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How to Make My ADU a Profitable Investment in Hawthorne?
To turn your ADU in Hawthorne into a profitable investment, it's important to focus on strategies that enhance its value and maximize returns. The problem often lies in effectively leveraging the property's potential to achieve financial gains. Key solutions include improving the ADU’s appeal through renovations, understanding the local real estate market, and utilizing smart marketing techniques. This involves upgrading features to increase value, analyzing market trends to price competitively, and employing effective marketing strategies to attract high-quality tenants or buyers.
Introduction to ADU Investments in Hawthorne
Why are ADUs popular in California?
ADUs, sometimes called granny flats, are becoming more common in California because of the housing shortage. As home prices rise and there’s limited space for new homes, building an ADU is an affordable way to add extra living areas. These units can also provide additional income through rentals or serve as nearby housing for family members, such as adult children or aging parents.
How can an ADU increase property value?
Adding an ADU to your property can raise its value by offering more functional space. Homes with an ADU attract more buyers since the extra unit can be rented, used by the family, or turned into a home office, making the property more versatile and desirable.
Is it possible to sell an ADU in Hawthorne?
In California, a law called AB 1033 allows local cities to create rules for selling an ADU separately from the main home, similar to how condos are sold, as long as specific requirements are met. In Hawthorne, selling an ADU separately might be allowed under certain conditions, like if a qualified nonprofit built it, if there's an agreement for shared ownership, or if the city permits the ADU and the main house to be owned separately.
The ROI for building an ADU in Hawthorne
We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Hawthorne. 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 Hawthorne 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 Hawthorne
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 $386,430. 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 Hawthorne 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 Hawthorne comes with a total cost of $386,430. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,443 or $29,316/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 $680 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 a program called the CalHFA ADU Grant Program, which provides funding to homeowners wanting to build an ADU. Since 2021, homeowners have been able to receive up to $40,000 in grants to help cover costs like permits, design, and property evaluations for single-family homes.
Building Your Team for the ADU Project
To get started on your ADU project, it’s important to put together a reliable team. After securing the funding, make sure your property is suitable for an ADU and check if there are any size limits. If you plan to rent out or invest in the ADU, hiring experienced professionals like architects and contractors is essential for keeping everything on track. Working with local experts who specialize in ADUs will ensure the project is completed correctly.
What are some other financing options for building an ADU?
There are different methods to fund your ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, allowing you to withdraw funds when needed. With a Home Equity Loan, you receive a lump sum and pay it back over time. Cash-out refinancing gives you the option to adjust your mortgage and get extra funds. Renovation loans can cover construction costs, and 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 construct an ADU, and any attempt to stop it could lead to penalties.
Maximizing Profitability in Hawthorne
Marketing Strategies to Increase ADU Investment Returns
To get the best return on your ADU in Hawthorne, good marketing is key. Working with local real estate agents and creating appealing ads can attract renters or buyers. Offering virtual tours allows people to view the property remotely. Social media platforms like Instagram and Facebook can also help spread the word and draw in more interest.
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