Introduction to ADU Investments in Imperial Beach

Why are ADUs popular in California?

ADUs, or accessory dwelling units, are becoming more popular in California due to the state’s housing challenges. With high home prices and limited new construction, ADUs allow homeowners to expand their living space without purchasing additional land. These units can serve various purposes, such as providing affordable housing, offering rental income, or accommodating family members, young professionals, or seniors. They also help people stay close to their loved ones and remain part of their community.

How can an ADU increase property value?

Adding an ADU can increase a property’s value by creating additional space that can be rented out or used for different purposes. Homes with ADUs tend to attract more buyers because they offer flexibility for rental income, multi-generational living, or a private office. In California's competitive housing market, the extra space and versatility of properties with ADUs make them more appealing.

Is it possible to sell an ADU in Imperial Beach?

In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In Imperial Beach, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.

The ROI for building an ADU in Imperial Beach

We analyzed multiple projects, and we determined that on average you should expect a 180% ROI for an ADU project in Imperial Beach. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Imperial 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%+.

Interested to find out the market value of an ADU for your property?

Please enter a valid address

Case study: 900 sq. ft. ADU built in Imperial 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 $325, resulting in total hard costs of $292,500. 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 $42,258 covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $334,758. 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 Imperial Beach is estimated at $1,040. 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 $936,000 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 $601,242 or 180% 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 Imperial Beach comes with a total cost of $334,758. Financing with a 6.5% interest rate loan results in a monthly payment of $2,115 or $25,380/year. Ideally, renting out the main house could cover this payment, while the ADU serves as a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $35,988 per year. At this rental income, which gives you a $10,600 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

City rules state that rentals should be for at least 30 days, so short-term stays are not allowed. While renting through sites like Airbnb can bring in extra money during busy times, long-term rentals offer more stable and dependable income. With long-term rentals, you won’t need to keep searching for new tenants, cleaning between stays, or re-advertising the property, leading to steady earnings and less maintenance.

Check if the market value of your ADU covers the construction costs.

Please enter a valid address

Is there financial assistance for building ADUs?

Yes, California offers financial support through the CalHFA ADU Grant Program, which began on September 20, 2021. This program provides up to $40,000 to eligible homeowners to cover initial expenses such as permits, design, surveys, soil testing, and impact fees. The goal is to make building ADUs more affordable and help create more housing options.

Building Your Team for the ADU Project

Once you secure funding, ensure that your property meets all the requirements for an ADU, including size limits. Decide how you plan to use the ADU, whether for renting or other purposes and hire professionals like architects and contractors to handle the project. It's a good idea to work with contractors who are familiar with local rules and regulations, which you can find by looking at similar projects nearby.

What are some other financing options for building an ADU?

1. Home Equity Line of Credit (HELOC)

A HELOC allows you to borrow money based on your home’s value, similar to using a credit card. You can access funds as needed, giving you the flexibility to pay for your ADU costs.

2. Home Equity Loan

This option gives you a lump sum of money upfront, based on your home’s value. You’ll pay it back with fixed monthly payments, making it a clear and predictable way to finance an ADU.

3. Cash-Out Refinance

This involves refinancing your mortgage for a higher amount and taking the difference in cash. It’s a way to access funds for your ADU without taking out a second loan.

4. Renovation Loans

These loans are specifically designed for home improvements, including adding an ADU. They can cover the cost of construction.

5. Private Loans

Some private lenders offer loans specifically for building ADUs. These can be tailored to your needs.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, California laws (AB 670 and AB 3182) protect homeowners from homeowners' associations (HOAs) trying to prevent or overly restrict the construction of ADUs in single-family zones. If an HOA tries to block your ADU, their rules won’t stand, and they may face penalties.

Maximizing Profitability in Imperial Beach

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment, consider these marketing strategies:

1. Know Local Rental Rates: Research the going rates for ADUs in your area to set a competitive and fair price. Online tools can help you understand local demand and pricing trends.

2. Partner with Real Estate Agents: Work with local agents to help find tenants or investors. Provide them with marketing materials to attract the right people.

3. Leverage Social Media: Use platforms like Facebook and Instagram to highlight the advantages of your ADU and connect with potential renters or buyers, helping to build trust and increase interest.

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

Please enter a valid address

Related Articles

ADU Solutions for Aging in Place in Imperial Beach

All You Need to Know About Building on Properties in Imperial Beach Under SB-9

Everything You Need to Know About SB-684 Development in Imperial Beach

How to get your permits fast or the benefits of using SB-423 in Imperial Beach

What are the requirements to build ADU in Imperial Beach?

More articles ...

Resources