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How to Make My ADU a Profitable Investment in Bellflower?
Local regulations in Bell Gardens can make it tricky to generate significant income from an ADU, especially when balancing expenses. However, by taking the right steps, you can increase your chances of making a profit. This involves following zoning and building rules, setting competitive rental prices, and keeping construction and maintenance costs under control. This article provides useful tips to help improve the financial outcomes of your ADU.
Introduction to ADU Investments in Bellflower
Why are ADUs popular in California?
Accessory Dwelling Units, or ADUs (often known as granny flats), are becoming more common in California as a solution to the state’s housing shortage. With property prices soaring and fewer new homes being built, ADUs allow homeowners to add extra living space without needing more land. These units provide affordable rental options, offer homeowners a way to earn extra income, and can be flexible spaces for young adults, families, or seniors who want to stay close to loved ones.
How can an ADU increase property value?
Building an ADU can increase the value of a property by providing extra, versatile space that appeals to buyers looking for rental opportunities or adaptable living areas. In California, homes with ADUs often sell for more because they offer the possibility to rent the space, house family members, or create a home office, making the property more attractive in a competitive 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 Bellflower, 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 an 83% ROI for an ADU project in Bellflower. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Bellflower an appealing and promising location for real estate development. 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 Bellflower
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 $48,780, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $391,680. 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 Bellflower is estimated at $796. 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 $716,400 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 $324,720 or 83% ROI. At this level of return, the investment in an ADU to sell it offers a substantial return on investment relative to the total project cost and the market value making the city a highly attractive and promising location for housing projects. In addition to the high 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 Bellflower comes with a total cost of $391,680. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,475 or $29,700/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 $27,600 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.
According to municipal code, rentals should be for a minimum of 30 days, so short-term rentals aren’t allowed. While platforms like Airbnb might offer higher earnings during busy times (for example, $600 for a five-night stay), long-term rentals offer more reliable income. With a long-term rental, you don’t need to repeatedly search for new tenants, clean after each visit, or keep posting ads, which makes your income more consistent and helps maintain the property’s 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, launched on September 20, 2021, offers financial help to qualified homeowners. It provides up to $40,000 to cover early costs such as permits, design plans, soil testing, and other expenses when building an ADU on a single-family property.
Building Your Team for the ADU Project
After securing funding, the next step is to find a property where ADUs are allowed and check for any size limits. If you plan to rent or invest, it’s important to hire experienced professionals like architects and contractors to ensure the project runs smoothly. Working with local contractors who have done similar projects is also a great advantage.
What are some other financing options for building an ADU?
There are several options for funding an ADU project. You can use a Home Equity Line of Credit (HELOC) to borrow against your home's value as needed. A Home Equity Loan provides a lump sum of money that you pay back over time. Cash-out refinancing allows you to increase your mortgage to cover the costs of building an ADU. Renovation loans are also available for home improvements, including adding an ADU. Additionally, private lenders might offer more flexible terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowners associations (HOAs) cannot obstruct the construction of ADUs in areas zoned for single-family homes. Laws such as AB 670 and AB 3182 make sure that HOA rules limiting ADUs are not enforceable, and enforcing such rules could lead to penalties.
Maximizing Profitability in Bellflower
Marketing Strategies to Increase ADU Investment Returns
To improve the return on your ADU investment in Bellflower, effective marketing is key. Working with local real estate agents and creating appealing marketing materials can help attract potential tenants or buyers. Offering virtual tours makes it easier for people to explore the space online and make decisions. Sharing information about your ADU on social media platforms like Instagram and Facebook can also generate interest and help build your reputation.
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