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How to Make My ADU a Profitable Investment in Bradbury?
Local rules in Bradbury can make it challenging to earn a good income from an ADU, especially when trying to manage costs. However, by taking the right approach, you can improve your chances of making a profit. This includes following zoning and building guidelines, pricing rent competitively, and keeping construction and maintenance expenses low. This article offers helpful advice on how to boost the financial success of your ADU.
Introduction to ADU Investments in Bradbury
Why are ADUs popular in California?
ADUs or Granny flats are becoming a popular solution in California due to the housing shortage. With rising property costs and limited new homes, ADUs allow homeowners to add extra living space without needing more land. These units provide affordable rental options, offer homeowners a chance to earn additional income, and can be customized for young adults, families, or seniors who prefer to live near their loved ones.
How can an ADU increase property value?
Building an ADU can increase a home's value by adding adaptable space that attracts buyers interested in rental income or flexible living areas. In California, properties with ADUs often sell for more, as they offer the option to rent out the space, house family members, or create a home office, making the property more desirable in the market.
Is it possible to sell an ADU in Bradbury?
In California, the AB 1033 law lets local governments set rules for selling an ADU separately from the main house, similar to how condos are sold, as long as certain regulations are followed. In Bradbury, selling an ADU separately could be possible if certain conditions are met, such as the ADU being built by a qualified nonprofit, having a shared ownership agreement, or if the city allows separate ownership of the ADU and the main house.
The ROI for building an ADU in Bradbury
We analyzed multiple projects, and we determined that on average you should expect a 37% ROI for an ADU project in Bradbury. 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 Bradbury 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 Bradbury
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 $51,595, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $394,495. 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 Bradbury is estimated at $600. 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 $540,000 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 $145,505 or 37% 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 Bellflower comes with a total cost of $394,495. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,493 or $29,916/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.
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 offers the CalHFA ADU Grant Program, which started on September 20, 2021, to assist eligible homeowners. This program provides up to $40,000 to help cover early costs such as permits, design plans, soil testing, and other expenses when adding an ADU to a single-family property.
Building Your Team for the ADU Project
After securing the necessary funding, the next step is to find a property where ADUs are permitted and check for any size restrictions. If you're planning to rent out or invest in the ADU, it's crucial to hire skilled professionals, such as architects and contractors, to ensure the project runs smoothly. It's also beneficial to work with local contractors who have experience with similar projects.
What are some other financing options for building an ADU?
There are several ways to fund an ADU project. One option is a Home Equity Line of Credit (HELOC), where you borrow funds based on the equity in your home as needed. Another option is a Home Equity Loan, which provides a lump sum that is repaid over time. Cash-out refinancing allows you to borrow more against your existing mortgage to help pay for the ADU. Renovation loans are also available to finance home improvements, including building an ADU. Additionally, private lenders may offer more flexible terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations (HOAs) cannot prevent the construction of ADUs in areas designated for single-family homes. Laws such as AB 670 and AB 3182 prevent HOA rules from restricting ADUs, and trying to enforce such rules could result in penalties.
Maximizing Profitability in Bradbury
Marketing Strategies to Increase ADU Investment Returns
To increase the return on your ADU investment in Bradbury, effective marketing is key. Partnering with local real estate agents and creating engaging marketing materials can help attract potential tenants or buyers. Offering virtual tours lets people view the space online, making it easier for them to decide. Sharing posts about your ADU on social media platforms like Instagram and Facebook can also help generate interest and build your reputation.
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