Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Artesia?
In Artesia, it can be tricky for homeowners to make an ADU financially rewarding, especially with rising costs, rental income limits, and local rules to follow. Yet, with some smart planning, it’s possible to boost the ADU’s profitability. This involves setting fair rental rates, keeping construction and maintenance costs manageable, and making sure the ADU meets all zoning and building codes. This guide provides useful tips to help homeowners increase their returns from ADU investments.
Introduction to ADU Investments in Artesia
Why are ADUs popular in California?
ADUs, also known as granny flats or in-law units, are increasingly popular as a way to tackle California's housing shortage. With high housing costs and few new homes available, ADUs allow homeowners to add living space without purchasing more land. These units provide affordable rental opportunities, extra income, and flexible spaces for young adults, families, and seniors who want to stay close to family and community.
How can an ADU increase property value?
Adding an ADU can raise a home's value by creating additional space that attracts buyers looking for rental income or versatile living arrangements. In California, properties with ADUs are often valued higher because they offer options for renting, accommodating family, or setting up a home office. An ADU also increases the total functional space, making the property more desirable in a crowded housing market.
Is it possible to sell an ADU in Artesia?
Under California’s AB 1033 law, local governments can set rules for selling an ADU separately from the main home, similar to a condo, if all ADU regulations are followed. In Artesia, selling an ADU on its own may be possible if certain conditions are met—such as the ADU being developed by a qualified nonprofit, having a shared ownership agreement, or if the city allows separate ownership of the ADU and main house.
The ROI for building an ADU in Artesia
Based on a review of several projects, we found that on average, you can expect a 63% ROI for an ADU project in Artesia. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is modest, making it a relatively conservative option 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 Artesia
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 $43,058, covering essential aspects of the project's development and approval process.
Combining both hard and soft costs, the total project cost sums up to $385,958. 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 Artesia is estimated at $700. 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 $630,000 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 $244,041 or 63% 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 Artesia comes with a total cost of $385,958. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,462 or $29,544/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.
Local rules require rentals to be at least 30 days, meaning short-term rentals aren’t allowed. Although sites like Airbnb could bring higher earnings with short stays (such as about $600 for a five-night booking during peak times), long-term rentals provide a more stable income stream. With a long-term lease, there's no need for frequent guest changes, ongoing cleaning, or advertising efforts. For those who prefer steady earnings, long-term rentals offer reliable income and help maintain the property’s value.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California offers help through the CalHFA ADU Grant Program. Since September 20, 2021, the program has provided up to $40,000 to eligible homeowners to cover initial costs when building an ADU on a single-family property. This grant helps with expenses like permits, architectural plans, soil tests, surveys, impact fees, and energy assessments that are needed before construction begins, to increase housing availability.
Building Your Team for the ADU Project
After securing funds, make sure to choose a property where building an ADU is permitted and check any restrictions on its size. If your goal is rental income or investment, consider hiring experienced professionals like architects and contractors to handle the construction. Connecting with local contractors who have experience with similar projects in the area can also be beneficial.
What are some other financing options for building an ADU?
- Home Equity Line of Credit (HELOC): This allows you to borrow money based on the value of your home and access the funds as needed, similar to using a credit card. It's a popular choice for financing ADU projects.
- Home Equity Loan: This loan gives you a lump sum of money based on your home's value, which you pay back in regular monthly payments, helping you manage your budget.
- Cash-Out Refinancing: With this option, you refinance your mortgage for a larger amount and use the additional funds to pay for your ADU project.
- Renovation Loans: These loans are specifically for home improvements and can be used to finance an ADU.
- Private Lender Loans: Some private lenders offer loans for building ADUs, with more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, laws like AB 670 (2019) and AB 3182 (2020) prevent Homeowners Associations (HOAs) from blocking or imposing unfair restrictions on ADUs in areas designated for single-family homes. Any HOA rules that try to prevent ADUs are not valid and may result in penalties.
Maximizing Profitability in Artesia
Marketing Strategies to Increase ADU Investment Returns
To get the best return on an ADU investment in Artesia, consider these marketing strategies:
- Marketing Tips for Higher Returns. To get the best return on your ADU investment in Artesia, consider these strategies:
- Build Connections. Create custom marketing materials to engage local real estate agents, which may lead to valuable partnerships.
- Offer Virtual Tours. Let potential buyers or renters view the property online, making it easier for them to evaluate the space.
- Share Expertise. Post educational content about ADU investments on social media platforms like Instagram and Facebook to build credibility and attract more interest.
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