Introduction to ADU Investments in Hawaiian Gardens

Why are ADUs popular in California?

ADUs, also known as granny flats, have gained popularity in California due to the ongoing housing shortage. With rising home prices and limited land for new builds, constructing an ADU offers a budget-friendly way to create additional living space. These units can also generate extra income by renting them out or providing nearby housing for family members, like adult children or elderly relatives.

How can an ADU increase property value?

Adding an ADU to your property can boost its value by providing extra usable space. Homes with an ADU are more attractive to potential buyers, as the additional unit can be rented, used for a family, or converted into a home office, making the property more flexible and appealing.

Is it possible to sell an ADU in Hawaiian Gardens?

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 Hawaiian Gardens, 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 Hawaiian Gardens

We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Hawaiian Gardens. This ROI doesn't include the acquisition cost for the property. 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 Hawaiian Gardens is a risky investment. As a benchmark, a good investment for us is when the ROI is min. 50%+."

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Case study: 900 sq. ft. ADU built in Hawaiian Gardens

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 $43,530, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $388,430. 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 Hawaiian Gardens is estimated at $450. 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 $405,000 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 $18,570 or 5% 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 Hawaiian Gardens comes with a total cost of $388,430. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,455 or $29,460/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 a $540 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.

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Is there financial assistance for building ADUs?

Yes, California has a program called the CalHFA ADU Grant Program, which gives financial assistance to homeowners who want to build an ADU. Since 2021, this program has provided grants of up to $40,000 to help with costs such as permits, design, and property assessments for single-family homes.

Building Your Team for the ADU Project

Starting an ADU project requires assembling a strong team. Once you've secured funding, make sure your property meets the requirements and check for any size restrictions. If you plan to rent or invest in the ADU, hiring experienced professionals like architects and contractors is crucial to ensure everything runs smoothly. Working with local experts who have ADU experience will help make sure the project meets all standards.

What are some other financing options for building an ADU?

There are several ways to fund your ADU project. A Home Equity Line of Credit (HELOC) lets you borrow against your home's value and access the money as needed. With a Home Equity Loan, you get a lump sum that you pay back over time. Cash-out refinancing allows you to adjust your mortgage and access extra funds. Renovation loans can help cover construction expenses, and some private lenders may offer more flexible loan 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 building an ADU on your property. Laws like AB 670 and AB 3182 protect your right to build, and any attempt to block the project could lead to penalties.

Maximizing Profitability in Hawaiian Gardens

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU in Hawaiian Gardens, effective marketing is essential. Partnering with local real estate agents and creating attractive promotional content can help draw in renters or buyers. Offering virtual tours makes it easier for people to explore the property remotely. Social media platforms like Instagram and Facebook also expand your reach, helping generate more interest.

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Resources

Hawaiian Gardens Municipal Code