Southwest Builders

How to Make My ADU a Profitable Investment in Alhambra?

Making an ADU in Alhambra a profitable investment can be difficult. Many homeowners face challenges with increasing rental income, keeping expenses under control, and following local rules. However, with the right approach, it’s possible to boost the financial success of your ADU. This involves setting competitive rental rates, managing construction and other related costs wisely, and ensuring the ADU meets all local zoning and building requirements. In this article, you'll discover practical tips to maximize your ADU investment returns.

Introduction to ADU Investments in Alhambra

Why are ADUs popular in California?

ADUs, also known as granny flats or in-law units, are gaining popularity in California because they help solve the state's housing issues. With high housing prices and limited new home construction, ADUs allow homeowners to add extra living spaces to their property without having to purchase more land. These units can provide affordable rental options, additional income, and flexible living spaces for various groups, such as young professionals, families, and seniors, making it easier to stay close to loved ones and their community.

How can an ADU increase property value?

Building an ADU can increase the value of a home by adding extra, rentable space that appeals to buyers looking for income opportunities or versatile living arrangements. In California, homes with ADUs are generally worth more due to the added flexibility—whether used as a rental, for extended family, or as a home office. An ADU also enhances the overall space on the property, making it more attractive and valuable in a competitive housing market.

Is it possible to sell an ADU in Alhambra?

In California, under AB 1033, local governments can set rules for selling an ADU and the main house separately, like condominiums, as long as they follow existing ADU laws. In Alhambra, selling an ADU separately might be possible if certain conditions are met, such as the ADU being built by a qualified nonprofit, having a shared ownership agreement in place, or if the city allows the ADU and the main house to be sold as separate condos.

The ROI for building an ADU in Alhambra

After analyzing several projects, we found that on average, you can expect a 73% ROI for an ADU project in Alhambra. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Alhambra an appealing and promising location for real estate development. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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

Case study: 900 sq. ft. ADU built in Alhambra

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 $48,161, covering essential aspects of the project's development and approval process.

Combining both hard and soft costs, the total project cost sums up to $391,061. 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 Alhambra is estimated at $750. 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 $675,000 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 $283,938 or 73% ROI. At this level of return, the investment in an ADU to sell it offers a substantial return on investment relative to the total project cost and the market value making the city a highly attractive and promising location for housing projects. In addition to the high 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 Alhambra comes with a total cost of $391,061. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,472 or $29,664/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 $34,800 per year. At this rental income, which gives you only $5,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

Local rules prevent rentals of less than 30 days, so renting long-term is the only option available. While platforms like Airbnb can generate higher earnings through short stays (around $600 for 5 nights during peak times), a long-term lease provides a more stable income. Plus, it doesn’t require the constant effort of managing new guests, frequent cleaning, or ongoing advertising. For those looking for reliable income, this option offers steady cash flow and helps maintain the property’s value over time.

Check if the market value of your ADU covers the construction costs.

Is there financial assistance for building ADUs?

Yes, there is financial help available in California through the CalHFA ADU Grant Program. Since September 2021, this program has been offering up to $40,000 to eligible homeowners to cover the initial expenses of building an ADU on a single-family property. The grant helps with costs like permits, architectural designs, surveys, soil testing, and impact fees that are needed before construction can begin.

Building Your Team for the ADU Project

After securing funding, choose a property where building an ADU is allowed and check if there are any size restrictions. If you're planning to rent or invest in the property, hire professionals such as architects and contractors who will handle the construction. It's also helpful to find local contractors familiar with the area, especially if you see nearby projects that might be similar to yours. Reaching out to these contractors could be a smart move for your project.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC): This option lets you borrow money based on your home's value, and you can access the funds as needed, similar to how a credit card works. It's a popular choice for financing ADU projects.

Home Equity Loan: With this type of loan, you borrow a fixed amount upfront, based on the value of your home, and repay it in fixed monthly installments, which makes budgeting easy.

Cash-Out Refinancing: This option allows you to refinance your mortgage for a higher amount and take out the extra money to use for your ADU project.

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

Private Lender Loans: Some private lenders specialize in offering loans for ADU construction, and they may provide flexible terms to suit the project's needs.

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 blocking or imposing unreasonable restrictions on building or using ADUs on properties zoned for single-family homes. Any rules that try to stop ADUs are not enforceable and could lead to penalties.

Maximizing Profitability in Alhambra

Marketing Strategies to Increase ADU Investment Returns

To get the best return on an ADU investment in Alhambra, consider these marketing strategies:

Build Connections: Use personalized materials to network with local real estate agents, which could lead to potential partnerships.
Offer Virtual Tours: Allow potential investors to view the property online, making it easier for them to see the space without visiting in person.
Educate and Share Information: Post valuable content about ADU investments on social media platforms like Instagram and Facebook to increase your credibility and engage with potential investors.