How to Make My ADU a Profitable Investment in Unincorporated Los Angeles County?
Adding an ADU in Unincorporated Los Angeles County can be a smart way to boost your property’s value and income potential, but it comes with challenges. Landlords may need to navigate costs, follow city regulations, and ensure steady rental earnings. By planning carefully, you can make the most of your ADU. This includes setting a fair rental price, managing construction and other expenses wisely, and staying compliant with local rules. Here, you’ll find useful advice to help turn your ADU into a worthwhile investment.
Introduction to ADU Investments in Whittier
Why are ADUs popular in California?
ADUs, also known as granny flats or backyard homes, are increasingly common in California due to the state's ongoing housing shortage. With high home prices and limited new construction, ADUs provide a practical solution for adding living space without needing more land. They offer an affordable housing option, extra rental income for homeowners, and flexible spaces for various groups, such as young adults, families, and seniors. They also help people stay connected to their families and local communities.
How can an ADU increase property value?
Building an ADU can increase a home's value by adding rentable space that appeals to buyers interested in earning income or having versatile living options. In California, properties with ADUs are often worth more because of their flexibility—they can be used for renting, housing extended family, or even as a home office. By expanding the functional space, an ADU makes a property more attractive in a competitive market.
Is it possible to sell an ADU in Unincorporated Los Angeles County?
In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In Unincorporated Los Angeles County, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.
The ROI for building an ADU in Unincorporated Los Angeles County
We analyzed multiple projects, and we determined that on average you should expect a 250% ROI for an ADU project in Unincorporated Los Angeles County. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Unincorporated Los Angeles County 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 Unincorporated Los Angeles County
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 $42,884, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is 385,784. 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 Unincorporated Los Angeles County is estimated at $1,500. 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 $1,350,000 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 $964,215 or 250% 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 Unincorporated Los Angeles County comes with a total cost of 385,784. Financing with a 6.5% interest rate loan results in a monthly payment of $2,438 or $29,256/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 $35,520 per year. At this rental income, which gives you a $6,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
City regulations require rentals to be at least 30 days long, meaning short-term rentals are not allowed. While platforms like Airbnb can bring in extra income during peak times (for example, $600 for a five-night stay), long-term rentals provide more reliable and steady income. With long-term rentals, you won’t have to constantly find new tenants, clean between guests, or re-list the property, resulting in more consistent earnings and less upkeep.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California assists with the CalHFA ADU Grant Program, which started on September 20, 2021. This program offers up to $40,000 to eligible homeowners to cover initial costs like permits, design plans, surveys, soil testing, and impact fees. The grant helps make it easier for homeowners to begin building ADUs, increasing housing options across the state.
Building Your Team for the ADU Project
After securing funding, confirm your property meets the requirements for building an ADU and check any size limits. Decide if the ADU will be used for renting or personal purposes. Then, hire experts like architects and contractors to handle the design and construction. Choosing local contractors who know the area’s regulations can simplify the process, and you might find potential candidates by checking out other construction projects in your neighborhood.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC):
A HELOC allows you to borrow against your home’s equity and works like a credit card. You can access funds as needed, making it a flexible way to pay for ADU construction.
Home Equity Loan:
This provides a one-time lump sum based on your home’s value. With set monthly payments, it’s a reliable and straightforward financing choice.
Cash-Out Refinance:
By refinancing your mortgage for a larger amount, you can take the extra cash to fund your ADU project, eliminating the need for a separate loan.
Renovation Loans:
These loans are designed for home improvement projects and can cover the costs of building an ADU.
Private Lenders:
Some private lenders offer loans specifically for ADUs, providing flexible terms to suit your construction needs.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, California laws like AB 670 and AB 3182 prevent HOAs from blocking or placing unfair restrictions on ADU construction for single-family homes. HOA rules against ADUs are invalid and could lead to penalties for enforcement attempts.
Maximizing Profitability in Unincorporated Los Angeles County
Marketing Strategies to Increase ADU Investment Returns
To maximize returns on an ADU investment, consider these marketing strategies:
Understand Local Rents
Research rental prices for ADUs in your area using online resources to set a competitive rate that attracts tenants.
Partner with Real Estate Agents
Collaborate with local realtors who can help you find potential renters or buyers interested in homes with ADUs.
Use Social Media
Share posts highlighting the advantages of ADUs on platforms like Instagram and Facebook. This can create interest among renters and establish your reputation as a landlord.
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