, and 5% or more once a second ADU is added. In my Costa Mesa example, a higher-priced coastal city landed around 3.4%.
The bottom line
Higher rents are only better if they’re higher relative to what you paid. In this comparison, the cheaper city with the bigger lot earned more per dollar, cash flowed from day one and kept the option of a second ADU in 2027. The pricier city needs to beat it on appreciation by roughly a point a year for ten years to tie. Pick the expensive city because it fits your long-term plans, not because the rent number looks bigger.
If you want me to run this comparison on two real properties you’re looking at, call Dylan Serna, ADU Realtor at 714-860-2868.
Dylan Serna | The ADU Realtor | eXp Realty | DRE #02217359
Related Reading
This post is general information, not financial, lending or tax advice. Prices and rents come from CRMLS listings pulled in September and October 2026, and rates are as of early October 2026. The two deals are illustrations built from those numbers. Appreciation, rent growth, build costs and financing will differ on any real property, so confirm your numbers with a licensed loan officer and tax advisor before you buy.
