Cali ADU Design+Build
How to Make My ADU a Profitable Investment in La Mirada?
Many homeowners in La Mirada face challenges in making their ADU investments profitable. The main problem is understanding how to maximize return on investment. The solution involves strategic planning, effective cost management, and enhancing property value. This will cover identifying ideal properties for ADUs, controlling construction expenses, and boosting property value to ensure a successful and profitable investment.
Introduction to ADU Investments in La Mirada
Why are ADUs popular in California?
In California, ADUs (also called granny flats or in-law units) have gained popularity because they offer a solution to the state’s housing issues. With home prices rising and fewer new homes being built, ADUs provide a cost-effective way for homeowners to expand their living space without needing more land. These units can be rented out for extra income or used to house different groups, such as young professionals, families, or seniors, while also keeping people close to family and community.
How can an ADU increase property value?
Adding an ADU to your property can raise its value by providing extra space that can be rented, used for family members, or turned into a home office. In California, homes with ADUs tend to be more valuable because they offer greater flexibility in how the space can be used. The extra living space makes the property more attractive to buyers, which can increase its value in the real estate market.
Is it possible to sell an ADU in La Mirada?
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 Mirada, 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 Mirada
We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in La Mirada. 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 Mirada 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 Mirada
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 $47,576, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,476. 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 Mirada 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 $59,524 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 Mirada comes with a total cost of $390,476. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,468 or $29,616/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 $30,000 annually. At this rental income, which gives you only $380 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 provides the CalHFA ADU Grant Program, which gives homeowners financial support to help with building costs. Homeowners can get grants of up to $40,000 to assist with expenses like permits, design, and property assessments for single-family homes, starting in 2021.
Building Your Team for the ADU Project
When starting your ADU project, it’s important to build a reliable team. After securing your funding, check that your property is suitable for an ADU and confirm any size limits. If you plan to rent or sell the ADU, it’s crucial to hire experienced professionals, such as architects and contractors, to ensure everything stays on track. Local experts who understand ADUs can make the process much easier.
What are some other financing options for building an ADU?
There are a few ways to fund your ADU project. A Home Equity Line of Credit (HELOC) lets you borrow money based on your home's value, allowing you to take out funds when needed. A Home Equity Loan provides a one-time sum that you pay back in installments. Cash-out refinancing lets you adjust your mortgage to access extra funds. Renovation loans cover the costs of building, and some private lenders may offer more flexible repayment terms than banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) can’t prevent you from adding an ADU. Laws like AB 670 and AB 3182 protect your right to build one. If an HOA tries to stop you, they could face penalties.
Maximizing Profitability in La Mirada
Marketing Strategies to Increase ADU Investment Returns
To get the best return on your ADU investment in La Mirada, effective marketing is key. Teaming up with local real estate agents and crafting attractive property listings can help you attract potential renters or buyers. Offering virtual tours lets people view the property without visiting in person. Promoting your ADU on social media platforms like Instagram and Facebook can expand your reach and generate more interest.
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