Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Glendale?
To make an ADU investment in Glendale profitable, the main challenge is managing construction costs and ensuring a solid return on investment. The problem lies in balancing the initial expenses of building the ADU with the potential increase in property value. The solution involves a thorough understanding of construction costs and accurately estimating the added market value of the property. Learning how to calculate these costs and potential returns will help you make strategic decisions that enhance the overall profitability of your ADU project.
Introduction to ADU Investments in Glendale
Why are ADUs popular in California?
Granny flats, or ADUs, are becoming a popular choice in California due to the shortage of homes. With home prices going up and limited space for new houses, building an ADU is an affordable way to add more living areas. These units can also generate extra rental income or provide a convenient place for family members, such as adult children or aging parents, to live nearby.
How can an ADU increase property value?
Adding an ADU can increase your property's worth by creating additional living space. Homes with an ADU are more appealing to buyers because the extra unit can be rented out, used by the family, or even transformed into a home office, making the property more adaptable and attractive.
Is it possible to sell an ADU in El Glendale?
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 Glendale, 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 Glendale
We analyzed multiple projects, and we determined that on average you should expect a 61% ROI for an ADU project in Glendale. 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 Glendale
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 $47,608, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,508. 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 Glendale is estimated at $700. 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 $630,000 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 $239,492 or 61% 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 Glendale comes with a total cost of $390,508. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,468 or $29,616/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 $380 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 a program called the CalHFA ADU Grant Program that helps homeowners pay for building an ADU. Since 2021, this program has offered grants of up to $40,000 to assist with expenses like permits, design, and property assessments for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project involves assembling a reliable team. After securing your funding, make sure your property qualifies for an ADU and check if there are any size restrictions. If you plan to rent or invest in the ADU, hiring experienced professionals such as architects and contractors will help keep the project moving smoothly. Local contractors who are familiar with ADUs will ensure the work is done well.
What are some other financing options for building an ADU?
There are several ways to fund the building of an ADU. A Home Equity Line of Credit (HELOC) lets you borrow against the value of your home, giving you the freedom to access money as needed. A Home Equity Loan provides a one-time payment that you repay in installments. With cash-out refinancing, you can adjust your mortgage to release additional funds. Renovation loans are another option to help cover construction costs, and some private lenders might 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 stop you from adding an ADU to your property. Laws such as AB 670 and AB 3182 protect your right to build an ADU, and any attempt by an HOA to block it could lead to penalties.
Maximizing Profitability in Glendale
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU in Glendale, effective marketing is essential. Partnering with local real estate agents and creating attractive promotional materials can help draw in potential tenants or buyers. Offering virtual tours gives people the chance to explore the property from home. Using social media platforms like Instagram and Facebook can broaden your reach and generate more interest.
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