Introduction to ADU Investments in National City

Why are ADUs popular in California?

ADUs, also known as granny flats or in-law units, are becoming more popular in California because they help address the housing shortage. With rising home prices and fewer new homes built, ADUs allow homeowners to expand their living space without needing extra land. These additions can be rented out affordably, generate additional income, and offer living options for various groups like young professionals, families, and seniors, while keeping them close to their loved ones and community.

How can an ADU increase property value?

Building an ADU can raise the value of a property by adding extra space that can be rented or used for different purposes. Homes with ADUs are more appealing to buyers because they offer multiple options, like earning rental income, providing space for extended family, or creating a home office. In California’s competitive housing market, the added space and flexibility make these properties more desirable and increase their worth.

Is it possible to sell an ADU in National City?

In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In National City, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.

The ROI for building an ADU in National City

We analyzed multiple projects, and we determined that on average you should expect a 76% ROI for an ADU project in National City. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is high, making National City an appealing and promising location for real estate development. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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Case study: 900 sq. ft. ADU built in National City

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 $325, resulting in total hard costs of $292,500. 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 $39,715 covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $332,215. 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 National City is estimated at $650. 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 $585,000 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 $252,784 or 76% 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 National City comes with a total cost of $332,215. Financing with a 6.5% interest rate loan results in a monthly payment of $2,099 or $25,188/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 $37,200 per year. At this rental income, which gives you a $12,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

City rules state that rentals should be for at least 30 days, so short-term stays are not allowed. While renting through sites like Airbnb can bring in extra money during busy times, long-term rentals offer more stable and dependable income. With long-term rentals, you won’t need to keep searching for new tenants, cleaning between stays, or re-advertising the property, leading to steady earnings and less maintenance.

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Is there financial assistance for building ADUs?

California offers financial help through the CalHFA ADU Grant Program, which started on September 20, 2021. Homeowners who qualify can get up to $40,000 to cover costs like permits, design plans, surveys, soil tests, and fees. This program aims to make building ADUs more affordable and increase housing options.

Building Your Team for the ADU Project

After securing funds, check that your property meets all the rules for ADUs, like size limits. Decide how you’ll use the ADU, whether as a rental or for another purpose and hire experts such as architects and contractors to manage the work. It’s helpful to hire contractors who know local building rules, which you can identify by reviewing similar projects in your area.

What are some other financing options for building an ADU?

• Home Equity Line of Credit (HELOC): A HELOC allows you to borrow money based on your home's value, working like a credit card. You can withdraw funds as needed, making it a flexible option to pay for ADU construction.
• Home Equity Loan: This loan gives you a one-time payment upfront, determined by your home's value. With fixed monthly payments, it’s a predictable way to finance your project.
• Cash-Out Refinance: By refinancing your current mortgage for a higher amount, you can use the extra cash for your ADU. This option avoids taking out a separate loan.
• Renovation Loans: These loans are meant for home improvement projects, including building ADUs, and can cover the cost of construction.
• Private Loans: Some private lenders offer financing tailored for ADU projects, with terms designed to suit your specific needs.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, California laws ensure homeowners can build ADUs even if they live in HOA-governed neighborhoods. Rules from HOAs attempting to block or heavily restrict ADUs are invalid, and penalties may apply to HOAs that enforce them.

Maximizing Profitability in National City

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment, consider these marketing strategies:

• Check Local Rental Rates: Explore rental trends for ADUs in your area to set a competitive price. Use online tools to understand demand and market conditions.
• Collaborate with Real Estate Agents: Work with agents who know your local market. Share information about your ADU to help attract suitable renters or investors.
• Leverage Social Media: Share appealing posts about your ADU on platforms like Instagram and Facebook to connect with renters or buyers and generate interest in your property.

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