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How to Make My ADU a Profitable Investment in Long Beach?
To make your ADU in Long Beach a profitable investment, you need to address how to maximize its value and manage costs effectively. The key is to research local market trends to set a competitive price and enhance the ADU’s appeal through smart design and upgrades. Utilize effective marketing to reach potential buyers or users, ensure compliance with local regulations, and consider professional management to streamline operations and boost profitability.
Introduction to ADU Investments in Long Beach
Why are ADUs popular in California?
ADUs, or granny flats, have become popular in California as they help address the state's housing challenges. With home prices rising and fewer properties available, building an ADU allows homeowners to add extra space without needing more land. These units can be rented out for additional income or used by family members, like young adults or older relatives, keeping everyone close.
How can an ADU increase property value?
Building an ADU can raise the value of your home by adding practical living space that can be rented, used by family members, or turned into a home office. In California, homes with ADUs tend to be more attractive to buyers because they offer more flexibility, which can make the property more valuable.
Is it possible to sell an ADU in Long Beach?
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 Long Beach, 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 Long Beach
We analyzed multiple projects, and we determined that on average you should expect a 120% ROI for an ADU project in Long Beach. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Long Beach 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 Long Beach
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 $46,066, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $388,966. 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 Long Beach is estimated at $950. 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 $855,000 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 $466,033 or 120% 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 Long Beach comes with a total cost of $388,966. Financing with a 6.5% interest rate loan results in a monthly payment of $2,459 or $29,508/year. Ideally, renting out the main house could cover this payment, while the ADU serves as a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $34,800 per year. At this rental income, which gives you a $5,000 possible profit per year, you probably look at paying off the loan by simply 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 homeowners can take advantage of the CalHFA ADU Grant Program, which offers up to $40,000 to help with expenses like permits, design work, and site assessments for single-family homes. This program has been available since 2021.
Building Your Team for the ADU Project
To successfully build an ADU, it’s important to assemble a dependable team. Once you’ve secured funding, confirm that your property meets all necessary rules and size limitations. If your goal is to rent or sell the ADU, hiring skilled architects and contractors can ensure the project stays on track. Working with local experts who specialize in ADUs can also streamline the process and help things run smoothly.
What are some other financing options for building an ADU?
You have several options to fund your ADU project:
- HELOC: Access funds as needed by leveraging your home's equity.
- Home Equity Loan: Receive a set amount upfront and repay it in installments with interest.
- Cash-Out Refinance: Modify your mortgage to withdraw additional funds.
- Renovation Loans: Tailored loans to cover building or renovation expenses.
- Private Lenders: Often provide more flexible repayment plans compared to banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations cannot legally prevent you from building an ADU. California laws such as AB 670 and AB 3182 ensure your right to construct one. An HOA that interferes might face legal action.
Maximizing Profitability in Long Beach
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU investment, consider these marketing tactics:
- Collaborate with local realtors to showcase your property effectively.
- Provide virtual tours to make viewing convenient for renters or buyers.
- Utilize platforms like Instagram or Facebook to reach more potential clients and generate interest.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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