The Southwest Builders

How to Make My ADU a Profitable Investment in Lakewood?

Investing in an Accessory Dwelling Unit (ADU) in Lakewood can be a great way to generate extra income, but making it profitable comes with its challenges. Homeowners often find it tricky to balance rental income with costs while staying within local rules. By using smart strategies, you can improve your ADU’s profitability. This includes setting the right rental price, controlling both construction and ongoing expenses, and following local zoning and building codes. This article explores ways to increase your ADU’s return on investment.

Introduction to ADU Investments in Lakewood

Why are ADUs popular in California?

ADUs, granny flats, or in-law suites, have become a popular solution in California due to the state’s ongoing housing challenges. With rising home prices and limited availability of new homes, ADUs allow homeowners to add extra space without purchasing more land. These units can generate rental income or be used by a variety of people, such as young adults, families, or seniors, all while keeping loved ones nearby.

How can an ADU increase property value?

Building an ADU can raise the value of your property by adding usable space that can be rented, used by family members, or even set up as a home office. In California, properties with ADUs are often seen as more desirable because they offer flexible living options, which can make the property more appealing to potential buyers and increase its market value.

Is it possible to sell an ADU in Lakewood?

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 Lakewood, 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 Lakewood

We analyzed multiple projects, and we determined that on average you should expect a 62% ROI for an ADU project in Lakewood. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is high, making Lakewood an appealing and promising location for real estate development. 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 Lakewood

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 $45,305, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $388,205. 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 Lakewood is estimated at $700. 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 $630,000 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 $241,795 or 62% 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 Lakewood comes with a total cost of $388,205. Financing with a 6.5% interest rate loan results in a monthly payment of $2,453 or $29,436/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 $32,400 annually. At this rental income, which gives you only $3,000 possible profit per year, you probably look at paying off the loan by renting the ADU.

The city rules state that rentals should last at least 30 days, so short-term rentals are prohibited. 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 provides financial support to homeowners building an ADU. Grants of up to $40,000 are available to cover expenses such as permits, designs, and property assessments, available starting in 2021 for single-family homes.

Building Your Team for the ADU Project

Starting an ADU project means gathering a team of experts. After securing funding, make sure your property is eligible for an ADU and check for any size limitations. If you plan to rent or sell the unit, hiring experienced professionals like architects and contractors is key to keeping the project on schedule. Local experts familiar with ADUs can also help simplify the process.

What are some other financing options for building an ADU?

(1) Home Equity Line of Credit (HELOC): Borrow against your home's value and take out money as needed.

(2) Home Equity Loan: Receive a lump sum to pay off over time.

(3) Cash-out Refinancing: Adjust your mortgage to free up extra funds.

(4) Renovation Loans: Help cover construction costs.

(5) Private Lenders: May offer more flexible repayment options than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, a homeowners association (HOA) cannot block the construction of an ADU. Laws such as AB 670 and AB 3182 protect your right to build one, and if an HOA tries to stop it, they could face penalties.

Maximizing Profitability in Lakewood

Marketing Strategies to Increase ADU Investment Returns

To get the best returns on your ADU investment in Lakewood, effective marketing is essential.

(1) Partner with local real estate agents to create appealing property listings.

(2) Offer virtual tours to give potential tenants or buyers a remote viewing option.

(3) Promote your ADU on social media platforms like Instagram and Facebook to generate more interest.

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

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