Cali ADU Design+Build

How to Make My ADU a Profitable Investment in La Puente?

Many homeowners in La Puente struggle to make their ADU investments profitable. The main problem is maximizing return on investment. The solution involves strategic planning, cost management, and enhancing property value. Learn how to research the market, set clear goals, analyze property potential, and leverage financing to ensure your ADU investment is successful and profitable.

Introduction to ADU Investments in La Puente

Why are ADUs popular in California?

ADUs, sometimes referred to as granny flats or in-law suites, have become a popular choice in California due to the state’s housing challenges. With rising home prices and fewer new homes being built, ADUs give homeowners a budget-friendly way to add more living space without the need to buy additional land. These units can be rented out for extra income or used by different groups, like young professionals, families, or seniors, all while keeping people close to family and their communities.

How can an ADU increase property value?

Building an ADU can boost the value of your home by adding more usable space that can be rented, used for family, or set up as a home office. In California, homes with ADUs often have a higher value because they offer flexible living options. The added space makes the property more appealing to buyers, which can raise its value in a competitive real estate market.

Is it possible to sell an ADU in La Puente?

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 Puente, 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 Puente

We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in La Puente. 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 Puente 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 Puente

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 La Puente is estimated at $450. 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, 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 Puente 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 $27,600 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 rules state that rentals should last at least 30 days, so short-term rentals are not allowed. While services like Airbnb might bring in more money during busy seasons (for example, $600 for a five-night stay), long-term rentals offer steadier, more predictable income. With long-term rentals, you don't have to worry about finding new tenants all the time, cleaning between guests, or re-listing the property, which leads to more consistent 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, which helps homeowners cover some of the costs involved in building an ADU. Homeowners can receive grants of up to $40,000 for things like permits, design, and property assessments, available for single-family homes starting in 2021.

Building Your Team for the ADU Project

When beginning your ADU project, it's important to put together a trustworthy team. After securing your 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, hiring skilled professionals like architects and contractors is essential to keep everything moving smoothly. Local experts familiar with ADUs can help ensure a hassle-free process.

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) lets you borrow money based on the value of your home, giving you access to funds when needed. A Home Equity Loan provides a lump sum that you repay over time. Cash-out refinancing allows you to adjust your mortgage to get extra cash. Renovation loans help cover building costs, and some private lenders may offer more flexible payment options than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, a homeowners association (HOA) can’t block you from building an ADU. Laws like AB 670 and AB 3182 protect your right to add one, and if an HOA tries to prevent it, they could face penalties.

Maximizing Profitability in La Puente

Marketing Strategies to Increase ADU Investment Returns

To get the most out of your ADU investment in La Puente, effective marketing is essential. Partnering with local real estate agents and creating appealing property listings can help attract renters or buyers. Offering virtual tours allows people to view the space remotely. Promoting your ADU on social media platforms like Instagram and Facebook can help you reach a wider audience and generate more interest.

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

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