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How to Make My ADU a Profitable Investment in Cudahy?
If you're trying to make your ADU a profitable investment in Cudahy, you might be facing challenges like maximizing its value and attracting renters or buyers. To solve this, focus on enhancing the property’s appeal with smart upgrades, understanding local market trends, and using effective marketing strategies. Learn how to boost your ADU’s value, make it stand out, and attract the right tenants or buyers to maximize your returns.
Introduction to ADU Investments in Cudahy
Why are ADUs popular in California?
ADUs, also known as granny flats, are becoming a popular choice in California due to the housing shortage. With rising home prices and limited space for new houses, adding an ADU is an affordable way to expand living areas. These units can provide rental income and accommodate family members, young adults, or elderly relatives who wish to live close to their families.
How can an ADU increase property value?
Adding an ADU to a home can increase its value by providing additional usable living space. Homes with ADUs are often more appealing to buyers, as the extra unit can be rented out, used by the family, or transformed into a home office, which makes the property more attractive overall.
Is it possible to sell an ADU in Cudahy?
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 Cudahy, 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 Cudahy
We analyzed multiple projects, and we determined that on average you should expect a 4% ROI for an ADU project in Cudahy. 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 Cudahy
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 $47,315, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,215. 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 Cudahy is estimated at $450. 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 $405,000 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 $14,785 or 4% 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 Cudahy comes with a total cost of $390,215. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,466 or $29,592/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 $30,800 annually. At this rental income, which gives you only $400 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
The city's rules state that rentals should be for a minimum of 30 days, so short-term rentals aren't allowed. Although services like Airbnb can bring in higher earnings during busy periods (like $600 for a five-night stay), long-term rentals offer more consistent income. With long-term rentals, you don't need to keep looking for new tenants, cleaning between stays, or re-listing the property, 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 has a program called the CalHFA ADU Grant Program that helps homeowners fund the construction of an ADU. Since 2021, it has been offering up to $40,000 to cover early costs like permits, design, and property evaluations for single-family homes.
Building Your Team for the ADU Project
To start an ADU project, you’ll need to build a reliable team. After securing funding, make sure your property qualifies for an ADU and check for any size restrictions. If you plan to rent or invest in the ADU, hiring professionals like 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 different ways to fund an ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value as needed. Alternatively, a Home Equity Loan gives you a lump sum to pay back over time. You can also consider cash-out refinancing, which adjusts your existing mortgage to free up extra funds. Renovation loans can help cover the cost of building the ADU. Some private lenders might offer more flexible options compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) cannot prevent you from building an ADU in single-family areas. Laws like AB 670 and AB 3182 protect your right to construct one, and any attempt to block it could result in penalties.
Maximizing Profitability in Cudahy
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in Cudahy, effective marketing is key. Collaborating with local real estate agents and creating attractive promotional materials can help bring in renters or buyers. Offering virtual tours allows potential tenants or buyers to view the property from afar. Using social media platforms like Instagram and Facebook can also expand your reach and visibility.
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