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How to Make My ADU a Profitable Investment in Montebello?
Investing in an ADU in Montebello can be tricky. Homeowners often find it difficult to maximize rental income, control expenses, and follow local rules. However, with the right approach, you can improve the financial success of your ADU. This means setting the right rental price, carefully managing both building and maintenance costs, and ensuring your ADU follows local zoning and construction guidelines. This article will look at strategies to help you get the best return on your ADU investment.
Introduction to ADU Investments in Montebello
Why are ADUs popular in California?
ADUs, also known as granny flats, have become a popular choice in California as a way to address the state’s housing issues. With rising home prices and fewer available properties, adding an ADU allows homeowners to create extra living space without the need for additional land. These units are flexible—they can provide rental income or offer affordable housing for family members, like elderly parents or adult children.
How can an ADU increase property value?
Building an ADU can boost a home’s value by adding extra, usable space. Whether it’s rented out, used by family, or turned into a home office, the added functionality makes the property more appealing to potential buyers. In California, homes with ADUs tend to attract more buyers because they provide additional living options, which can increase the property’s market value.
Is it possible to sell an ADU in Montebello?
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 Montebello, 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 Montebello
We analyzed multiple projects, and we determined that on average you should expect a 27% ROI for an ADU project in Montebello. 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 Montebello 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 Montebello
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 $46,304, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $389,204. 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 Montebello is estimated at $550. 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 $495,000 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 $105,796 or 27% 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 Montebello comes with a total cost of $389,204. Financing with a 6.5% interest rate loan results in a monthly payment of $2,460 or $29,520/year. Ideally, renting out the main house could cover the loan payment, while the ADU provides additional rental income. However, renting out a 2-bedroom, 1-bath ADU long-term in this city could only generate approximately $27,600 annually. At this level of income, the ADU alone would not generate a profit, as its rental income would still fall short of covering its costs.
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?
In California, homeowners can apply for the CalHFA ADU Grant Program, which provides up to $40,000 to help with costs like permits, design, and site assessments for single-family homes. This funding has been available since 2021.
Building Your Team for the ADU Project
Building an ADU successfully requires putting together a trustworthy team of experts. After securing financing, make sure your property meets local regulations and size restrictions. If you plan to rent or sell the ADU, working with experienced architects and contractors will help keep the project on track. Collaborating with local ADU professionals can also make the process smoother and help avoid any delays.
What are some other financing options for building an ADU?
There are various options to fund your ADU project:
1. HELOC: Borrow money by using your home’s value as security.
2. Home Equity Loan: Receive a lump sum upfront and pay it back in fixed installments.
3. Cash-Out Refinance: Change your current mortgage to access extra cash.
4. Renovation Loans: Loans specifically for construction or property improvements.
5. Private Lenders: These lenders might offer more flexible payment terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations cannot prevent you from building an ADU. California laws like AB 670 and AB 3182 protect your right to build. If an HOA tries to block you, they could face legal consequences.
Maximizing Profitability in Montebello
Marketing Strategies to Increase ADU Investment Returns
To get better returns from your ADU, consider these strategies:
- Work with local real estate agents to create appealing property listings.
- Offer virtual tours to make it easier for renters or buyers to check out the space.
- Use social media, like Instagram and Facebook, to attract more attention and reach a broader audience.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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