Introduction to ADU Investments in Pasadena

Why are ADUs popular in California?

Accessory Dwelling Units, or ADUs, are becoming a go-to option in California due to the state's housing challenges. With high home prices and limited inventory, adding an ADU allows homeowners to maximize their property without needing extra land. These units are versatile, offering space for family members, such as seniors or young adults, or serving as rental units for additional income.

How can an ADU increase property value?

An ADU can make a property more valuable by offering extra usable space. Whether it’s rented out, used for family, or set up as a home office, the added functionality appeals to potential buyers. In California, properties with ADUs are especially attractive because they provide flexible living options, often increasing their overall market value.

Is it possible to sell an ADU in Pasadena?

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 Pasadena, 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 Pasadena

We analyzed multiple projects, and we determined that on average you should expect a 50% ROI for an ADU project in Pasadena. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. 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 Pasadena

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 $48,186, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,086. 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 Pasadena 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 $193,913 or 50% ROI. At this level of return, the investment in an ADU to sell it offers a modest return relative to the total project cost and the market value. In addition to the modest 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 Pasadena comes with a total cost of $391,086. Financing with a 6.5% interest rate loan results in a monthly payment of $2,472 or $29,652/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 $43,800 per year. At this rental income, which gives you a $14,000 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.

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Is there financial assistance for building ADUs?

California homeowners can apply for the CalHFA ADU Grant Program, which offers up to $40,000 to cover costs like permits, design work, and property evaluations for single-family homes. This funding option has been available since 2021.

Building Your Team for the ADU Project

Creating an ADU requires assembling a reliable team. After securing funding, confirm that your property complies with local rules and size limits. If you plan to rent or sell the ADU, working with experienced architects and contractors will keep the project organized. Consulting local ADU experts can also simplify the process and help avoid delays.

What are some other financing options for building an ADU?

Here are some options to fund your ADU project:

• Home Equity Line of Credit (HELOC): Borrow money whenever you need it, using your home’s value as collateral.
• Home Equity Loan: Get a fixed loan amount upfront, and pay it back with interest over time.
• Cash-Out Refinancing: Refinance your mortgage to free up additional funds.
• Renovation Loans: Loans specifically for covering the costs of home improvements or construction.
• Private Lenders: Lenders who might offer more flexible repayment terms than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, homeowners associations (HOA) can't stop you from building an ADU. Laws such as AB 670 and AB 3182 protect your right to do so. If an HOA tries to block the project, it could face legal consequences.

Maximizing Profitability in Pasadena

Marketing Strategies to Increase ADU Investment Returns

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

• Partner with local real estate agents to create attractive listings.
• Provide virtual tours so potential renters or buyers can view the space remotely.
• Advertise on social media platforms like Instagram and Facebook to reach a wider audience and attract more interest.

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