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How to Make My ADU a Profitable Investment in Hidden Hills?

Making an Accessory Dwelling Unit (ADU) in Hidden Hills a successful investment can be tough. Homeowners frequently face challenges with boosting rental income, keeping expenses under control, and following local rules. However, by using smart strategies, you can increase the financial benefits of your ADU. This involves setting the right rental prices, managing both construction and ongoing costs well, and adhering to local zoning and building laws. In this article, you'll discover tips to help you get more value from your ADU investment.

Introduction to ADU Investments in Hidden Hills

Why are ADUs popular in California?

ADUs, or granny flats, are becoming more common in California because of the ongoing housing shortage. With home prices rising and available land decreasing, building an ADU is an affordable way to add more living space. These units can also generate extra income through rentals or provide housing for family members like adult children or elderly parents.

How can an ADU increase property value?

Adding an ADU can raise the value of your property by offering more functional space. Homes with an ADU tend to attract more buyers since the extra unit can be rented out, used for family, or turned into a home office, making the property more adaptable and desirable.

Is it possible to sell an ADU in Hidden Hills?

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 Hidden Hills, 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 Hidden Hills

We analyzed multiple projects, and we determined that on average you should expect a 244% ROI for an ADU project in Hidden Hills. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Hidden Hills an appealing and promising location for real estate development. 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 Hidden Hills

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 $49,562, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $392,462. 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 Hidden Hills is estimated at $1,500. 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 $1,350,000 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 $957,538 or 244% 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 Hidden Hills comes with a total cost of $392,462. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,480 or $29,760/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 $34,800 annually. At this rental income, which gives you a $5,040 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 the CalHFA ADU Grant Program, which helps homeowners cover the costs of building an ADU. Since 2021, homeowners can receive up to $40,000 in grants to assist with things like permits, design, and property evaluations for single-family homes.

Building Your Team for the ADU Project

When starting your ADU project, it’s important to build a strong team. After securing funding, check that your property is suitable for an ADU and ensure there are no size limits. If you plan to rent out or sell the ADU, hiring experienced professionals such as architects and contractors is key to keeping the project moving smoothly. Local experts with ADU experience can help ensure that everything is completed correctly.

What are some other financing options for building an ADU?

There are different ways to fund your ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow against your home's value, letting you take out money as needed. With a Home Equity Loan, you receive a lump sum that you repay in installments. Cash-out refinancing lets you adjust your mortgage and access additional funds. Renovation loans can help with building 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 stop you from building an ADU. Laws like AB 670 and AB 3182 protect your right to build one, and if an HOA tries to prevent it, they could face penalties.

Maximizing Profitability in Hidden Hills

Marketing Strategies to Increase ADU Investment Returns

To get the best return on your ADU in Hidden Hills, good marketing is key. Working with local real estate agents and creating appealing listings can attract renters or buyers. Offering virtual tours allows people to check out the property remotely. Plus, using social media platforms like Instagram and Facebook can help expand your audience and generate more interest.

Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.

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