Introduction to ADU Investments in Chula Vista

Why are ADUs popular in California?

Accessory Dwelling Units (ADUs), also known as granny flats or backyard homes, are becoming more common in California as a way to address the state’s housing shortage. With high home prices and limited new construction, ADUs offer homeowners an affordable option to add extra living space without purchasing additional land. These units provide versatile solutions for rental income, affordable housing, and flexible living arrangements for groups like young professionals, families, or seniors. They also help families stay close and maintain community ties.

How can an ADU increase property value?

Adding an ADU can raise a property’s value by creating extra space that can be rented out or used for other purposes. This makes the property attractive to buyers interested in earning rental income or having flexible living options. In California, homes with ADUs are often more valuable because of their added functionality—whether for hosting family, generating income, or setting up a private office. The extra square footage also enhances the property’s appeal in a competitive housing market.

Is it possible to sell an ADU in Chula Vista?

In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In Chula Vista, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.

The ROI for building an ADU in Chula Vista

We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in Chula Vista. The ROI does not account for the property's acquisition cost. 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 Chula Vista is a risky investment. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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Case study: 900 sq. ft. ADU built in Chula Vista

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 $325, resulting in total hard costs of $292,500. 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 $38,809 covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $331,309. 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 Chula Vista is estimated at $423. 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 $380,700 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 $49,391 or 15% 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 Chula Vista comes with a total cost of $331,309. Financing with a 6.5% interest rate loan results in a monthly payment of $2,094 or $25,128/year. Ideally, renting out the main house could cover this payment, while the ADU serves as a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $38,400 per year. At this rental income, which gives you a $13,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

City regulations require rentals to be at least 30 days long, meaning short-term rentals are not allowed. While platforms like Airbnb can bring in extra income during peak times (for example, $600 for a five-night stay), long-term rentals provide more reliable and steady income. With long-term rentals, you won’t have to constantly find new tenants, clean between guests, or re-list the property, resulting in more consistent earnings and less upkeep.

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

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Is there financial assistance for building ADUs?

Yes, California provides the CalHFA ADU Grant Program, which began on September 20, 2021. This program offers up to $40,000 to eligible homeowners to help with initial costs such as permits, design work, surveys, soil tests, and fees needed to start building. The goal is to make it easier for homeowners to create ADUs and add more housing options.

Building Your Team for the ADU Project

Once you secure funding, check if your property qualifies for an ADU and be aware of size limits. Decide if you want to use the ADU for renting or other purposes, then hire professionals like architects and contractors to handle the design and construction. It's a good idea to choose contractors familiar with local building rules, and you can often find reliable ones by looking at other projects being built in your area.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC):
This lets you borrow against the value of your home, much like a credit card. You can withdraw money as needed, offering flexibility to cover your ADU construction costs.

Home Equity Loan:
With this loan, you get a lump sum based on your home’s equity. It comes with fixed monthly payments, making it an easy and predictable way to fund your ADU.

Cash-Out Refinance:
By refinancing your mortgage for a higher amount, you can take the extra cash for your ADU project. This method doesn’t require a separate loan.

Renovation Loans:
These are loans specifically for home improvement projects, like building an ADU, and can cover related expenses.

Private Loans:
Some private lenders offer loans customized to ADU construction. These loans can be customized to match the specific needs of your project.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, California laws (AB 670 and AB 3182) protect homeowners from homeowners' associations (HOAs) blocking ADU construction on single-family properties. Any HOA rules trying to stop ADUs aren’t enforceable and could result in penalties.

Maximizing Profitability in Chula Vista

Marketing Strategies to Increase ADU Investment Returns

To maximize returns on an ADU investment, consider these marketing strategies:

Know the Local Rental Rates:
Look up the rental rates for ADUs in your area so you can set a fair, competitive price. Online tools can help you assess demand and pricing.

Partner with Real Estate Agents:
Build relationships with local real estate agents and share marketing materials. They can help you attract renters or investors.

Use Social Media:
Promote the benefits of ADUs on platforms like Facebook and Instagram to connect with potential tenants or buyers and establish trust.

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