Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Covina?
Are you looking to turn your ADU into a profitable investment in Covina? The challenge often lies in maximizing its value and attracting tenants or buyers. To address this, strategies include optimizing property value through updates and location analysis, and effectively marketing your ADU. Learn how to enhance your ADU’s appeal, leverage local market trends, and use targeted marketing to increase its profitability.
Introduction to ADU Investments in Covina
Why are ADUs popular in California?
Granny flats, or ADUs, are gaining popularity in California as a solution to the housing crisis. With home prices soaring and limited space for new homes, ADUs offer an affordable way to add extra living space. They can generate rental income and serve various needs, such as housing relatives, young adults, or seniors who want to stay near family.
How can an ADU increase property value?
Building an ADU can increase a home's value by adding more functional living space. Homes with an ADU are often more attractive to potential buyers since the extra unit can be rented, used by family members, or turned into a home office, making the property more desirable.
Is it possible to sell an ADU in Covina?
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 Covina, 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 Covina
We analyzed multiple projects, and we determined that on average you should expect a 39% ROI for an ADU project in Covina. 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 Covina 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 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 $46,771, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $389,671. 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 Covina is estimated at $600. 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 $540,000 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 $150,329 or 39% 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 Covina comes with a total cost of $389,671. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,463 or $29,556/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 $28,800 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 offers the CalHFA ADU Grant Program, which provides financial support for homeowners looking to build an ADU. Since September 2021, the program has been offering up to $40,000 to cover initial expenses like permits, design, and property assessments for single-family homes.
Building Your Team for the ADU Project
To start an ADU project, you’ll need to assemble a reliable team. Once you've secured funding, make sure your property is eligible for an ADU and check for any size restrictions. If you plan to rent or invest in the ADU, hiring professionals such as architects and contractors will help keep things on track. It’s best to choose local contractors who specialize in ADUs to ensure quality results.
What are some other financing options for building an ADU?
There are several options for funding an ADU project. One is a Home Equity Line of Credit (HELOC), which allows you to borrow money based on the value of your home as you need it. Another is a Home Equity Loan, where you receive a lump sum to repay over time. Cash-out refinancing involves adjusting your current mortgage to access extra funds, and renovation loans can also help cover ADU construction costs. Some private lenders may offer more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations (HOAs) cannot stop you from building an ADU in single-family areas. Laws such as AB 670 and AB 3182 protect your right to build an ADU, and trying to block it could lead to penalties.
Maximizing Profitability in Covina
Marketing Strategies to Increase ADU Investment Returns
To maximize your ADU investment in Covina, strong marketing is essential. Partnering with local real estate agents and creating appealing promotional materials can help attract potential renters or buyers. Offering virtual tours makes it easier for people to view the space remotely. Additionally, using social media platforms like Instagram and Facebook can help broaden your reach and improve visibility.
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