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How to Make My ADU a Profitable Investment in Lawndale?
To make your ADU in Lawndale a profitable investment, focus on increasing its value and managing costs effectively. Start by setting competitive pricing based on local market trends and optimizing the space to appeal to potential buyers or users. Implement strong marketing strategies to showcase your ADU’s features, ensure compliance with local regulations, and consider professional property management to streamline operations and maximize returns.
Introduction to ADU Investments in Lawndale
Why are ADUs popular in California?
ADUs, often called granny flats or in-law suites, have become popular in California due to the state's housing challenges. With rising home prices and fewer available properties, ADUs allow homeowners to add living space without requiring extra land. These units can be rented out for additional income or used by family members, such as young adults, seniors, or relatives, allowing everyone to stay nearby.
How can an ADU increase property value?
Building an ADU can increase your property's value by adding useful living space that can be rented, used by the family, or even transformed into a home office. In California, homes with ADUs tend to attract more buyers because they provide additional flexibility, which can make the property more valuable.
Is it possible to sell an ADU in Lawndale?
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 Lawndale, 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 Lawndale
We analyzed multiple projects, and we determined that on average you should expect a 13% ROI for an ADU project in Lawndale. 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 Lawndale 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 Lawndale
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 $54,745, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $397,645. 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 Lawndale 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 $450,00 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 $52,355 or 13% 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 Lawndale comes with a total cost of $397,645. Financing with a 6.5% interest rate loan results in a monthly payment of $2,513 or $30,144/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 $30,000 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.
Is there financial assistance for building ADUs?
Yes, California homeowners can apply for the CalHFA ADU Grant Program, which offers up to $40,000 in grants. These funds can help cover expenses such as permits, design, and site assessments for single-family homes. This program has been available since 2021.
Building Your Team for the ADU Project
Starting an ADU project requires assembling a trusted team. Once you secure funding, make sure your property meets all the requirements and check for any size limits. If you plan to rent or sell the ADU, collaborating with experienced architects and contractors can keep everything on track. Additionally, working with local professionals who specialize in ADUs can simplify the process and ensure everything goes smoothly.
What are some other financing options for building an ADU?
- Home Equity Line of Credit (HELOC): Borrow money as needed by using the equity in your home as security.
- Home Equity Loan: Get a set loan amount upfront and pay it back over time with interest.
- Cash-Out Refinancing: Change your mortgage to access extra funds.
- Renovation Loans: These loans are meant to cover the cost of construction or upgrades.
- Private Lenders: These lenders might offer more flexible repayment options compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowners associations cannot stop you from building an ADU. Laws like AB 670 and AB 3182 protect your right to build one. If an HOA tries to block your project, they may face legal issues.
Maximizing Profitability in Lawndale
Marketing Strategies to Increase ADU Investment Returns
To get the best return on your ADU investment, use these marketing strategies:
- Collaborate with local real estate agents to create appealing property listings.
- Offer virtual tours so potential renters or buyers can easily view the space online.
- Promote the property on social media platforms like Instagram and Facebook to reach a broader audience and generate more interest.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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