Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Bell Gardens?
Income from an ADU in Bell Gardens can be challenging to generate at a profitable level, particularly with the need to manage expenses and comply with local rules. However, with the right approach, profitability can improve. This includes setting competitive rental rates, keeping construction and maintenance costs in check, and making sure the ADU complies with the local building and zoning regulations. This article provides helpful advice to enhance the financial returns of your ADU.
Introduction to ADU Investments in Bell Gardens
Why are ADUs popular in California?
Accessory Dwelling Units, or ADUs (often called granny flats), are becoming increasingly popular across California as a practical response to the state’s ongoing housing shortage. With high property prices and fewer new homes being built, ADUs give homeowners a way to create additional living areas without expanding the land they own. These units offer lower-cost rental options, provide homeowners with a source of extra income, and serve as adaptable spaces for young adults, families, and seniors who prefer staying close to family and friends.
How can an ADU increase property value?
Adding an ADU to a property can enhance its value by offering additional, flexible space that attracts buyers interested in rental income or adaptable living areas. Homes with ADUs generally see higher values in California since they offer the option to rent out the extra unit, provide housing for a family, or create a home office, making the property more appealing in a competitive housing market.
Is it possible to sell an ADU in Bell Gardens?
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 Gardens, 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 Gardens
We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Bell Gardens. 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 Bell Gardens 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 Bell Gardens
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.
The total project cost, including hard and soft costs, is $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 Bell Gardens 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 Bell Gardens comes with a total cost of $386,430. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,442 or $29,304/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 $28,800 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 rules require rentals to last at least 30 days, which means short-term rentals aren’t permitted. Though sites like Airbnb could bring in more during peak periods (for example, $600 for a five-night stay), long-term rentals provide a steadier income stream. With a long-term lease, you don’t have to constantly find new tenants, clean up after each stay, or keep advertising, making your earnings more predictable and helping keep the property in good condition.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California’s CalHFA ADU Grant Program, introduced on September 20, 2021, offers support to eligible homeowners, providing up to $40,000 to help 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 funding is in place, the next step is finding a property that allows ADUs and reviewing any size restrictions. If you’re looking to rent or invest, bringing in skilled professionals like architects and contractors is key to keeping the project on track. It’s also helpful to work with local contractors experienced in similar projects.
What are some other financing options for building an ADU?
There are various ways to finance an ADU project. A Home Equity Line of Credit (HELOC) allows you to draw on your home’s equity as needed. A Home Equity Loan, on the other hand, provides a lump sum to be paid back over time. Cash-out refinancing lets you increase your mortgage to cover ADU construction costs. Renovation loans are another option, specifically for home improvement projects, including ADUs. Additionally, private lenders may offer more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowners associations (HOAs) aren’t allowed to prevent the construction of ADUs in single-family areas. Laws like AB 670 and AB 3182 ensure that HOA rules restricting ADUs aren’t enforceable, and any such restrictions could lead to penalties.
Maximizing Profitability in Bell
Marketing Strategies to Increase ADU Investment Returns
To boost returns on your ADU investment in Bell Gardens, having a solid marketing approach is essential. Partnering with local real estate agents and developing attractive marketing materials can help attract renters or buyers. Virtual tours provide an online viewing option, helping prospective tenants or buyers make decisions more easily. Sharing ADU-related information on social media, like Instagram or Facebook, can also create interest and build your reputation.
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