Introduction to ADU Investments in Lancaster

Why are ADUs popular in California?

ADUs, also known as granny flats or in-law suites, have gained popularity in California because they help address the state's housing issues. As home prices soar and new homes become harder to find, ADUs allow homeowners to add space without needing extra land. These units can be rented out for income or used by different groups, like young adults, families, or seniors while keeping everyone close.

How can an ADU increase property value?

Adding an ADU can boost your property's value by providing additional, functional space that can be rented, used by relatives, or turned into a home office. In California, homes with ADUs are often more appealing to buyers because they offer greater flexibility, which can increase the property’s value.

Is it possible to sell an ADU in Lancaster?

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 Lancaster, 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 Lancaster

We analyzed multiple projects, and we determined that on average you should expect a 50% ROI for an ADU project in Lancaster. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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Case study: 900 sq. ft. ADU built in Lancaster

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 $47,337, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $390,237. 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 Lancaster is estimated at $652. 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 $586,800 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 $196,564 or 50% ROI. At this level of return, the investment in an ADU to sell it offers a modest return relative to the total project cost and the market value. In addition to the modest 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 Lancaster comes with a total cost of $390,237. Financing with a 6.5% interest rate loan results in a monthly payment of $2,467 or $29,604/year. Ideally, renting out the main house could cover the loan payment, while the ADU provides additional rental income. However, renting out a 2-bedroom, 1-bath ADU long-term in this city could only generate approximately $25,200 annually. At this level of income, the ADU alone would not generate a profit, as its rental income would still fall short of covering its costs.

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.

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Is there financial assistance for building ADUs?

Yes, homeowners in California can take advantage of the CalHFA ADU Grant Program, which provides grants of up to $40,000. These funds can help cover costs like permits, design work, and site evaluations for single-family properties. The program has been available since 2021.

Building Your Team for the ADU Project

When starting an ADU project, it’s important to put together a reliable team. After securing funding, confirm that your property meets the requirements for an ADU and understand any size restrictions. If you plan to rent or sell the unit, working with skilled architects and contractors can help ensure the project stays on track. Additionally, hiring local professionals who specialize in ADUs can make the process smoother and more manageable.

What are some other financing options for building an ADU?

• Home Equity Line of Credit (HELOC): Borrow money as needed, using your home’s equity as collateral.
• Home Equity Loan: Access a fixed amount upfront, repaid over time with interest.
• Cash-Out Refinancing: Adjust your mortgage and take out additional funds.
• Renovation Loans: Designed to help with construction expenses.
• Private Lenders: This may provide more flexible repayment terms compared to banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, homeowners associations cannot legally prevent you from building an ADU. State laws like AB 670 and AB 3182 protect homeowners’ rights to construct ADUs. If an HOA attempts to block your project, they may face consequences.

Maximizing Profitability in Lancaster

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment, use smart marketing strategies:

• Work with local real estate professionals to create attractive listings.
• Offer virtual tours, allowing potential renters or buyers to view the property online.
• Use social media platforms like Instagram and Facebook to reach a wider audience and draw more interest.

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