Introduction to ADU Investments in Azusa

Why are ADUs popular in California?

ADUs, also known as granny flats, are gaining popularity as a solution to California’s housing issues. With high home prices and limited new construction, these compact units allow homeowners to add extra living space without purchasing additional land. ADUs provide affordable rental opportunities, generate extra income, and offer flexible living spaces for young adults, families, and seniors who want to remain close to their families.

How can an ADU increase property value?

Adding an ADU can increase a property’s value by providing extra space that appeals to buyers seeking rental income or versatile living options. In California, homes with ADUs are often valued highly because they offer possibilities for renting out space, accommodating relatives, or setting up a home office. This added space makes the property more appealing in a competitive real estate market.

Is it possible to sell an ADU in Azusa?

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 Azusa, 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 Azusa

We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in Azusa. This ROI doesn't include the acquisition cost for the property. 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 Azusa 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 Azusa

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 $47,309, covering essential aspects of the project's development and approval process.

Combining both hard and soft costs, the total project cost sums up to $390,210. 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 Azusa is estimated at $500. 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 $450,000 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 $59,790 or 15% 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 Azusa comes with a total cost of $390,210. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,466 or $29,592/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 $30,000 per year. At this rental income, which gives you only $400 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

Local regulations state that rentals should be at least 30 days, meaning short-term rentals are not allowed. Although platforms like Airbnb could offer higher earnings from short stays (like $600 for a five-night booking during busy times), long-term rentals provide more consistent income. With a long-term lease, you don't have to worry about frequently finding new tenants, cleaning the space, or promoting the property, which makes for a more stable income and helps maintain the property's value.

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Is there financial assistance for building ADUs?

Yes, California offers support through the CalHFA ADU Grant Program, which launched on September 20, 2021. Homeowners who qualify can receive up to $40,000 to cover initial costs such as permits, design plans, soil testing, and other fees involved in building an ADU on a single-family property.

Building Your Team for the ADU Project

After securing funds, it's crucial to choose a property where ADUs are allowed and to check for any size limits. If you're looking to rent or invest, hiring experienced professionals like architects and contractors will help keep the project on track. It's also a good idea to reach out to local contractors who have worked on similar projects nearby.

What are some other financing options for building an ADU?

There are several ways to finance an ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money against your home's value and access it when needed. A Home Equity Loan gives you a lump sum based on your home's value, which you pay back over time. Cash-out refinancing lets you increase your mortgage to cover the costs of building an ADU. Renovation loans are specifically designed for home improvements, including building an ADU. Private lenders might also offer loans with more flexible terms than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No. Laws such as AB 670 and AB 3182 prevent Homeowners Associations (HOAs) from blocking ADU construction in areas zoned for single-family homes. Any HOA rules that try to restrict ADUs are not valid and could lead to penalties.

Maximizing Profitability in Azusa

Marketing Strategies to Increase ADU Investment Returns

To maximize the return on an ADU investment in Azusa, using effective marketing strategies can help. You can connect with local real estate agents by creating tailored marketing materials that may lead to valuable partnerships. Offering virtual tours allows potential renters or buyers to view the property online, which makes it easier for them to assess. Sharing helpful information about ADU investments on social media platforms such as Instagram and Facebook can also help increase interest and build your reputation.

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