Introduction to ADU Investments in Diamond Bar

Why are ADUs popular in California?

In California, the demand for ADUs, also known as granny flats, has risen due to the housing shortage. As home prices increase and space for new homes is limited, building an ADU is a more affordable way to expand living areas. These units can also generate rental income or provide housing for family members, such as adult children or elderly parents, who want to live close by.

How can an ADU increase property value?

Building an ADU can increase a property's value by adding extra living space. Homes with ADUs tend to attract more buyers, as the additional unit can be rented, used by family members, or transformed into a home office, making the property more adaptable and attractive.

Is it possible to sell an ADU in Diamond Bar?

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 Diamond Bar, 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 Diamond Bar

We analyzed multiple projects, and we determined that on average you should expect a 37% ROI for an ADU project in Diamond Bar. 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 Diamond Bar 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?

Please enter a valid address

Case study: 900 sq. ft. ADU built in Diamond Bar

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 $51,493, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $394,393. 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 Diamond Bar 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 $145,607 or 37% 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 Diamond Bar comes with a total cost of $394,393. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,493 or $29,916/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 $36,000 annually. At this rental income, which gives you a $6,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

The city's regulations require rentals to be at least 30 days long, meaning short-term rentals are not allowed. While platforms like Airbnb might offer higher profits during peak times (such as $600 for a five-night stay), long-term rentals provide more reliable and consistent income. With long-term rentals, there's no need to constantly search for new tenants, clean between stays, or re-list the property, resulting in more stable earnings and less maintenance.

Check if the market value of your ADU covers the construction costs.

Please enter a valid address

Is there financial assistance for building ADUs?

Yes, California has a program called the CalHFA ADU Grant Program that provides financial support to homeowners building ADUs. Since 2021, the program has offered up to $40,000 in grants to cover expenses 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 assemble a trustworthy team. After securing funding, make sure your property qualifies for an ADU and check if there are any size restrictions. If you plan to rent out or invest in the ADU, it's a good idea to hire skilled professionals, such as architects and contractors, to keep the process moving smoothly. Hiring local contractors who specialize in ADUs will help ensure quality results.

What are some other financing options for building an ADU?

There are various ways to fund an ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, and you can take out the amount you need when you need it. A Home Equity Loan gives you a lump sum to repay over time. Cash-out refinancing involves adjusting your mortgage to access extra funds. Renovation loans are also available to cover the costs of building an ADU. Private lenders may 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 block you from building an ADU on single-family properties. Laws like AB 670 and AB 3182 protect your right to build, and any attempt to stop it could result in penalties.

Maximizing Profitability in Diamond Bar

Marketing Strategies to Increase ADU Investment Returns

Effective marketing is key to maximizing your ADU's potential in Diamond Bar. Working with local real estate agents and developing appealing promotional materials can help attract renters or buyers. Offering virtual tours allows potential tenants or buyers to explore the property remotely. Leveraging social media platforms like Instagram and Facebook can also boost your visibility and help expand your reach.

Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.

Please enter a valid address

Related Articles

ADU Solutions for Aging in Place in Diamond Bar

All You Need to Know About Building on Properties in Diamond Bar Under SB-9

Everything You Need to Know About SB-684 Development in Diamond Bar

How to get your permits fast or the benefits of using SB-423 in Diamond Bar

What are the requirements to build ADU in Diamond Bar?

More articles ...

Resources

Diamond Bar Municipal Code