Cali ADU Design+Build
How to Make My ADU a Profitable Investment in La Verne?
Struggling to make your ADU investment in La Verne profitable? The challenge is finding the best way to maximize returns. The solution involves careful market research, effective cost management, and boosting property value. Learn how to analyze the local market, set clear investment goals, assess property potential, and utilize financing options to ensure your ADU investment is successful and profitable.
Introduction to ADU Investments in La Verne
Why are ADUs popular in California?
ADUs, also known as granny flats or in-law suites, have become increasingly popular in California because they help address the state's housing problems. As home prices rise and new homes are harder to come by, ADUs offer a cost-effective way for homeowners to expand their living space without needing more land. These units can provide rental income or be used by different groups like young professionals, families, or seniors, all while keeping people close to their loved ones and communities.
How can an ADU increase property value?
Adding an ADU to your property can increase its value by providing extra space that can be rented out, used for family, or turned into a home office. In California, properties with ADUs tend to be more valuable because they offer more flexible living arrangements. The additional space makes the property more attractive to buyers, which can drive up its market value.
Is it possible to sell an ADU in La Verne?
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 Verne, 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 Verne
We analyzed multiple projects, and we determined that on average you should expect a 25% ROI for an ADU project in La Verne. 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 Verne 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 Verne
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 $54,419, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $397,319. 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 Verne is estimated at $550. 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 $495,000 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 $97,681 or 25% 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 Verne comes with a total cost of $397,319. If financed with a 6.5% interest rate loan, this results in a monthly payment of $2,511 or $30,132/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, 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 has a program called the CalHFA ADU Grant Program that assists homeowners with some of the expenses of building an ADU. Homeowners can get grants up to $40,000 to cover costs like permits, designs, and property evaluations, starting in 2021 for single-family homes.
Building Your Team for the ADU Project
Starting an ADU project requires assembling a reliable team. Once you’ve secured funding, ensure your property is suitable for an ADU and check any size restrictions. If you intend to rent or sell the ADU, it's important to hire experienced professionals like architects and contractors to ensure the project stays on track. Local specialists who know about ADUs can help make the process easier.
What are some other financing options for building an ADU?
There are a few options to fund your ADU project. A Home Equity Line of Credit (HELOC) allows you to borrow against the value of your home and take out money as you need it. A Home Equity Loan gives you a lump sum that you pay back over time. Cash-out refinancing lets you adjust your mortgage and access extra funds. Renovation loans can help with construction costs, and some private lenders may offer more flexible repayment plans compared to banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, a homeowners association (HOA) cannot prevent you from building an ADU. Laws like AB 670 and AB 3182 protect your right to do so, and if an HOA tries to block it, they may face penalties.
Maximizing Profitability in La Verne
Marketing Strategies to Increase ADU Investment Returns
To make the most of your ADU investment in La Verne, good marketing is key. Working with local real estate agents and creating attractive property listings can draw in potential tenants or buyers. Offering virtual tours allows people to view the property without being there in person. Sharing your ADU on social media sites like Instagram and Facebook can help spread the word and generate more interest.
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