Introduction to ADU Investments in Burbank

Why are ADUs popular in California?

In California, ADUs, also known as granny flats, are becoming a common choice because of the housing shortage. As home prices rise and new properties are limited, ADUs allow homeowners to expand their living space without needing extra land. These units offer an affordable housing option, provide a way for homeowners to earn extra income, and can be designed for different needs, whether for young adults, families, or seniors who want to stay close to loved ones.

How can an ADU increase property value?

Adding an ADU to a property can boost its value by offering flexible living space that appeals to buyers looking for rental income or adaptable areas. Homes with ADUs in California often sell for higher prices since the extra space can be rented out, used to house family members, or serve as a home office, making the property more attractive to potential buyers.

Is it possible to sell an ADU in Burbank?

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 Burbank, 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 Burbank

We analyzed multiple projects, and we determined that on average you should expect a 97% ROI for an ADU project in Burbank. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Burbank 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?

Please enter a valid address

Case study: 900 sq. ft. ADU built in Burbank

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 $45,444, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $388,344. 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 Burbank is estimated at $850. 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 $765,000 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 $376,656 or 97% 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 Burbank comes with a total cost of $388,344. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,455 or $29,460/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 $34,800 annually. At this rental income, which gives you a $5,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

The city's municipal code requires that rentals last at least 30 days, meaning short-term rentals are not allowed. While platforms like Airbnb may offer higher earnings during peak periods (for example, $600 for a five-night stay), long-term rentals provide more steady income. With a long-term rental, there's no need to constantly find new tenants, clean between stays, or post ads repeatedly, resulting in more reliable income and less property maintenance.

Check if the market value of your ADU covers the construction costs.

Please enter a valid address

Is there financial assistance for building ADUs?

California offers financial help for homeowners looking to build an ADU through the CalHFA ADU Grant Program, which began on September 20, 2021. This program provides up to $40,000 to cover early expenses, including permits, design, soil testing, and other costs when adding an ADU to a single-family property.

Building Your Team for the ADU Project

Once you've secured funding, the next step is finding a property that allows ADUs and checking for any size limitations. If you're planning to rent or invest in the ADU, it's important to hire experienced professionals, like architects and contractors, to ensure everything goes smoothly. It can also be helpful to work with local contractors who are familiar with similar projects.

What are some other financing options for building an ADU?

There are various ways to finance an ADU project. One option is a Home Equity Line of Credit (HELOC), which lets you borrow funds as you need them based on your home’s value. Alternatively, you can get a Home Equity Loan, which gives you a lump sum that you repay over time. Cash-out refinancing allows you to borrow extra money by increasing your current mortgage, and renovation loans can help fund home improvements like adding an ADU. Some private lenders might 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 prevent the construction of ADUs in single-family home areas. Laws like AB 670 and AB 3182 prevent HOA rules from restricting ADUs, and enforcing such rules could result in penalties.

Maximizing Profitability in Burbank

Marketing Strategies to Increase ADU Investment Returns

To increase your ADU’s return on investment in Burbank, effective marketing is crucial. Collaborating with local real estate agents and creating appealing marketing materials can help attract tenants or buyers. Virtual tours allow potential renters or buyers to explore the space online, making decisions easier. Posting about your ADU on social media platforms like Instagram and Facebook can also create buzz and improve your property's visibility.

Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.

Please enter a valid address

Related Articles

ADU Solutions for Aging in Place in Burbank

All You Need to Know About Building on Properties in Burbank Under SB-9

Everything You Need to Know About SB-684 Development in Burbank

How to get your permits fast or the benefits of using SB-423 in Burbank

What are the requirements to build ADU in Burbank?

More articles ...

Resources

Burbank Municipal Code