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How to Make My ADU a Profitable Investment in Baldwin Park?
Investing in an ADU in Baldwin Park can be challenging, especially when it comes to making enough rental income, managing costs, and staying within local regulations. However, with the right approach, you can boost your ADU's profitability. This includes setting fair rental prices, keeping construction and maintenance costs under control, and ensuring your ADU meets local building and zoning rules. This article offers helpful tips for improving your ADU’s financial success.
Introduction to ADU Investments in Baldwin Park
Why are ADUs popular in California?
ADUs, or granny flats, are becoming more popular in California as a way to address the state’s housing challenges. With high home prices and limited new builds, ADUs allow homeowners to create additional living space without needing more land. These units offer affordable rental options, provide extra income, and offer flexible living spaces for young adults, families, and seniors who want to stay close to loved ones.
How can an ADU increase property value?
Adding an ADU can raise a property's value by providing more space that attracts buyers looking for rental income or adaptable living areas. Homes with ADUs are often valued higher in California because they offer opportunities to rent out space, house family members, or create a home office, making the property more desirable in a competitive market.
Is it possible to sell an ADU in Baldwin Park?
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 Baldwin Park, 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 Baldwin Park
We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Baldwin Park. 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 Baldwin Park is a risky investment. 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 Baldwin Park
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 $43,530, covering essential aspects of the project's development and approval process.
Combining both hard and soft costs, the total project cost sums up to $386,430. 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 Baldwin Park is estimated at $450. 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 $405,000 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 $18,570 or 5% 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 Baldwin Park comes with a total cost of $386,430. If financed with a loan at a 6.5% interest rate, this results in a monthly payment of $2,443 or $29,316/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 $700 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, so short-term rentals aren't allowed. While platforms like Airbnb can bring in more money for short stays (like $600 for five nights during peak times), long-term rentals offer steadier income. With a long-term lease, you won’t have to constantly find new tenants, clean the space, or advertise the property, making your income more reliable and helping to keep the property's value stable.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, financial help is available in California through the CalHFA ADU Grant Program, which started on September 20, 2021. Eligible homeowners can receive up to $40,000 to cover initial expenses like permits, design plans, soil tests, and other costs for building an ADU on a single-family property.
Building Your Team for the ADU Project
Once you have the funds, it's important to pick a property where ADUs are allowed and check for size limits. If you're planning to rent or invest, hiring skilled professionals like architects and contractors will keep your project on track. It's also helpful to connect with local contractors who have experience with similar projects.
What are some other financing options for building an ADU?
There are different ways to pay for an ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, which you can use as needed. A Home Equity Loan gives you a lump sum to pay back over time. Cash-out refinancing increases your mortgage to cover the cost of building an ADU. Renovation loans are designed for home improvements, including adding an ADU. Private lenders may also offer loans with more flexible terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No. Laws like AB 670 and AB 3182 stop Homeowners Associations (HOAs) from blocking ADU construction in areas meant for single-family homes. Any HOA rules that try to limit ADUs aren't allowed and could result in penalties.
Maximizing Profitability in Baldwin Park
Marketing Strategies to Increase ADU Investment Returns
To get the best return on your ADU investment in Baldwin Park, using smart marketing can help. Partnering with local real estate agents and creating marketing materials can open up valuable opportunities. Offering virtual tours allows potential renters or buyers to view the property online, making it easier for them to decide. Sharing useful information about ADU investments on social media platforms like Instagram and Facebook can also generate interest and build your reputation.
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