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How to Make My ADU a Profitable Investment in Duarte?
Making an ADU a profitable investment in Duarte can be challenging due to competition and market conditions. The key to success is effectively using the ADU to generate income and increase property value. This can be achieved through strategic planning, effective marketing, and efficient management. Understanding local regulations and maintaining high occupancy rates are also essential.
Introduction to ADU Investments in Duarte
Why are ADUs popular in California?
Granny flats, or ADUs, have gained popularity in California due to the ongoing housing shortage. As home prices climb and available land for new homes becomes scarce, building an ADU is an affordable way to add more living space. These units can also generate rental income or serve as a home for family members, such as adult children or elderly parents, who want to live nearby.
How can an ADU increase property value?
Adding an ADU can increase the value of a property by creating additional living space. Homes with an ADU are more attractive to buyers, as the extra unit can be rented out, used by family members, or even turned into a home office, making the property more flexible and appealing.
Is it possible to sell an ADU in Duarte?
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 Duarte, 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 Duarte
We analyzed multiple projects, and we determined that on average you should expect a 26% ROI for an ADU project in Duarte. 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 Duarte 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 Duarte
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 $48,444, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $391,344. 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 Duarte is estimated at $550. 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 $495,000 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 $103,656 or 26% 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 Duarte comes with a total cost of $391,344. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,474 or $29,688/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 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 has a program called the CalHFA ADU Grant Program to assist homeowners in funding ADU construction. Since 2021, this program has offered grants of up to $40,000 to cover expenses such as permits, design work, and property assessments for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project requires building a trustworthy team. After securing your funding, ensure your property qualifies for an ADU and check for any size restrictions. If you plan to rent or invest in the ADU, it’s a good idea to hire skilled professionals, like architects and contractors, to help keep the process on track. Choosing local contractors with experience in ADUs will help ensure quality work.
What are some other financing options for building an ADU?
There are different ways to pay for building an ADU. A Home Equity Line of Credit (HELOC) lets you borrow money based on the value of your home, giving you the flexibility to take out only what you need. A Home Equity Loan gives you a lump sum that you repay in installments. With cash-out refinancing, you can adjust your current mortgage to free up extra cash. Renovation loans can cover the cost of building the ADU. Some private lenders may offer better terms than regular banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) cannot stop you from building an ADU on single-family properties. Laws like AB 670 and AB 3182 protect your right to add one, and attempting to block it could lead to penalties.
Maximizing Profitability in Duarte
Marketing Strategies to Increase ADU Investment Returns
To maximize the potential of your ADU in Duarte, effective marketing is crucial. Partnering with local real estate agents and creating attractive promotional materials can help you draw in renters or buyers. Offering virtual tours gives potential tenants or buyers the chance to check out the property remotely. Using social media platforms such as Instagram and Facebook can help expand your reach and boost visibility.
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