Introduction to ADU Investments in Paramount

Why are ADUs popular in California?

In California, ADUs, also known as granny flats, have become a common solution to the state's housing issues. With rising home prices and fewer properties on the market, homeowners can add an ADU to their property to create more space without buying additional land. These units are flexible—they can be rented out to earn extra income or used as affordable housing for family members, like elderly parents or grown children.

How can an ADU increase property value?

Adding an ADU to a property can increase its value by providing additional, practical living space. Whether it's rented, used by family, or turned into a home office, the extra space makes the property more appealing to buyers. In California, homes with ADUs tend to attract more buyers because they offer more living possibilities, which can raise the property's market value.

Is it possible to sell an ADU in Paramount?

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 Paramount, 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 Paramount

We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in Paramount. This ROI doesn't include the acquisition cost for the property. 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 Paramount is a risky investment. 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 Paramount

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 $48,625, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,525. 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 Paramount is estimated at $500. 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 $450,000 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 $58,475 or 15% 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 Norwalk comes with a total cost of $391,525. Financing with a 6.5% interest rate loan results in a monthly payment of $2,475 or $29,700/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 $26,400 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. Get an answer for your property right away!

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Is there financial assistance for building ADUs?

California homeowners have access to the CalHFA ADU Grant Program, which can provide up to $40,000 to assist with expenses such as permits, design, and property assessments for single-family homes. This program has been available since 2021.

Building Your Team for the ADU Project

To build an ADU successfully, it's important to assemble a trustworthy team of experts. After securing the needed funds, make sure your property meets local regulations and size requirements. If you're looking to rent or sell the ADU, collaborating with skilled architects and contractors will help the project stay on track. Working with local ADU specialists can also make the process easier and help prevent unnecessary delays.

What are some other financing options for building an ADU?

Here are some options to fund your ADU project:

• HELOC: Borrow money using your home’s equity as security.
• Home Equity Loan: Receive a lump sum and pay it back in set amounts over time.
• Cash-Out Refinance: Adjust your current mortgage to unlock extra funds.
• Renovation Loans: Loans specifically for home upgrades or construction.
• Private Lenders: These lenders may offer more flexible repayment plans than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, homeowner associations can’t block the construction of an ADU. California laws such as AB 670 and AB 3182 protect your right to build. If an HOA tries to prevent the project, they could face legal consequences.

Maximizing Profitability in Paramount

Marketing Strategies to Increase ADU Investment Returns

To get the most from your ADU, consider these strategies:

• Collaborate with local real estate agents to create appealing listings.
• Provide virtual tours so potential renters or buyers can easily explore the space.
• Promote your property on social media platforms like Instagram and Facebook to increase visibility and attract more interest.

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