Introduction to ADU Investments in Huntington Park

Why are ADUs popular in California?

ADUs, often called granny flats, are becoming a popular solution in California due to the state's ongoing housing crisis. As home prices climb and land for new construction becomes scarce, building an ADU is an affordable way to create additional living space. These units can also be rented out for extra income or used to accommodate family members like grown children or elderly parents.

How can an ADU increase property value?

Adding an ADU to your property can make it more valuable by providing additional usable space. Homes with an ADU are more attractive to potential buyers since the extra unit can be rented, used by the family, or transformed into a home office, making the property more versatile and appealing.

Is it possible to sell an ADU in Huntington Park?

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 Huntington Park, 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 Huntington Park

We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Huntington Park. The ROI does not account for the property's acquisition cost. 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 Huntington Park 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 Huntington Park

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 Huntington Park is estimated at $430. 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 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 Huntington Park 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 $28,800 annually. At this rental income, the ADU would result in a negative profit, meaning you would still owe more than you earn from the rental.

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 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 several ways to pay for your ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow money based on your home's value, giving you the flexibility to withdraw as needed. A Home Equity Loan gives you a lump sum upfront that you pay back in installments. Cash-out refinancing lets you adjust your mortgage and access extra funds. Renovation loans can cover construction costs, and some private lenders may offer more flexible options than 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, and any attempt by an HOA to block your project could result in penalties.

Maximizing Profitability in Huntington Park

Marketing Strategies to Increase ADU Investment Returns

To maximize your ADU's potential in Huntington Park, effective marketing is essential. Partnering with local real estate agents and creating attractive property listings can draw in tenants or buyers. Offering virtual tours gives people the option to view the property remotely. Additionally, using social media platforms like Instagram and Facebook can help you reach a wider audience and attract more interest.

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