Leonard ADU Garage Conversion (1)
How to Make My ADU a Profitable Investment in Downey?
To make an ADU a profitable investment in Downey, start by understanding the key steps to maximize its potential. The challenge often lies in effectively leveraging the ADU to generate income and enhance property value. By focusing on strategic planning, marketing, and management, you can turn your ADU into a valuable asset. You will learn how to attract tenants, increase rental income, and boost property value. This includes tips on marketing your ADU, setting competitive rental rates, and ensuring high occupancy through effective property management.
Introduction to ADU Investments in Downey
Why are ADUs popular in California?
ADUs, also called granny flats, have become more popular in California because of the housing shortage. With rising home prices and limited land available for new homes, adding an ADU is a cost-effective way to create more living space. These units can also provide rental income or offer a place for family members, like adult children or elderly parents, to live nearby.
How can an ADU increase property value?
Adding an ADU can boost a property's value by providing extra living space. Homes with ADUs are often more appealing to buyers since the extra unit can be rented, used by the family, or turned into a home office, making the property more versatile and desirable.
Is it possible to sell an ADU in Downey?
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 Downey, 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 Downey
We analyzed multiple projects, and we determined that on average you should expect a 39% ROI for an ADU project in Downey. 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 Downey 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 Downey
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 Downey 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 Downey 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 $33,600 annually. At this rental income, which gives you a $4,000 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.
Is there financial assistance for building ADUs?
Yes, California offers the CalHFA ADU Grant Program, which helps homeowners fund the construction of ADUs. Since 2021, the program has been providing grants of up to $40,000 to cover costs like permits, design, and property assessments for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project means putting together a reliable team. Once you've secured funding, make sure your property is eligible for an ADU and check for any size limitations. If you plan to rent or invest in the ADU, it's wise to hire experienced professionals, such as architects and contractors, to ensure everything runs smoothly. Working with local contractors who are experienced with ADUs can help deliver high-quality results.
What are some other financing options for building an ADU?
There are several options for funding an ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow money based on your home's value and take out what you need when necessary. A Home Equity Loan provides a lump sum that you repay over time. Cash-out refinancing lets you adjust your mortgage to access additional funds. Renovation loans can help with the costs of building an ADU. Private lenders may offer more flexible terms 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 adding an ADU on single-family properties. Laws such as AB 670 and AB 3182 protect your right to build, and trying to block it could result in penalties.
Maximizing Profitability in Downey
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in Downey, effective marketing is essential. Collaborating with local real estate agents and creating engaging marketing materials can help attract renters or buyers. Offering virtual tours allows potential tenants or buyers to explore the property online. Using social media platforms like Instagram and Facebook can also increase your visibility and broaden your audience.
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