The Southwest Builders
How to Make My ADU a Profitable Investment in Avalon?
In Avalon, homeowners may face challenges in making their ADU profitable due to increasing expenses, rental restrictions, and local regulations. However, with careful planning, it's possible to improve the ADU’s financial return by setting reasonable rental prices, managing building and upkeep costs, and ensuring the unit complies with zoning and construction rules. This guide offers helpful advice for maximizing ADU investment returns.
Introduction to ADU Investments in Avalon
Why are ADUs popular in California?
ADUs, or granny flats, are becoming a popular solution to California's housing shortage. With high property prices and limited new homes, these small units allow homeowners to expand their space without buying extra land. ADUs offer affordable rental options, extra income, and flexible living spaces for young adults, families, and seniors who want to stay close to their loved ones.
How can an ADU increase property value?
Building an ADU can boost a property's value by adding usable space that appeals to buyers interested in rental income or adaptable living arrangements. In California, homes with ADUs tend to be worth more because they provide options for renting, housing family members, or creating a home office. The added space makes the property more attractive in a competitive housing market.
Is it possible to sell an ADU in Avalon?
In California, the AB 1033 law allows local governments to create rules for selling an ADU separately from the main house, much like a condo, as long as all ADU regulations are followed. In Avalon, selling an ADU on its own might 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 separate ownership of the ADU and the main house.
The ROI for building an ADU in Avalon
We analyzed multiple projects, and we determined that on average you should expect a 50% ROI for an ADU project in Avalon. 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%+.
Interested to find out the market value of an ADU for your property?
Case study: 900 sq. ft. ADU built in Avalon
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 $48,356, covering essential aspects of the project's development and approval process.
Combining both hard and soft costs, the total project cost sums up to $391,256. 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 Avalon 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 to sell 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 Avalon comes with a total cost of $391,256. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,496 or $29,952/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 $4,800 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
Local rules require that rentals last for at least 30 days, so short-term rentals are not allowed. While sites like Airbnb could bring in more money with short-term bookings (for example, about $600 for a five-night stay during peak times), renting out the property long-term offers steadier income. With long-term leases, there is no need to constantly find new tenants, clean the space, or market the property, providing a more reliable income and helping to keep the property's value intact.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California provides financial assistance through the CalHFA ADU Grant Program, which started on September 20, 2021. Eligible homeowners can receive up to $40,000 to help cover early expenses like permits, architectural plans, soil testing, and impact fees when building an ADU on a single-family property.
Building Your Team for the ADU Project
Once you secure the funding, it's important to pick a property where building an ADU is allowed and check size restrictions. If you're planning to rent out or invest in the property, hiring skilled professionals like architects and contractors will ensure the project runs smoothly. It’s also helpful to connect with local contractors experienced in similar projects in the area.
What are some other financing options for building an ADU?
Several financing options are available for building an ADU. A Home Equity Line of Credit (HELOC) lets you borrow money against the value of your home, giving you access to funds as needed. A Home Equity Loan provides a lump sum based on your home’s value, which you pay back over time. Cash-out refinancing involves increasing your mortgage amount to cover ADU costs. Renovation loans are customized for home improvements, including ADUs. Additionally, private lenders may offer loans with more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No. Homeowners Associations (HOAs) cannot block ADU construction in areas zoned for single-family homes, according to laws like AB 670 and AB 3182. Any HOA rules attempting to restrict ADUs are not enforceable and could lead to penalties.
Maximizing Profitability in Avalon
Marketing Strategies to Increase ADU Investment Returns
To boost the return on an ADU investment in Avalon, marketing strategies can be key. Engage with local real estate agents by creating customized materials that may lead to valuable partnerships. Offer virtual tours to allow potential buyers or renters to view the space remotely, making it easier to assess. Additionally, sharing informative content about ADU investments on social media platforms like Instagram and Facebook can help attract interest and build credibility.
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