Introduction to ADU Investments in La Canada Flintridge

Why are ADUs popular in California?

ADUs, or granny flats, are becoming more common in California because of the state's housing challenges. With home prices going up and fewer available lots for new homes, building an ADU is an affordable way to add more living space. These units can also help homeowners earn extra money by renting them out or offering housing for family members like grown children or elderly parents.

How can an ADU increase property value?

Adding an ADU to your property can increase its value by creating more functional space. Homes with an ADU are often more attractive to buyers because the extra unit can be rented, used by the family, or turned into a home office, making the property more flexible and appealing.

Is it possible to sell an ADU in La Canada Flintridge?

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 La Canada Flintridge, 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 La Canada Flintridge

We analyzed multiple projects, and we determined that on average you should expect a 157% ROI for an ADU project in La Canada Flintridge. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making La Canada Flintridge 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 La Canada Flintridge

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 $42,966, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $385,866. 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 La Canada Flintridge is estimated at $1,100. 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 $990,000 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 $604,134 or 157% 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 La Canada Flintridge comes with a total cost of $385,866. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,439 or $29,268/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 $37,200 annually. At this rental income, which gives you only $7,900 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, which helps homeowners cover some of the costs of building an ADU. Homeowners can receive up to $40,000 to help with expenses like permits, designs, and property assessments for single-family homes, starting in 2021.

Building Your Team for the ADU Project

When beginning your ADU project, it’s important to assemble a reliable team. Once you have secured funding, ensure that your property is suitable for an ADU and check for any size restrictions. If you plan to rent or sell the ADU, hiring skilled professionals like architects and contractors is key to keeping the project on track. Local experts familiar with ADUs will ensure everything proceeds as expected.

What are some other financing options for building an ADU?

There are various ways to fund your ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow money based on your home’s value and take out funds as needed. A Home Equity Loan provides a lump sum that you pay back over time. Cash-out refinancing lets you adjust your mortgage to access additional funds. Renovation loans help cover construction costs, and some private lenders may offer more flexible payment 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 add one. If an HOA tries to prevent it, they could face penalties.

Maximizing Profitability in La Canada Flintridge

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment in La Canada Flintridge, effective marketing is crucial. Partnering with local real estate agents and crafting appealing property listings can help attract renters or buyers. Offering virtual tours allows potential tenants to view the property from afar. Additionally, promoting your ADU on social media platforms like Instagram and Facebook can help you reach a larger audience and generate more interest.

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Resources

La Canada Flintridge Municipal Code