Introduction to ADU Investments in Arcadia

Why are ADUs popular in California?

ADUs, often called granny flats or in-law units, are becoming a popular solution in California's housing crisis. With housing prices soaring and limited options for new homes, ADUs let homeowners add extra living space to their property without buying more land. These units offer affordable rental options, extra income, and adaptable living spaces for young professionals, families, and seniors, helping them stay close to loved ones and their communities.

How can an ADU increase property value?

Building an ADU can boost a home's value by adding extra, usable space that attracts buyers interested in rental income or flexible living options. In California, homes with ADUs tend to be worth more because they offer flexibility, whether for renting, hosting extended family, or creating a home office. An ADU also increases the total usable area of the property, making it more appealing and valuable in a competitive housing market.

Is it possible to sell an ADU in Arcadia?

In California, a law called AB 1033 allows local governments to create rules for selling an ADU separately from the main house, similar to how condominiums are sold, as long as they comply with current ADU regulations. In Arcadia, selling an ADU separately may be possible if specific conditions are met, such as the ADU being built by a qualified nonprofit, having a shared ownership agreement, or if the city permits the ADU and main house to be sold as separate units like condos.

The ROI for building an ADU in Arcadia

After analyzing several projects, we found that the typical return on investment (ROI) for an ADU in Arcadia is about 27%. This ROI value is low and it signals a risky investment. Consequently, unless you have personal goals you want to achieve, we consider that an ADU project in Agoura Hill is a risky investment. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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

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 $46,838, covering essential aspects of the project's development and approval process.

Combining both hard and soft costs, the total project cost sums up to $389,738. 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 Arcadia is estimated at $550. 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 $495,000 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 $105,262 or 27% ROI. At this level, building an ADU to sell it provides a relatively low return compared to both the costs and the market value. In addition to the low 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 Arcadia comes with a total cost of $389,738. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,463 or $29,556/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 $10,800 per year. At this rental income, the ADU would result in a negative profit, meaning you would still owe more than you earn from the rental.

Local regulations restrict rentals to 30 days or longer, so renting out the space for extended periods is the only option. While platforms like Airbnb can bring in more money from short stays (around $600 for 5 nights during busy periods), a long-term lease offers more consistent income. It also eliminates the need for regular guest turnover, constant cleaning, or advertising. For those seeking steady income, this approach provides reliable cash flow and helps keep the property’s value intact.

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Is there financial assistance for building ADUs?

Yes, California offers financial support for building ADUs through the CalHFA ADU Grant Program. Since September 2021, this program has provided up to $40,000 to qualifying homeowners to help cover upfront costs like permits, design fees, surveys, soil tests, and impact fees before construction starts.

Building Your Team for the ADU Project

Once you have funding, find a property where building an ADU is allowed, and make sure to check for any size limits. If you plan to rent or invest, hire professionals like architects and contractors to manage the construction. It’s also a good idea to connect with local contractors who know the area, especially if they’ve worked on similar projects nearby.

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 access it as needed, much like using a credit card. It's commonly used for ADU projects.
• Home Equity Loan: This loan provides a lump sum based on your home’s value, which you pay back in fixed monthly payments, making it easier to budget.
• Cash-Out Refinancing: This option allows you to refinance your mortgage for a higher amount and use the extra funds for your ADU project.
• Renovation Loans: These loans are created for home improvements and can help with building an ADU.
• Private Lender Loans: Some private lenders offer loans specifically for ADU construction with more flexible terms.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, laws like AB 670 (2019) and AB 3182 (2020) stop Homeowners Associations (HOAs) from blocking or placing unfair restrictions on ADUs in areas designated for single-family homes. Any HOA rules that attempt to prevent ADUs are not valid and could result in penalties.

Maximizing Profitability in Arcadia

Marketing Strategies to Increase ADU Investment Returns

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

• Build Relationships: Use tailored marketing materials to connect with local real estate agents, potentially leading to beneficial partnerships.
• Offer Virtual Tours: Allow prospective buyers or renters to explore the property online, making it more convenient for them to assess the space.
• Share Knowledge: Post informative content about ADU investments on social media platforms like Instagram and Facebook to establish your expertise and attract more interest.

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