Introduction to ADU Investments in Pomona

Why are ADUs popular in California?

Accessory Dwelling Units or ADUs have become a sought-after solution in California due to the state's ongoing housing shortage. With expensive home prices and limited space, adding an ADU lets homeowners get more from their property without needing extra land. These units are versatile, providing room for family members like seniors or young adults, or offering a chance to generate extra income through renting.

How can an ADU increase property value?

An ADU can raise a property’s value by adding extra, practical space. Whether it's rented out, used to accommodate family, or set up as a home office, the added flexibility makes the property more attractive to potential buyers. In California, homes with ADUs are particularly valuable because they offer more living options, which can increase their market worth.

Is it possible to sell an ADU in Pomona?

In California, AB 1033 allows cities to set guidelines for selling an ADU apart from the main home, similar to how condos are sold, as long as certain conditions are met. In places like Pomona, selling an ADU separately may be possible if specific rules apply, such as when a qualified nonprofit builds it, if there is an agreement for joint ownership, or if the city permits separate ownership of the ADU and the main house.

The ROI for building an ADU in Pomona

We analyzed multiple projects, and we determined that on average you should expect a 28% ROI for an ADU project in Pomona. 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 Pomona 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 Pomona

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 $47,575, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $390,475. 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 Pomona is estimated at $555. 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 $499,500 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 $109,025 or 28% 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 $390,475. Financing with a 6.5% interest rate loan results in a monthly payment of $2,468 or $29,616/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 $27,600 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.

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Is there financial assistance for building ADUs?

California homeowners have the option to apply for the CalHFA ADU Grant Program, which offers up to $40,000 to help with costs such as permits, designs, and property evaluations for single-family homes. This program has been available since 2021.

Building Your Team for the ADU Project

Building an ADU requires gathering a reliable team. After securing funding, ensure your property meets local regulations and size limits. If you intend to rent or sell the ADU, working with experienced architects and contractors will keep your project on track. Consulting local ADU specialists can also help streamline the process and avoid delays.

What are some other financing options for building an ADU?

Here are some options for financing your ADU:

• Home Equity Line of Credit (HELOC): Borrow funds as you need them, using your home's value as collateral.
• Home Equity Loan: Get a lump sum upfront and pay it back with interest over time.
• Cash-Out Refinancing: Refinance your mortgage to access extra money.
• Renovation Loans: Loans specifically for home improvements or construction projects.
• Private Lenders: Lenders who may offer more flexible repayment terms compared to 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 stopping or imposing unfair rules on the construction or use of ADUs on properties meant for single-family homes. Any HOA rules that try to block ADUs are not enforceable and could result in penalties.

Maximizing Profitability in Pico Pomona

Marketing Strategies to Increase ADU Investment Returns

To get the best return from your ADU investment in Pomona, consider these strategies:

• Build Relationships: Use personalized materials to network with local real estate agents, which can help create partnerships.
• Offer Virtual Tours: Let potential investors view the property remotely, making it more convenient for them to explore the space.
• Share Valuable Content: Post useful information about ADU investments on social media platforms like Instagram and Facebook to build credibility and attract more interest.

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