Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Gardena?
To make an ADU investment in Gardena profitable, it's essential to address the challenge of optimizing both construction costs and rental returns. The problem lies in balancing the upfront costs of building an ADU with the potential rental income it can generate. A practical solution involves carefully planning the construction budget, considering cost-saving measures, and assessing the local rental market to maximize returns. Understanding how to calculate the return on investment (ROI) and analyzing the added market value of the property can help in making informed decisions. This approach will aid in ensuring the ADU investment is both financially sound and profitable.
Introduction to ADU Investments in Gardena
Why are ADUs popular in California?
Granny flats, or ADUs, are becoming more popular in California because there aren’t enough homes to meet demand. With rising home prices and fewer places to build new houses, adding an ADU is a cost-effective way to create more space. These units can also provide extra rental income or offer a nearby home for family members, such as grown children or older parents.
How can an ADU increase property value?
Building an ADU can boost your property's value by adding more living space. Homes with an ADU are more attractive to buyers since the additional unit can be rented, used by the family, or even turned into a home office, making the property more versatile and appealing.
Is it possible to sell an ADU in El Gardena?
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 Gardena, 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 Gardena
We analyzed multiple projects, and we determined that on average you should expect a 50% ROI for an ADU project in Gardena. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. 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 Gardena
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 $47,337, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,237. 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 Gardena is estimated at $650. 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 $585,000 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 $194,764 or 50% ROI. At this level of return, the investment in an ADU to sell it offers a modest return relative to the total project cost and the market value. In addition to the modest 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 Gardena comes with a total cost of $390,237. 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 $26,400 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 offers the CalHFA ADU Grant Program, which provides financial assistance to homeowners looking to build ADUs. Since 2021, this program has given out grants of up to $40,000 to help cover costs like permits, design, and property evaluations for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project means putting together a trusted team. Once you’ve secured funding, check that your property is eligible for an ADU and verify if there are any size limits. If you're planning to rent or invest in the ADU, hiring skilled professionals such as architects and contractors will help keep everything on track. Local contractors who specialize in ADUs will ensure the project is completed with quality workmanship.
What are some other financing options for building an ADU?
There are a few options to help pay for building your ADU. A Home Equity Line of Credit (HELOC) allows you to borrow money based on the value of your home, with the flexibility to withdraw funds when needed. A Home Equity Loan gives you a lump sum of money upfront, which you pay back over time. Cash-out refinancing lets you adjust your existing mortgage to free up extra cash. Renovation loans can help with the costs of constructing the ADU, and private lenders might offer more flexible deals than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) can't block your right to build an ADU on your property. Laws like AB 670 and AB 3182 ensure you can build one, and any attempt to stop you could result in penalties.
Maximizing Profitability in Gardena
Marketing Strategies to Increase ADU Investment Returns
To get the best returns on your ADU in Gardena, you need to market it well. Working with local real estate agents and creating appealing promotional materials can help attract potential renters or buyers. Offering virtual tours lets people check out the property online. Social media platforms like Instagram and Facebook can also help you reach a wider audience and increase interest.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
Related Articles
ADU Solutions for Aging in Place in Gardena
All You Need to Know About Building on Properties in Gardena Under SB-9
Everything You Need to Know About SB-684 Development in Gardena
How to get your permits fast or the benefits of using SB-423 in Gardena