Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Monterey Park?
Homeowners in Monterey Park often struggle to make their ADU investments profitable due to market demand, competitive pricing, and effective property management challenges. Understanding and addressing these issues can help maximize your ADU's profitability. Learn how to analyze market trends, set appropriate rental prices, and manage your ADU efficiently to turn it into a successful investment.
Introduction to ADU Investments in Monterey Park
Why are ADUs popular in California?
ADUs, or granny flats, have become a preferred solution in California to help tackle the state’s housing challenges. As home prices climb and available properties shrink, homeowners can add an ADU to their property to gain more space without needing extra land. These units are versatile—they can be rented out for extra income or serve as affordable housing for family members, such as aging parents or adult children.
How can an ADU increase property value?
Adding an ADU can increase a home’s value by offering additional, practical living space. Whether it’s rented, used by family members, or converted into a workspace, the added options make the property more attractive to buyers. In California, homes with ADUs tend to draw more interest because they offer more possibilities for living arrangements, which can raise the property’s value on the market.
Is it possible to sell an ADU in Monterey Park?
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 Monterey Park, 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 Monterey Park
We analyzed multiple projects, and we determined that on average you should expect a 26% ROI for an ADU project in Monterey Park. 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 Monterey Park 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 Monterey Park
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 $51,093, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $393,993. 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 Monterey Park 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 $101,007 or 26% 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 Monterey Park comes with a total cost of $393,993. Financing with a 6.5% interest rate loan results in a monthly payment of $2,490 or $29,880/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 $25,200 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?
California homeowners have access to the CalHFA ADU Grant Program, which offers up to $40,000 to assist with costs such as permits, design, and property evaluations for single-family homes. This program has been available since 2021.
Building Your Team for the ADU Project
Successfully constructing an ADU requires a reliable group of professionals. Once you’ve secured funding, ensure your property complies with local rules and size limits. If you plan to rent or sell the ADU, working with skilled architects and contractors will help keep things running smoothly. Teaming up with local ADU experts can also simplify the process and minimize potential delays.
What are some other financing options for building an ADU?
There are several options available for financing your ADU project:
1. HELOC: Borrow money by using your home’s equity as collateral.
2. Home Equity Loan: Receive a lump sum upfront and repay it in set amounts over time.
3. Cash-Out Refinance: Modify your existing mortgage to free up extra cash.
4. Renovation Loans: These loans are specifically designed for home construction or improvements.
5. Private Lenders: These lenders may provide more flexible repayment plans than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowner associations cannot stop you from building an ADU. Laws such as AB 670 and AB 3182 protect your right to build. If an HOA tries to block the construction, they could face legal consequences.
Maximizing Profitability in Monterey Park
Marketing Strategies to Increase ADU Investment Returns
To get the most out of your ADU, try these marketing tactics:
- Collaborate with local real estate agents to create attractive property listings.
- Offer virtual tours to make it easier for potential renters or buyers to view the space.
- 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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