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How to Make My ADU a Profitable Investment in Cerritos?
Maximizing the profitability of an ADU investment in Cerritos requires a strategic approach. The main challenge is ensuring that the ADU attracts tenants and generates income while increasing property value. Effective marketing strategies, understanding the target demographic, leveraging diverse marketing channels, and optimizing the property to meet market demands can help turn an ADU into a profitable investment in Cerritos.
Introduction to ADU Investments in Cerritos
Why are ADUs popular in California?
ADUs, often called granny flats, are gaining popularity in California because they help address the housing shortage. With property costs climbing and less available land for new homes, ADUs provide a practical way to expand living space. They’re affordable to build, can bring in rental income, and offer flexible options, like housing for relatives, young adults, or seniors who prefer to stay near 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. Homes with ADUs typically attract higher offers since the extra unit can be rented, used by family members, or repurposed as an office, enhancing the property’s appeal.
Is it possible to sell an ADU in Cerritos?
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 Cerritos, 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 Cerritos
We analyzed multiple projects, and we determined that on average you should expect a 73% ROI for an ADU project in Cerritos. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Cerritos 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 Cerritos
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 $48,162, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $391,062. 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 Cerritos is estimated at $750. 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 $675,000 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 $283,938 or 73% 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 Cerritos comes with a total cost of $391,062. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,472 or $29,664/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 $31,200 annually. At this rental income, which gives you a $1,500 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
The city's rules state that rental periods should be at least 30 days, so short-term rentals aren't allowed. Although sites like Airbnb can bring in higher income during busy times (for example, $600 for a five-night stay), long-term rentals offer more consistent earnings. With a long-term rental, you don’t have to worry about finding new tenants all the time, cleaning between stays, or repeatedly advertising, leading to steadier income and less upkeep.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California has a program, the CalHFA ADU Grant Program, to support homeowners with funding for building an ADU. Since September 2021, this grant has offered up to $40,000 to help with early costs like permits, design, and property assessments for ADUs on single-family properties.
Building Your Team for the ADU Project
Starting your ADU project involves assembling a skilled team. After securing funds, confirm that your property meets ADU requirements and check for any size limitations. For rental or investment purposes, it’s helpful to hire professionals like architects and contractors to keep the project on track. Choosing local contractors who specialize in ADUs can be particularly beneficial.
What are some other financing options for building an ADU?
There are multiple ways to finance an ADU project. One choice is a Home Equity Line of Credit (HELOC), which lets you borrow against your home's value as needed. Alternatively, a Home Equity Loan provides a single lump sum to be repaid over time. Cash-out refinancing allows you to take out additional funds by adjusting your current mortgage, while renovation loans can also cover ADU construction costs. Some private lenders offer loans with terms that may be more flexible than those from traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, HOAs are not allowed to block ADU construction in single-family areas. Laws like AB 670 and AB 3182 prohibit HOAs from setting restrictions against ADUs, and enforcing such rules could result in penalties.
Maximizing Profitability in Cerritos
Marketing Strategies to Increase ADU Investment Returns
To make the most of your ADU investment in Cerritos, strong marketing is key. Partnering with local real estate agents and creating appealing promotional materials can attract interested renters or buyers. Virtual tours are a convenient way for people to view the space online. Additionally, social media platforms such as Instagram and Facebook can increase visibility and help reach a larger audience.
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