If you’re a real estate investor in California, there’s one mistake I see over and over again that can blow up your cash flow, your legal standing, and your entire deal:
The #1 RISK is Renting out an illegal ADU.
It’s tempting, I get it. You buy a property with a converted garage, guest house, or backyard unit that looks move-in ready. You toss it on Airbnb or rent it out long-term and boom — instant income.
But if that ADU isn’t permitted, you might be sitting on a ticking time bomb. And here’s why:
Tenants Can Sue You — And Win
This is the big one.
In California, courts have consistently ruled that tenants living in illegal units can sue the landlord to recover all rent they paid during their tenancy.
Real cases. Real judgments.
Landlords have been forced to:
- Refund every dollar in rent
- Pay the tenant’s attorney fees
- And in some areas, even cover relocation assistance
Bottom line: if your unit isn’t permitted, the lease is considered void. And if anything goes wrong, you’ve got zero legal ground to stand on.
Attorney Daniel Bornstein (a California real estate legal expert) puts it bluntly:
“Renting out illegal units is fraught with even more risk.”
And he’s right. The risk isn’t just about city fines or appraisals — it’s about being sued by the person paying you rent.
Wait, What About AB 2533? Isn’t There an Amnesty Program Now?
Yes — starting January 1, 2025, California’s new AB 2533 gives homeowners a chance to legalize unpermitted ADUs that were built before Jan 1, 2020.
San Diego’s on board too. They’ll let you apply for retroactive permits if the unit meets basic safety and livability standards.
BUT — and this is huge — legalizing the unit now doesn’t protect you from what happened in the past.
So if you had tenants in there before you brought it up to code, they can still sue you for back rent.
AB 2533 is great for moving forward the right way, but it’s not a “wipe the slate clean” law.
Don’t sleep on getting your unit legal ASAP, I have had clients that have been sued, had to pay back all the past rents and then relocation fees. Then they were fined by the city and had to shut down unit until legal.
Other Reasons Illegal ADUs Are a Bad Bet
If the lawsuit risk wasn’t enough, here are more reasons to avoid renting out unpermitted units:
- Appraisals won’t count the square footage or rental income
- Refis can fall apart when the lender flags the unpermitted space
- Insurance may deny claims if a tenant gets hurt or the place catches fire
- Cities can fine you daily and even force you to demo the unit
Here’s What You Should Do
If you’ve got an illegal ADU — or you’re thinking about buying a property with one — here’s how to stay out of trouble:
- Don’t rent it until it’s permitted
- Start the legalization process (especially if the unit was built before 2020)
- Talk to your contractor or city about permit requirements
- Get legal advice if you currently have tenants in an unpermitted unit
- Be transparent with your lender or broker before you try to refinance or sell
The good news is I have lots of experience getting purchases and refinances done with illegal ADU’s. If you need help reach out to me TODAY!
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2020 Lomita Blvd,
Torrance, CA 90101
United States
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