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How to Make My ADU a Profitable Investment in La Habra Heights?
Turning an Accessory Dwelling Unit (ADU) in La Habra Heights into a money-making investment can be tough. Homeowners often face challenges with getting the best rental income, keeping costs under control, and following local rules. But by using the right approach, it's possible to improve the financial outcome of your ADU. This includes setting the right rental price, managing both expected and unexpected costs, and staying in line with local zoning and building laws. In this article, you'll discover strategies to help you get a better return on your ADU investment.
Introduction to ADU Investments in La Habra Heights
Why are ADUs popular in California?
ADUs, also known as granny flats or in-law units, have become a popular choice in California due to the state’s housing challenges. With home prices climbing and new construction slowing down, ADUs provide an affordable way for homeowners to add extra living space without needing to buy more land. These spaces can be used for renting, providing extra income, or offering living arrangements for different groups such as young professionals, families, and seniors, all while keeping people closer to their loved ones and communities.
How can an ADU increase property value?
Building an ADU can boost a home's value by adding extra space that can be rented out, used for family members, or turned into a home office. In California, homes with ADUs are often more valuable because they offer more living options and flexibility. The additional space not only makes the property more versatile but also more appealing to buyers, increasing its overall market value.
Is it possible to sell an ADU in La Habra Heights?
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 Habra Heights, 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 Habra Heights
We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in La Habra Heights. 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 La Habra Heights is a risky investment. 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 La Habra Heights
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 $48,625, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $391,525. 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 Habra Heights is estimated at $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 $450,000 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 $58,475 or 15% ROI. At this level, building an ADU to sell it provides a relatively low return compared to both the costs and the market value. In addition to the low 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 Habra Heights comes with a total cost of $391,525. 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 $31,200 annually. At this rental income, which gives you only $1,500 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 to help homeowners with some of the costs of building an ADU. Homeowners can receive grants of up to $40,000 to cover expenses like permits, design, and property evaluations for single-family homes, starting in 2021.
Building Your Team for the ADU Project
Starting an ADU project requires gathering a trusted team. Once you’ve secured funding, make sure your property is ready for an ADU and check for any size limitations. If you plan to rent or sell the ADU, it’s important to hire experienced professionals, such as architects and contractors, to keep the process on track. Local experts familiar with ADUs can help ensure everything goes smoothly.
What are some other financing options for building an ADU?
There are several options for funding your ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value and withdraw funds as needed. A Home Equity Loan gives you a lump sum that you repay over time. Cash-out refinancing allows you to adjust your mortgage and access extra money. Renovation loans can cover construction costs, and some private lenders may offer more flexible repayment plans compared to 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 such as AB 670 and AB 3182 protect your right to build one. If an HOA tries to block it, they could face penalties.
Maximizing Profitability in La Habra Heights
Marketing Strategies to Increase ADU Investment Returns
To get the best return on your ADU investment in La Habra Heights, it’s important to market it well. Working with local real estate agents and creating eye-catching property listings can help draw in potential renters or buyers. Offering virtual tours allows people to see the property remotely. Additionally, promoting your ADU on social media platforms like Instagram and Facebook can help you reach a wider audience and spark more interest.
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