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How to Make My ADU a Profitable Investment in Claremont?
To make your Accessory Dwelling Unit (ADU) a profitable investment in Claremont, start by understanding the local market and regulations. The challenge is finding effective ways to maximize rental income and property value. To address this, you can focus on optimizing your ADU’s appeal and managing it efficiently. By implementing these strategies, you can enhance your ADU's profitability and ensure it meets the demand for affordable housing in Claremont.
Introduction to ADU Investments in Claremont
Why are ADUs popular in California?
ADUs, also known as granny flats, are becoming more popular in California because they help tackle the housing crisis. As home prices rise and land for new homes becomes insufficient, ADUs offer an affordable way to add extra living space. They can generate rental income and serve various purposes, such as housing family members, young adults, or seniors who want to stay close to loved ones.
How can an ADU increase property value?
Building an ADU can increase the value of a property by adding useful living space. Homes with ADUs are often more attractive to buyers, as the extra unit can be rented out, used by the family, or turned into a home office, making the property more desirable.
Is it possible to sell an ADU in Claremont?
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 Claremont, 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 Claremont
We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in Claremont. This 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 Claremont 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 Claremont
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 $47,576, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,476. 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 Claremont is estimated at $500. 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 $450,000 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 $59,524 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 Claremont comes with a total cost of $390,476. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,468 or $29,616/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 $1,600 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 offers the CalHFA ADU Grant Program to assist homeowners with funding to build an ADU. Since September 2021, this grant has provided up to $40,000 to cover initial expenses like permits, design, and property evaluations for ADUs on single-family homes.
Building Your Team for the ADU Project
To start your ADU project, you'll need to put together a reliable team. Once funding is in place, check if your property qualifies for an ADU and verify if there are any size restrictions. If you plan to rent or invest in the ADU, hiring experts such as architects and contractors will help keep things moving smoothly. It’s a good idea to choose local contractors who have experience with ADUs for better results.
What are some other financing options for building an ADU?
There are several options to fund an ADU project. One option is a Home Equity Line of Credit (HELOC), which allows you to borrow money based on your home's value as needed. Another choice is a Home Equity Loan, which provides a lump sum that you repay over time. With cash-out refinancing, you can borrow extra money by adjusting your current mortgage, and renovation loans can also be used to cover the cost of building an ADU. Some private lenders may offer more flexible loan terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, Homeowners Associations (HOAs) cannot stop you from building an ADU in single-family neighborhoods. Laws like AB 670 and AB 3182 prevent HOAs from blocking ADUs, and enforcing such restrictions could lead to fines.
Maximizing Profitability in Claremont
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in Claremont, good marketing is essential. Collaborating with local real estate agents and creating attractive promotional materials can help you reach potential renters or buyers. Offering virtual tours allows people to check out the space from anywhere. Using social media platforms like Instagram and Facebook is also a great way to increase visibility and attract a wider audience.
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