Luctor Company

How to Make My ADU a Profitable Investment in Manhattan Beach?

Successful ADU projects in Manhattan Beach are not impossible, but they often come with challenges. Homeowners may struggle with determining the right rent, managing expenses, and meeting local regulations. However, by using effective strategies, it’s possible to boost your ADU’s earning potential. This includes setting competitive rental prices, controlling construction and maintenance costs, and ensuring the project complies with zoning and building rules. With these approaches, your ADU can become a valuable financial asset.

Introduction to ADU Investments in Manhattan Beach

Why are ADUs popular in California?

ADUs, also known as granny flats, have gained popularity in California as a solution to the state’s housing problems. As home prices rise and available properties become scarce, ADUs allow homeowners to expand their living space without needing to buy more land. These units are versatile—they can generate extra income through rentals or provide affordable housing for family members, like aging parents or grown children.

How can an ADU increase property value?

Adding an ADU can raise a home’s value by creating extra functional space. Whether it’s rented, used by relatives, or converted into a workspace, the additional versatility makes the home more attractive to buyers. In California, homes with ADUs often have a greater appeal because they offer more options, which can drive up the property’s selling price.

Is it possible to sell an ADU in Manhattan 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 Manhattan 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 Manhattan Beach

We analyzed multiple projects, and we determined that on average you should expect a 174% ROI for an ADU project in Manhattan Beach. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Manhattan 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 Manhattan 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 $50,646, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $393,546. 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 Manhattan Beach is estimated at $1,200. 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 $1,080,000 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 $686,454 or 174% 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 Manhattan Beach comes with a total cost of $393,546. Financing with a 6.5% interest rate loan results in a monthly payment of $2,487 or $29,844/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 $30,156 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?

Homeowners in California can take advantage of the CalHFA ADU Grant Program, which provides up to $40,000 to help cover costs such as permits, design, and site evaluations for single-family properties. This funding option has been available since 2021.

Building Your Team for the ADU Project

Building an ADU requires assembling a reliable team of experts. Once you have the necessary funding, make sure your property complies with zoning laws and size restrictions. If you plan to rent or sell the ADU, hiring experienced architects and contractors can help keep things organized and on track. Partnering with local ADU specialists can also simplify the process and help avoid delays.

What are some other financing options for building an ADU?

You have several options to fund your ADU project:

HELOC: Borrow money as needed by tapping into the value of your home.
Home Equity Loan: Get a lump sum of money upfront and pay it back over time with fixed payments.
Cash-Out Refinance: Adjust your mortgage to free up extra cash.
Renovation Loans: These loans are designed specifically to help with construction or remodeling projects.
Private Lenders: These lenders may offer more flexible repayment terms compared to traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, homeowners associations cannot block you from building an ADU. California laws like AB 670 and AB 3182 protect your right to build one. If an HOA tries to prevent the construction, they could face legal consequences.

Maximizing Profitability in Manhattan Beach

Marketing Strategies to Increase ADU Investment Returns

To get the most out of your ADU, try these marketing strategies:

Partner with local real estate agents to create attractive listings.
Offer virtual tours to make the unit easy to view for potential renters or buyers.
Use social media platforms like Instagram and Facebook to reach a wider audience and generate more interest.