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How to Make My ADU a Profitable Investment in Pico Rivera?

Making an ADU in Pico Rivera a profitable project can be tough. Many homeowners face difficulties in increasing rental income, keeping expenses in check, and following local rules. But with the right approach, you can improve your ADU’s financial results. This means setting the right rental price, managing expenses wisely, and making sure you follow the local zoning and building codes. In this article, you'll discover tips to boost the returns on your ADU investment.

Introduction to ADU Investments in Pico Rivera

Why are ADUs popular in California?

Accessory Dwelling Units or ADUs are becoming a popular choice in California because of the state's ongoing housing issues. With high home prices and limited availability, adding an ADU allows homeowners to make the most of their property without needing more land. These units are flexible, offering space for relatives, such as elderly family members or young adults, or providing an opportunity to earn extra income through rentals.

How can an ADU increase property value?

An ADU can increase a property’s value by adding extra, usable space. Whether it’s used for renting, housing a family, or setting up a home office, the added convenience attracts potential buyers. In California, properties with ADUs are especially appealing because they offer more living options, which can raise their market value.

Is it possible to sell an ADU in Pico Rivera?

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 Pico Rivera, 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 Pico Rivera

We analyzed multiple projects, and we determined that on average you should expect a 26% ROI for an ADU project in Pico Rivera. 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 Pico Rivera 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 Pico Rivera

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 $48,444, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,344. 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 Pico Rivera 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 $103,656 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 Pico Rivera comes with a total cost of $391,344. Financing with a 6.5% interest rate loan results in a monthly payment of $2,473 or $29,676/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 $32,400 per year. At this rental income, which gives you a $2,700 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.

Is there financial assistance for building ADUs?

Homeowners in California can apply for the CalHFA ADU Grant Program, which provides up to $40,000 to help cover expenses like permits, designs, and property assessments for single-family homes. This funding has been available since 2021.

Building Your Team for the ADU Project

Building an ADU involves putting together a trustworthy team. Once you’ve secured funding, make sure your property follows local rules and size restrictions. If you plan to rent or sell the ADU, partnering with skilled architects and contractors will help keep things on track. Getting advice from local ADU experts can also make the process smoother and prevent delays.

What are some other financing options for building an ADU?

Here are some ways to finance your ADU project:

Home Equity Line of Credit (HELOC): Borrow money as you need it, using your home’s value as security.
Home Equity Loan: Receive a lump sum loan upfront, then repay it with interest over time.
Cash-Out Refinancing: Refinance your mortgage to unlock extra funds.
Renovation Loans: Loans designed to cover home improvement or construction costs.
Private Lenders: Lenders who may offer more flexible repayment options than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, recent laws (AB 670 in 2019 and AB 3182 in 2020) prevent Homeowners Associations (HOAs) from blocking or setting unreasonable rules on building or using ADUs on properties designated for single-family homes. Any HOA rules that try to restrict ADUs are not valid and could result in penalties.

Maximizing Profitability in Pico Rivera

Marketing Strategies to Increase ADU Investment Returns

To get the most out of your ADU investment in Pico Rivera, try these marketing strategies:

Build Connections: Use tailored materials to network with local real estate professionals, which can lead to potential partnerships.
Provide Virtual Tours: Allow potential investors to explore the property remotely, making it easier for them to check out the space without being there in person.
Share Valuable Information: Use social media platforms like Instagram and Facebook to share useful content about ADU investments, helping you gain credibility and attract potential investors.