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How to Make My ADU a Profitable Investment in Monrovia?

ADU investments in Monrovia can be challenging due to high construction costs and market competition. Solutions include researching market trends, setting a competitive price, and upgrading the ADU’s design for better appeal. It is important to learn how to navigate these challenges and implement effective strategies to make your ADU investment profitable, such as analyzing market data, optimizing space, and ensuring high-quality construction and design.

Introduction to ADU Investments in Monrovia

Why are ADUs popular in California?

ADUs, or granny flats, have become a favored solution in California to help with the state’s housing challenges. As home prices continue to rise and housing becomes scarcer, adding an ADU allows homeowners to expand their living space without needing to purchase more land. These units offer versatility—they can be used to generate rental income or provide a more affordable living option for family members, such as aging parents or grown children.

How can an ADU increase property value?

Adding an ADU can increase a home’s worth by providing additional functional space. Whether the ADU is rented out, used by the family, or converted into an office, it makes the property more attractive to buyers. In California, homes with ADUs are often in higher demand because they offer more options for living arrangements, which can help raise the property’s market value.

Is it possible to sell an ADU in Monrovia?

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 Monrovia, 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 Monrovia

We analyzed multiple projects, and we determined that on average you should expect a 3% ROI for an ADU project in Monrovia. 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 Monrovia 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 Monrovia

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 $50,092, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $392,992. 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 Monrovia is estimated at $450. 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 $405,000 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 $12,008 or 3% 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 Monrovia comes with a total cost of $392,992. Financing with a 6.5% interest rate loan results in a monthly payment of $2,484 or $29,808/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 $38,400 per year. At this rental income, which gives you only $8,500 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 apply for the CalHFA ADU Grant Program, which offers up to $40,000 to cover expenses like permits, design, and site evaluations 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 reliable team of professionals. Once funding is secured, make sure your property complies with local rules and size limits. If you plan to rent or sell the ADU, hiring skilled architects and contractors can keep everything on track. Working with local ADU specialists can also help simplify the process and avoid delays.

What are some other financing options for building an ADU?

There are several ways to fund your ADU project:

1. HELOC: Borrow money using your home's value as collateral.

2. Home Equity Loan: Get a lump sum upfront and pay it back in fixed amounts over time.

3. Cash-Out Refinance: Adjust your current mortgage to free up extra money.

4. Renovation Loans: These are loans designed specifically for building or upgrading a property.

5. Private Lenders: These lenders might offer more flexible repayment terms compared to traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, homeowner associations cannot block the construction of an ADU. Laws like AB 670 and AB 3182 protect your right to build. If an HOA tries to stop you, they could face legal trouble.

Maximizing Profitability in Monrovia

Marketing Strategies to Increase ADU Investment Returns

To increase the return on your ADU, try these marketing strategies:

Partner with local real estate agents to create attractive listings.
Provide virtual tours to make it easier for potential renters or buyers to view the unit.
Promote your property on social media platforms like Instagram and Facebook to reach a wider audience.

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

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