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How to make my ADU a Profitable Investment in Agoura Hills?

Turning an Accessory Dwelling Unit (ADU) in Agoura Hills into a profitable investment can be challenging. Homeowners often struggle with maximizing rental income, controlling costs, and meeting local regulations. However, by adopting effective strategies, it's possible to enhance your ADU's financial returns. This includes optimizing rental pricing, and managing both soft and hard costs efficiently while ensuring compliance with local zoning and building regulations. In this article, you'll learn strategies that help you achieve a higher return on your investment in an ADU.

Introduction to ADU Investments in Agoura Hills

Why are ADUs popular in California?

ADUs or accessory dwelling units often called granny flats or in-law units, have become popular in California because they help address the state’s housing shortage. With the cost of housing rising and fewer new homes being built, ADUs offer an affordable way for homeowners to create extra living spaces on their properties without needing to buy new land. This extra space can provide affordable rental housing, additional income for homeowners, and a variety of living options for different groups, like young professionals, families, and seniors, helping people live closer to family and community.

How can an ADU increase property value?

Adding an ADU can raise a home’s value by providing extra, rentable space, which is attractive to buyers looking for income potential or flexible living options. In California, properties with ADUs tend to be worth more because they offer flexibility—they can be rented out, used for extended family, or even as a home office. An ADU also adds more usable space to the property, making it more appealing and valuable in a competitive real estate market.

Is it possible to sell an ADU in Agoura Hills?

Under California’s AB 1033, local authorities can set rules for selling ADUs and main homes separately as condominiums, while still following current ADU regulations. In Agoura Hills, selling an ADU may be allowed if certain conditions are met: the ADU should have been built by a qualified nonprofit organization, there should be a recorded tenancy in common agreement, or the city should permit the ADU and main home to be sold as individual condominiums.

The ROI for building an ADU in Agoura Hills

We analyzed multiple projects, and we determined that on average you should expect a 50% ROI for an ADU project in Agoura Hills. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. As a benchmark, a good investment for us is when the ROI is min. 50%+.

Case study: 900 sq. ft. ADU built in Agoura Hills

Scenario 1: Build to sell

ADU Building Area

The project involves constructing an ADU with a total area of 900 square feet. This ADU is large enough for a 2 bedroom, 1 bath unit. This scenario assumes that you already own this property and there is an existing primary residential unit on site.

Total Project Cost

Based on the industry reports, the construction cost per square foot is $381, resulting in total hard costs of $342,900. Soft costs encompass various expenses incurred during the planning, design, and permitting stages of the project. These include fees for professional services such as land surveying, structural engineering, architectural design, soil engineering, and permit fees. In this case, the soft costs amount to $47,118, covering essential aspects of the project's development and approval process.

Combining both hard and soft costs, the total project cost sums up to $390,018. This estimate reflects the overall investment required to complete the construction project and obtain the necessary approvals.

Total Added Market Value

The sale price per square foot for a residential house in Agoura Hills is estimated at $650. This represents the anticipated value of the completed building per unit area in the current real estate market.

Multiplying the market value per square foot by the building area yields the total added market value. In this case, the completed project is expected to add $585,000 in value to the property.

ROI (Return on Investment)

The ROI provides insight into the project's profitability by comparing the total added market value to the total project cost. In this analysis, the potential gross Profit without considering acquisition or financing costs amounts to $194,982 or 50% ROI. At this level of return, the investment in an ADU with the goal of selling it offers a modest return relative to the total project cost and the market value. In addition to the modest return, you’ll have to consider the short capital gain tax, in case you want to sell it before 2 year's end.

Scenario 2: Build to rent

Potential Rental Income of an ADU

Constructing a 900-square-foot ADU in Agoura Hills comes with a total cost of $390,018. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,465.18 or $29,580/year. Ideally, renting out the main house could cover this payment, while the ADU serves as a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $33,600 per year. At this rental income, which gives you only $4,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

Due to local regulations prohibiting rentals shorter than 30 days, long-term leasing becomes the only option. Unlike short-term platforms like Airbnb, where higher nightly rates (around $600 for 5 nights during peak seasons) can boost income, a long-term rental offers steady income without the additional work involved in frequent guest turnover, active management, or constant marketing. For investors seeking a reliable revenue stream, this approach provides consistent rental income while helping to preserve the property’s long-term value.

Interested to find out the market value of an ADU for your property?

Is there financial assistance for building ADUs?

Yes, California offers financial assistance through the CalHFA ADU Grant Program. As of September 20, 2021, this program provides up to $40,000 to help qualifying homeowners cover early costs involved in building an ADU on a single-family property. The grant is aimed at encouraging more housing by reimbursing expenses like architectural plans, permits, soil tests, impact fees, surveys, and energy assessments needed before construction can start.

Building Your Team for the ADU Project

Once funding is secured, choose a property where building an ADU is allowed and be aware of any size limitations. Plan the property for rental or investment purposes and hire professionals such as architects and contractors to oversee the construction. Additionally, seek out local contractors who are familiar with the area. If you notice nearby projects, consider reaching out to those contractors as they may be a good fit for your ADU project.

What are some other financing options for building an ADU?

Home Equity Lines of Credit (HELOCs): This option allows borrowing based on the value of the home. It works like a credit card, where funds can be accessed as needed, making it a popular choice for ADU projects.

Home Equity Loans: With this option, a set amount of money is provided upfront based on the home's value. It comes with fixed monthly payments, offering simplicity and predictability.

Cash-Out Refinancing: This allows refinancing the mortgage for a larger amount and taking the extra cash. It's an easy way to get funds for an ADU without securing a separate loan.

Renovation Loans: These loans are intended for home improvements and can cover the costs of building an ADU.

Private Lender Loans: Some private lenders offer loans specifically for ADU construction, with flexible terms that can be adjusted to suit the needs of the project.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, recent laws (AB 670 in 2019 and AB 3182 in 2020) prevent Homeowners Associations (HOAs) from banning or placing unreasonable restrictions on the construction or use of ADUs on properties zoned for single-family homes. Any rules in the HOA’s guidelines that try to block ADUs are not enforceable and could lead to penalties.

Maximizing Profitability in Agoura Hills

Marketing Strategies to Increase ADU Investment Returns

To maximize returns on an ADU investment in Agoura Hills, consider these marketing strategies:

Network Effectively: Use customized materials to connect with local real estate professionals, which can lead to potential partnerships.
Offer Virtual Tours: Give potential investors the chance to explore the property virtually, making it easier for them to view the space without needing to be there in person.
Inform and Educate: Share valuable information about ADU investments on social media platforms like Instagram or Facebook to build credibility and engage with potential investors.