Abodu

How to Make My ADU a Profitable Investment in Malibu?

Turning an ADU in Malibu into a profitable project can be challenging. Homeowners might deal with issues like finding the right rental rate, managing expenses, and complying with local regulations. Still, with the right methods, it’s possible to increase the income potential of your ADU. This includes offering attractive rental prices, keeping building and maintenance costs in check, and ensuring the project aligns with zoning and construction guidelines. Using these approaches can make your ADU a stronger financial asset.

Introduction to ADU Investments in Malibu

Why are ADUs popular in California?

ADUs, often called granny flats, are becoming a popular choice in California to help tackle the housing shortage. With rising home prices and limited availability, they allow homeowners to add more living space without needing additional land. These units are flexible—they can bring in extra rental income or serve as housing for family members, such as elderly parents or adult children.

How can an ADU increase property value?

Building an ADU can also increase a home's overall value by adding practical space that serves various purposes. Whether it's rented out, used by family, or turned into an office, the extra functionality makes the property more appealing. In California, homes with ADUs often attract more buyers because they offer additional living options, which can lead to a higher market price.

Is it possible to sell an ADU in Malibu?

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 Malibu, 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 Malibu

We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in Malibu. 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 Malibu 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 Malibu

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 $47,576, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $390,476. 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 Malibu 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 $450,000 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 $59,524 or 15% 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 Malibu comes with a total cost of $390,476. Financing with a 6.5% interest rate loan results in a monthly payment of $2,468 or $29,616/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 $60,000 per year. At this rental income, which gives you only $30,384 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?

California homeowners can explore financial help through the CalHFA ADU Grant Program, offering up to $40,000 to assist with expenses like permits, design planning, 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 gather a dependable team of professionals. Once funding is secured, ensure your property meets zoning requirements and size limits. For those looking to rent or sell the ADU, hiring skilled architects and contractors can help keep the project well-organized and on time. Working with local experts who specialize in ADUs can make the entire process smoother and more efficient.

What are some other financing options for building an ADU?

There are several ways to finance an ADU project:

HELOC: Use your home's equity to borrow money as needed.
Home Equity Loan: Receive a set amount of money upfront and repay it over time in fixed payments.
Cash-Out Refinance: Restructure your mortgage to access additional funds.
Renovation Loans: Loans specifically tailored for building or upgrading homes.
Private Lenders: These lenders might offer repayment terms that are more flexible than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, HOAs cannot prevent ADU construction. California laws like AB 670 and AB 3182 ensure your right to build. If an HOA tries to stop your project, they could face legal repercussions.

Maximizing Profitability in Malibu

Marketing Strategies to Increase ADU Investment Returns

To improve the returns from your ADU, consider the following strategies:

Collaborate with local realtors to create appealing property listings.
Provide virtual tours to make the unit more accessible for potential tenants or buyers.
Use platforms like Instagram and Facebook to promote the property and attract attention from a broader audience.

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

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