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How to Make My ADU a Profitable Investment in El Cajon?
Turning an ADU into a profitable investment in El Cajon can be difficult due to market conditions and competition. The solution lies in effective marketing, strategic planning, and efficient management. Attracting reliable tenants, setting competitive rental rates, and enhancing the property's appeal are crucial. Understanding local regulations and maintaining high occupancy rates are also essential steps.
Introduction to ADU Investments in El Cajon
Why are ADUs popular in California?
Accessory Dwelling Units (ADUs), also known as granny flats or backyard cottages, have become a popular solution to California's housing shortage. As home prices rise and new construction slows down, ADUs offer homeowners an affordable way to expand their living space without needing to purchase additional land. These units are flexible and can be used for renting, affordable housing, or as a space for different people, such as young professionals, families, or older adults. They also allow families to live closer together, promoting stronger community connections.
How can an ADU increase property value?
Adding an ADU can increase a property’s value by creating more usable space that can be rented out or used for various purposes. This makes the property more appealing to buyers interested in rental income or flexible living arrangements. In California, properties with ADUs are often worth more because they offer additional options, whether it’s for housing family members, generating extra income, or creating a home office. The added space also helps the property stand out in a competitive housing market.
Is it possible to sell an ADU in El Cajon?
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 El Cajon, 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 El Cajon
We analyzed multiple projects, and we determined that on average you should expect a 39% ROI for an ADU project in El Cajon. The ROI does not account for the property's acquisition cost. 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 El Cajon 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 El Cajon
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 $39,243 covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $331,743. 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 El Cajon is estimated at $511. 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 $459,900 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 $128,156 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 El Cajon comes with a total cost of $331,743. 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 $32,400 per year. At this rental income, which gives you a $7,000 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 offers the CalHFA ADU Grant Program, which began on September 20, 2021. Homeowners who qualify can receive up to $40,000 to cover early costs such as permits, design, surveys, soil tests, and other necessary fees. The program aims to make it easier for homeowners to build ADUs and create more housing opportunities.
Building Your Team for the ADU Project
After securing funding, confirm that your property meets all requirements, including the size limits for the ADU. Decide whether you want to use the unit for renting or another purpose, then hire professionals like architects and contractors to handle the design and building. It’s helpful to select contractors who are experienced with local building codes, and you can often find trusted ones by checking out other construction projects in your area.
What are some other financing options for building an ADU?
1. Home Equity Line of Credit (HELOC)
This option lets you borrow against your home’s value, similar to using a credit card. You can withdraw money as needed, giving you the freedom to cover the costs of building your ADU.
2. Home Equity Loan
With this loan, you get a one-time payment based on your home’s equity, which you then pay back in fixed monthly payments. This makes it a simple, steady way to fund your ADU project.
3. Cash-Out Refinance
If you refinance your mortgage for a larger amount, you can use the extra money as cash to finance your ADU, without taking on another loan.
4. Renovation Loans
These loans are specifically for home improvements, like adding an ADU, and can cover all related expenses.
5. Private Loans
Some private lenders offer specialized loans just for building ADUs, allowing for more flexible terms that suit your specific project.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, in California, laws protect homeowners from HOA rules that try to stop the building of ADUs on single-family properties. Any such rules are not allowed and could result in penalties.
Maximizing Profitability in El Cajon
Marketing Strategies to Increase ADU Investment Returns
To maximize returns on an ADU investment, consider these marketing strategies:
1. Research Local Rental Prices
Check the rental rates for ADUs in your area to ensure your pricing is competitive. Online tools can help you evaluate the local market and set the right rent.
2. Collaborate with Real Estate Agents
Work with local agents and provide them with marketing materials. They can assist you in attracting renters or finding investors.
3. Utilize Social Media
Promote the advantages of ADUs on platforms like Facebook and Instagram. This helps you connect with potential renters or buyers while building trust and credibility.
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