EcoHome Builders
How to Make My ADU a Profitable Investment in Coronado?
Building an Accessory Dwelling Unit (ADU) on your property in Coronado can raise its value and bring in rental income, but there are some challenges to consider. Managing construction costs, knowing the local rental market, and using smart marketing are key to success. By addressing these factors, you can make your ADU more profitable and increase your property's value.
Introduction to ADU Investments in Coronado
Why are ADUs popular in California?
Accessory Dwelling Units (ADUs), also known as granny flats or backyard cottages, are gaining popularity in California as a solution to the state’s housing shortage. With home prices rising and new homes being built less frequently, ADUs give homeowners an affordable way to add more living space without buying more land. These units provide flexible options for generating rental income, offering affordable housing, and creating adaptable living spaces for groups like young professionals, families, or seniors. They also allow families to stay close together and maintain strong community connections.
How can an ADU increase property value?
Adding an ADU can boost a property’s value by providing additional space that can be rented out or used for various purposes. This makes the property more appealing to buyers who are looking for opportunities to earn rental income or have flexible living arrangements. In California, homes with ADUs tend to be more valuable because they offer more options—whether for accommodating family, generating extra income, or creating a home office. The added space also makes the property stand out in a competitive housing market.
Is it possible to sell an ADU in Coronado?
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 Coronado, 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 Coronado
We analyzed multiple projects, and we determined that on average you should expect a 117% ROI for an ADU project in Coronado. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Coronado 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 Coronado
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 $38,049 covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $330,549. 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 Coronado is estimated at $796. 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 $716,400 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 $385,851 or 117% 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 Coronado comes with a total cost of $330,549. Financing with a 6.5% interest rate loan results in a monthly payment of $2,089 or $25,068/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 $64,200 per year. At this rental income, which gives you a $39,000 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.
Is there financial assistance for building ADUs?
Yes, California offers financial support through the CalHFA ADU Grant Program, which started on September 20, 2021. This program provides up to $40,000 for eligible homeowners to help cover early costs, such as permits, design, surveys, soil tests, and impact fees. The aim is to make it easier for homeowners to build ADUs and increase available housing.
Building Your Team for the ADU Project
After securing funding, make sure your property meets the requirements for building an ADU, including any size limitations. Decide whether the ADU will be used for rental purposes or other needs, then hire professionals such as architects and contractors to manage the design and construction. It's beneficial to choose contractors familiar with local building regulations, and you can often find good candidates by observing ongoing projects in your neighborhood.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC)
This option allows you to borrow money based on your home's value, similar to a credit card. You can withdraw funds as needed, making it a flexible choice for covering ADU construction costs.
Home Equity Loan
This loan gives you a lump sum based on your home's value, with fixed monthly payments, making it a straightforward and predictable option for financing your ADU.
Cash-Out Refinance
By refinancing your mortgage for a larger amount, you can use the extra cash for your ADU project, without taking out an additional loan.
Renovation Loans
These loans are specifically designed for home improvements, including ADU construction, and can cover the necessary expenses.
Private Loans
Some private lenders offer loans tailored for ADU construction, giving you flexibility to meet 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 that try to prevent ADUs aren't enforceable and could lead to penalties.
Maximizing Profitability in Coronado
Marketing Strategies to Increase ADU Investment Returns
To maximize returns on an ADU investment, consider these marketing strategies:
Know Local Rental Rates
Research rental prices for ADUs in your area to ensure your price is competitive. Online tools can help you understand the local market and set the right price.
Partner with Real Estate Agents
Build connections with local real estate agents and share marketing materials. They can help you attract tenants or potential investors.
Use Social Media
Promote the benefits of ADUs on platforms like Facebook and Instagram to engage with potential renters or buyers and build trust.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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