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How to Make My ADU a Profitable Investment in El Monte?
Profitability challenges for ADUs in El Monte arise from competition and market conditions. The solution involves strategic planning, targeted marketing, and efficient management. This includes setting competitive rental rates, improving property appeal, understanding local regulations, and maintaining high occupancy rates.
Introduction to ADU Investments in El Monte
Why are ADUs popular in California?
Granny flats, or ADUs, have become a popular option in California because of the housing shortage. With home prices rising and fewer places to build new homes, adding an ADU offers an affordable way to increase living space. These units can also be a source of rental income or provide housing for family members, such as grown children or elderly parents, who prefer to live close by.
How can an ADU increase property value?
Building an ADU can raise a property's value by adding extra living space. Homes with an ADU tend to attract more buyers, as the extra unit can be rented out, used by family members, or converted into a home office, making the property more versatile and desirable.
Is it possible to sell an ADU in El Monte?
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 El Monte, 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 El Monte
We analyzed multiple projects, and we determined that on average you should expect a 39% ROI for an ADU project in El Monte. 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 Monte 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 Monte
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 $46,838, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $389,738. 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 Monte 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 $150,262 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 Monte comes with a total cost of $389,738. 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 $30,000 annually. At this rental income, which gives you only $400 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 pay for building an ADU. Since 2021, this program has provided grants of up to $40,000 to help cover costs like permits, designs, and property evaluations for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project means putting together a reliable team. Once you secure funding, confirm that your property meets the requirements for an ADU and check if there are size limitations. If you're planning to rent out or invest in the ADU, hiring experienced professionals like architects and contractors will keep the project on schedule. Choosing local contractors with ADU experience will ensure top-quality work.
What are some other financing options for building an ADU?
There are various options to fund your ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow money based on your home’s value, and you can take out funds as needed. A Home Equity Loan provides a lump sum that you pay back in installments. With cash-out refinancing, you can adjust your mortgage to free up some extra cash. Renovation loans can also cover the cost of building an ADU. Some private lenders may offer more flexible terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) cannot prevent you from building an ADU on your property. Laws like AB 670 and AB 3182 protect your right to build an ADU, and any attempt to block it could result in penalties.
Maximizing Profitability in El Monte
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in El Monte, smart marketing is key. Teaming up with local real estate agents and creating appealing promotional materials will help attract renters or buyers. Offering virtual tours gives potential tenants or buyers a chance to view the property from anywhere. Using platforms like Instagram and Facebook can increase your exposure and broaden your audience.
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