Cali ADU Design+Build
How to Make My ADU a Profitable Investment in El Segundo?
ADUs in El Segundo face profitability challenges due to competition and market conditions. The solution involves strategic planning, targeted marketing, and effective management. To overcome these challenges, it's essential to develop a clear investment strategy, leverage social media for marketing, and implement efficient property management practices. Understanding the local rental market and staying informed about regulations will also help maximize the profitability of your ADU investment in El Segundo.
Introduction to ADU Investments in El Segundo
Why are ADUs popular in California?
ADUs, also known as granny flats, have gained popularity in California due to the ongoing shortage of homes. As housing costs rise and available land for new homes decreases, building an ADU provides an affordable way to expand living space. These units can also generate rental income or offer a convenient place for family members, like adult children or elderly parents, to live nearby.
How can an ADU increase property value?
Adding an ADU can increase a property's value by providing additional living space. Homes with an ADU are more attractive to buyers because the extra unit can be rented out, used by the family, or turned into a home office, making the property more flexible and appealing.
Is it possible to sell an ADU in El Segundo?
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 Segundo, 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 Segundo
We analyzed multiple projects, and we determined that on average you should expect a 119% ROI for an ADU project in El Segundo. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making El Segundo an appealing and promising location for real estate development. 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 Segundo
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 $47,306, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,206. 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 Segundo is estimated at $950. 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 $855,000 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 $464,794 or 119% ROI. At this level of return, the investment in an ADU to sell it offers a substantial return on investment relative to the total project cost and the market value making the city a highly attractive and promising location for housing projects. In addition to the high 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 Segundo comes with a total cost of $390,206. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,467 or $29,604/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 $32,400 annually. At this rental income, which gives you only $2,700 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 has the CalHFA ADU Grant Program, which offers financial support to homeowners building ADUs. Since 2021, this program has given grants of up to $40,000 to help cover expenses such as permits, design, and property assessments for single-family homes.
Building Your Team for the ADU Project
To begin an ADU project, you'll need to form a reliable team. After securing your funding, make sure your property qualifies for an ADU and check for any size restrictions. If you're planning to rent out or invest in the ADU, hiring experienced professionals such as architects and contractors will help keep the project on track. Local contractors familiar with ADUs can ensure high-quality results.
What are some other financing options for building an ADU?
There are several options for funding your ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, and you can withdraw funds as you need them. A Home Equity Loan provides a one-time lump sum that you repay over time. With cash-out refinancing, you can adjust your mortgage to release extra funds. Renovation loans can also help cover the cost of building the ADU. Some 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 stop you from building an ADU on your property. Laws such as AB 670 and AB 3182 protect your right to build one, and attempting to prevent it could lead to penalties.
Maximizing Profitability in El Segundo
Marketing Strategies to Increase ADU Investment Returns
To make the most of your ADU in El Segundo, effective marketing is crucial. Collaborating with local real estate agents and creating engaging promotional materials can help attract renters or buyers. Offering virtual tours allows potential tenants or buyers to explore the property remotely. Utilizing platforms like Instagram and Facebook can expand your reach and increase visibility.
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