Introduction to ADU Investments in Hermosa Beach

Why are ADUs popular in California?

ADUs, also known as granny flats, are growing in popularity in California due to the ongoing housing crisis. With home prices rising and limited land for new homes, building an ADU is a cost-effective way to create more living space. These units can also bring in extra income by renting them out or be used to house family members, like grown children or elderly relatives.

How can an ADU increase property value?

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

Is it possible to sell an ADU in Hermosa Beach?

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 Hermosa Beach, 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 Hermosa Beach

We analyzed multiple projects, and we determined that on average you should expect a 199% ROI for an ADU project in Hermosa Beach. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Hermosa Beach an appealing and promising location for real estate development. 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 Hermosa Beach

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 $48,676, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,576. 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 Hermosa Beach is estimated at $1,300. 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 $1,170,000 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 $778,424 or 199% 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 Hermosa Beach comes with a total cost of $391,578. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,475 or $29,700/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 $42,000 annually. At this rental income, which gives you a $12,300 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 that offers financial assistance to homeowners who want to build an ADU. Since 2021, homeowners can receive 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

When starting your ADU project, it’s crucial to gather a reliable team. Once you've secured funding, ensure that your property is ready for an ADU and check for any size restrictions. If you plan to rent out or invest in the ADU, hiring skilled professionals such as architects and contractors will help keep the project on track. Working with local experts who are experienced with ADUs will ensure everything is done properly.

What are some other financing options for building an ADU?

There are various options to help pay for your ADU. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, giving you access to funds when you need them. With a Home Equity Loan, you receive a one-time lump sum that you pay back in installments. Cash-out refinancing allows you to modify your mortgage and free up extra money. Renovation loans can cover construction expenses, and some private lenders might 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 block you from building an ADU on your property. Laws like AB 670 and AB 3182 guarantee your right to build an ADU, and any attempt by an HOA to stop you could result in penalties.

Maximizing Profitability in Hermosa Beach

Marketing Strategies to Increase ADU Investment Returns

To make the most money from your ADU in Hermosa Beach, effective marketing is crucial. Partnering with local real estate agents and creating attractive listings can help draw in renters or buyers. Offering virtual tours gives potential tenants or buyers the chance to explore remotely. Additionally, using social media platforms like Instagram and Facebook can widen your reach and generate more interest in your property.

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Resources

Hermosa Beach Municipal Code