Source: Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Compton?
To make your ADU investment in Compton profitable, start by understanding the local real estate market. The problem is that without a clear strategy, it can be challenging to achieve the best returns on your investment. The solution involves researching high-demand areas, evaluating property conditions, and choosing the right financing. Additionally, effectively marketing your ADU and addressing tenant needs can help maximize your rental income and property value.
Introduction to ADU Investments in Compton
Why are ADUs popular in California?
ADUs, often called granny flats, are becoming more common in California because they help address the housing shortage. With rising home prices and limited land for new homes, ADUs provide an affordable option to create extra living space. They can bring in rental income and be used for various purposes, like housing family members, young adults, or seniors who prefer to stay close to their families.
How can an ADU increase property value?
Adding an ADU can boost a property's value by creating extra, usable living space. Homes with ADUs are typically more appealing to buyers, as the additional unit can be rented out, used by family members, or converted into an office, which increases the property's overall appeal.
Is it possible to sell an ADU in Compton?
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 Compton, 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 Compton
We analyzed multiple projects, and we determined that on average you should expect an 84% ROI for an ADU project in Compton. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Compton 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 Compton
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 Compton 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 Compton 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 $29,400 annually. At this rental income, the ADU would result in a negative profit, meaning you would still owe more than you earn from the rental.
The city's regulations require rentals to last at least 30 days, meaning short-term rentals are not allowed. While platforms like Airbnb can earn higher amounts during peak times (such as $600 for a five-night stay), long-term rentals provide a more reliable source of income. With long-term rentals, you don't have to constantly search for new tenants, clean between each stay, or re-advertise, which results in more stable earnings and less maintenance.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California has a program called the CalHFA ADU Grant Program, which helps homeowners fund the construction of ADUs. Since September 2021, this program has offered up to $40,000 to cover early costs, such as permits, design, and property assessments for ADUs on single-family homes.
Building Your Team for the ADU Project
Starting an ADU project requires building a solid team. After securing financing, make sure your property meets the requirements for an ADU and check for any size limits. If you intend to rent or invest in the ADU, hiring professionals like architects and contractors will help keep the project on track. Choosing local contractors who specialize in ADUs can lead to better outcomes.
What are some other financing options for building an ADU?
There are different ways to fund an ADU project. One option is a Home Equity Line of Credit (HELOC), which lets you borrow money based on your home's value as you need it. Another choice is a Home Equity Loan, where you get a lump sum to pay back over time. Cash-out refinancing lets you adjust your mortgage to borrow extra funds, and renovation loans can cover the cost of building 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, homeowners associations (HOAs) cannot prevent you from building an ADU in single-family neighborhoods. Laws like AB 670 and AB 3182 protect homeowners' rights to build ADUs, and trying to block them could result in fines.
Maximizing Profitability in Compton
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in Compton, strong marketing is key. Working with local real estate agents and creating eye-catching promotional materials can help attract renters or buyers. Offering virtual tours makes it easy for people to view the space from anywhere. Using social media platforms like Instagram and Facebook can also help increase your visibility and reach a broader audience.
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