Capy Construction
How to Make My ADU a Profitable Investment in Bell?
Investing in an ADU in Bell can be hard, particularly when trying to generate enough rental income, manage expenses, and follow local rules. However, by using the right strategies, you can increase your ADU’s profitability. This involves pricing rentals competitively, controlling the construction and keeping costs, and making sure your ADU complies with local building and zoning requirements. This article provides useful advice to help improve your ADU’s financial returns.
Introduction to ADU Investments in Bell
Why are ADUs popular in California?
ADUs, also known as granny flats, are gaining popularity in California as a solution to the state’s housing problems. With high home prices and limited new housing developments, ADUs allow homeowners to add extra living space without needing more land. These units provide affordable rental options, help homeowners earn extra income, and offer flexible living spaces for young adults, families, and seniors who want to stay near their loved ones.
How can an ADU increase property value?
Building an ADU can increase a property’s value by adding extra space that appeals to buyers who want rental income or versatile living areas. Homes with ADUs are often worth more in California because they offer the chance to rent out the extra space, accommodate family members, or create a home office, making the property more attractive in a competitive real estate market.
Is it possible to sell an ADU in Bell?
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 Bell, 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 Bell
We analyzed multiple projects, and we determined that on average you should expect a 56% ROI for an ADU project in Bell. 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 Bell
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 $47,338, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,238. 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 Bell is estimated at $677. 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 $609,300 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 $219,062 or 56% 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 Bell comes with a total cost of $390,238. If financed with a 6.5% interest rate loan, 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 is a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $13,200 annually. 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 specify that rentals should be for a minimum of 30 days, so short-term rentals aren’t allowed. While renting on platforms like Airbnb could potentially earn more for short stays (such as $600 for five nights during peak times), long-term leases provide more consistent income. With a long-term rental, you avoid the hassle of frequently searching for new tenants, cleaning between stays, or continuously advertising, which makes your earnings more predictable and helps 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, in California, the CalHFA ADU Grant Program, which launched on September 20, 2021, offers financial assistance. Homeowners who qualify can receive up to $40,000 to help cover costs such as permits, design, soil testing, and other early expenses for building an ADU on a single-family property.
Building Your Team for the ADU Project
After securing your funding, the next step is to find a property where ADUs are permitted and check the size limitations. If you're planning to rent or invest, it’s crucial to hire experienced professionals, such as architects and contractors, to ensure your project runs smoothly. Working with local contractors familiar with similar projects can also be beneficial.
What are some other financing options for building an ADU?
There are several options for funding an ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow against your home's value as needed. A Home Equity Loan gives you a lump sum amount to repay over time. Cash-out refinancing allows you to increase your mortgage to cover the cost of the ADU. Renovation loans are available for home improvements, including adding an ADU. Private lenders may offer more flexible loan terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowners associations (HOAs) cannot block the building of ADUs in areas designated for single-family homes. Laws such as AB 670 and AB 3182 prevent HOA rules from restricting ADUs, and any such rules are not enforceable and may result in penalties.
Maximizing Profitability in Bell
Marketing Strategies to Increase ADU Investment Returns
To maximize the return on your ADU investment in Bell, effective marketing is key. Collaborating with local real estate agents and creating marketing materials can help attract tenants or buyers. Offering virtual tours of the property lets potential renters or buyers explore the ADU online, making their decisions easier. Sharing information about ADU investments on social media platforms like Instagram and Facebook can also help generate interest and enhance your reputation.
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