Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Del Mar?
Adding an Accessory Dwelling Unit (ADU) to your property in Del Mar can increase its worth and provide extra rental income, though there are a few things to keep in mind. It's important to control building expenses, understand the rental market in your area, and use effective ways to advertise your unit. By focusing on these areas, you can boost both your ADU's profitability and your property's overall value.
Introduction to ADU Investments in Del Mar
Why are ADUs popular in California?
Accessory Dwelling Units (ADUs), also called granny flats or backyard homes, are becoming a popular choice in California as a way to address the housing shortage. With high home prices and fewer new homes being built, ADUs offer homeowners an affordable way to add extra living space without needing to buy more land. These units provide versatile options for renting, offering affordable housing, or creating spaces for different needs like young professionals, families, or seniors. They also help families stay close and strengthen community ties.
How can an ADU increase property value?
Building an ADU can raise the value of a property by adding more usable space, which can be rented or used in different ways. This makes the property more attractive to buyers looking for rental income opportunities or flexible living options. In California, homes with ADUs are often worth more because they provide more choices—whether for housing relatives, making extra income, or setting up a workspace. The extra space also helps the property stand out in a crowded housing market.
Is it possible to sell an ADU in Del Mar?
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 Del Mar, 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 Del Mar
We analyzed multiple projects, and we determined that on average you should expect a 305% ROI for an ADU project in Del Mar. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Del Mar 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 Del Mar
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 $39,198 covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $331,698. 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 Del Mar is estimated at $1,492. 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 $1,342,800 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 $1,011,102 or 305% 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 Del Mar comes with a total cost of $331,698. Financing with a 6.5% interest rate loan results in a monthly payment of $2,096 or $25,152/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 $72,000 per year. At this rental income, which gives you a $46,848 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 has the CalHFA ADU Grant Program, which started on September 20, 2021. This program can provide up to $40,000 to qualified homeowners to help pay for initial costs like permits, design plans, surveys, soil testing, and other fees. The goal is to make it easier for homeowners to build ADUs and add more housing options.
Building Your Team for the ADU Project
Once you’ve secured funding, check that your property meets all the requirements, including size limits for the ADU. Decide if you want the unit for rental income or other uses, then hire experts like architects and builders to take care of the design and construction. It’s a good idea to hire contractors who are familiar with local building rules, and you can often find reliable ones by looking at nearby construction projects.
What are some other financing options for building an ADU?
1. Home Equity Line of Credit (HELOC)
This option lets you borrow against the value of your home, much like a credit card. You can take out the money as you need it, giving you the flexibility to pay for your ADU construction.
2. Home Equity Loan
With this loan, you get a lump sum based on your home's equity and pay it back in fixed monthly amounts, making it a simple and predictable way to fund your ADU project.
3. Cash-Out Refinance
By refinancing your existing mortgage for a higher amount, you can take the difference as cash to fund your ADU, without needing an extra loan.
4. Renovation Loans
These are loans meant for home improvement projects, such as building an ADU, and they can cover all the necessary expenses.
5. Private Loans
Some private lenders offer loans specifically for building ADUs, allowing you to customize the terms based on your project’s needs.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, in California, laws (AB 670 and AB 3182) protect homeowners from HOA rules that try to block the construction of ADUs on single-family properties. Any such rules are not enforceable and could result in fines.
Maximizing Profitability in Del Mar
Marketing Strategies to Increase ADU Investment Returns
To maximize returns on an ADU investment, consider these marketing strategies:
1. Understand Local Rental Rates
Look into rental prices for ADUs in your area to make sure your rates are competitive. Online tools can help you assess demand and set the right price.
2. Work with Real Estate Agents
Partner with local agents and share marketing materials. They can help you find tenants or potential investors.
3. Leverage Social Media
Use platforms like Facebook and Instagram to share the benefits of ADUs. This helps you connect with potential renters or buyers and establish credibility.
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