Oasis Builders Inc.
How to Make My ADU a Profitable Investment in Calabasas?
Turning your ADU into a profitable investment in Calabasas can be challenging due to current market conditions and regulations. To address these challenges, explore strategies such as improving your ADU's market appeal, leveraging local opportunities like potential new laws, and using effective marketing techniques. Learn how to enhance your ADU's value, attract potential buyers or renters, and optimize your investment returns through smart planning and execution.
Introduction to ADU Investments in Calabasas
Why are ADUs popular in California?
ADUs, often called granny flats, are popular in California due to the housing crunch. As property prices soar and space for new homes dwindles, ADUs provide a way to add living space without extra land. These units offer affordable housing options, help homeowners earn rental income, and are versatile enough to serve different purposes, like housing for young adults, family members, or seniors wanting to stay close to family.
How can an ADU increase property value?
Adding an ADU can raise a property's value by creating extra living space that appeals to buyers interested in rental income or flexible-use areas. Properties with ADUs typically sell at higher prices, as these units can be rented out, used for family, or repurposed as offices, increasing their appeal to prospective buyers.
Is it possible to sell an ADU in Calabasas?
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 Calabasas, 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 Calabasas
We analyzed multiple projects, and we determined that on average you should expect an 84% ROI for an ADU project in Calabasas. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Calabasas 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 Calabasas
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 Calabasas is estimated at $800. 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 $720,000 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 $328,320 or 84% 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 Calabasas 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 $42,000 annually. At this rental income, which gives you a $12,000 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.
Is there financial assistance for building ADUs?
California has a program that provides financial assistance to homeowners building an ADU, known as the CalHFA ADU Grant Program. Starting in September 2021, this grant can give up to $40,000 to cover early costs like permits, design, and site evaluations for ADUs on single-family properties.
Building Your Team for the ADU Project
Getting started with your ADU project involves building a reliable team. After securing funds, ensure that your property is eligible for an ADU and look for any size restrictions. If the ADU will be rented or used as an investment, consider hiring professionals, such as architects and contractors, to help manage the project. Local contractors familiar with ADU projects can be especially beneficial.
What are some other financing options for building an ADU?
There are several ways to finance an ADU. You can use a Home Equity Line of Credit (HELOC), which lets you borrow money based on your home's value as needed. Another option is a Home Equity Loan, which provides a lump sum to be paid back in installments. Cash-out refinancing lets you borrow more by increasing your existing mortgage, and renovation loans can help fund the addition of an ADU. Some private lenders may also offer more flexible terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No. Regarding challenges, homeowner associations (HOAs) cannot prevent the construction of an ADU in single-family areas. Laws like AB 670 and AB 3182 prevent HOA rules from stopping ADUs, and violations could lead to penalties.
Maximizing Profitability in Calabasas
Marketing Strategies to Increase ADU Investment Returns
For maximizing returns on your ADU investment in Calabasas, marketing is key. Partnering with local real estate agents and creating strong marketing materials can attract potential tenants or buyers. Virtual tours make it easy for people to explore the space online. Social media platforms like Instagram and Facebook can also help boost visibility and generate interest in your property.
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