Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Beverly Hills?
Property owners in Beverly Hills often struggle to maximize profit from their Accessory Dwelling Units (ADUs) due to high competition and unique market dynamics. By implementing strategic marketing tactics and understanding the local market, you can turn your ADU into a profitable investment. Effective strategies include highlighting unique features and emphasizing the Beverly Hills lifestyle can make your ADU a successful investment in the competitive Beverly Hills market.
Introduction to ADU Investments in Bellflower
Why are ADUs popular in California?
ADUs, also known as granny flats, are gaining popularity in California as a way to address the housing shortage. With high property prices and limited new homes being built, ADUs offer homeowners the chance to create additional living space without needing more land. These units provide affordable rental options, give homeowners a way to generate extra income, and offer flexible living spaces for young adults, families, or seniors who want to stay near loved ones.
How can an ADU increase property value?
Adding an ADU can raise a property's value by creating extra, useful space that appeals to buyers looking for rental income or flexible living options. Homes with ADUs in California often sell for more because they offer the potential to rent out the space, accommodate family members, or set up a home office, making the property more appealing in a competitive market.
Is it possible to sell an ADU in Beverly Hills?
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 Beverly Hills, 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 Beverly Hills
We analyzed multiple projects, and we determined that on average you should expect a 195% ROI for an ADU project in Beverly Hills. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Beverly Hills 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 Beverly Hills
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 $53,647, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $396,547. 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 Beverly Hills is estimated at $1,300. 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 $1,170,000 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 $773,453 or 195% 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 $396,547. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,506 or $30,072/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 $55,200 annually. At this rental income, which gives you a $25,128 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
Municipal code requires that rentals be for at least 30 days, meaning short-term rentals are not allowed. While platforms like Airbnb might offer higher earnings during peak times (for example, $600 for a five-night stay), long-term rentals provide more consistent income. With a long-term rental, you don't have to constantly search for new tenants, clean between stays, or repeatedly post ads, which leads to steadier income and better upkeep of the property.
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, which started on September 20, 2021, offers financial support to eligible homeowners. It provides up to $40,000 to cover initial expenses like permits, design plans, soil testing, and other costs when building an ADU on a single-family property.
Building Your Team for the ADU Project
Once you have funding, the next step is to find a property where ADUs are allowed and check if there are any size restrictions. If you plan to rent out or invest in the ADU, it’s important to hire experienced professionals, like architects and contractors, to make sure everything goes smoothly. Working with local contractors who are familiar with similar projects can also be a big advantage.
What are some other financing options for building an ADU?
There are different ways to fund an ADU project. One option is using a Home Equity Line of Credit (HELOC), where you borrow money based on the value of your home as you need it. Another option is a Home Equity Loan, which gives you a lump sum of money that you pay back over time. Cash-out refinancing lets you borrow more money on your mortgage to cover ADU costs. There are also renovation loans designed for home upgrades, including adding an ADU. Some private lenders may offer more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations (HOAs) cannot stop the construction of ADUs in areas designated for single-family homes. Laws like AB 670 and AB 3182 prevent HOA rules from restricting ADUs, and enforcing such rules could lead to penalties.
Maximizing Profitability in Beverly Hills
Marketing Strategies to Increase ADU Investment Returns
To boost the return on your ADU investment in Beverly Hills, effective marketing is essential. Collaborating with local real estate agents and creating attractive marketing materials can help you reach potential renters or buyers. Virtual tours allow people to explore the space online, making it easier for them to decide. Posting about your ADU on social media platforms like Instagram and Facebook can generate interest and enhance your reputation.
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