Cali ADU Design+Build
How to Make My ADU a Profitable Investment in Rancho Palos Verdes?
In Rancho Palos Verdes, turning an ADU (Accessory Dwelling Unit) into a profitable investment can be challenging due to market competition and local regulations. The key to success lies in applying effective strategies to boost your ADU's appeal and profitability. To solve this, begin by assessing the demand in your area to ensure there's interest in your ADU. Also, stay updated on local regulations and financial factors to ensure your investment is compliant and financially viable.
Introduction to ADU Investments in Rancho Palos Verdes
Why are ADUs popular in California?
ADUs, or Accessory Dwelling Units, are becoming more popular in California because of the state's ongoing housing crisis. With high home prices and limited space, building an ADU allows homeowners to make the most of their property without needing more land. These units are flexible and can be used for family members, like older relatives or young adults, or as a source of extra income through renting.
How can an ADU increase property value?
An ADU can boost a property's value by adding extra usable space. Whether it’s rented out, used for family, or set up as a home office, the added functionality makes the property more appealing to buyers. In California, homes with ADUs are especially valuable because they provide more living options, which can increase the property’s market price.
Is it possible to sell an ADU in Rancho Palos Verdes?
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 Rancho Palos Verdes, 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 Rancho Palos Verdes
We analyzed multiple projects, and we determined that on average you should expect a 109% ROI for an ADU project in Rancho Palos Verdes. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Rancho Palos Verdes an appealing and promising location for real estate development. 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 Rancho Palos Verdes
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 $45,528, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $388,428. 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 Rancho Palos Verdes is estimated at $900. 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 $810,000 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 $421,872 or 109% 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 Rancho Palos Verdes comes with a total cost of $388,428. Financing with a 6.5% interest rate loan results in a monthly payment of $2,455 or $29,460/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 only $7,700 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 cover costs like permits, design fees, and property assessments for single-family homes. This program has been available since 2021.
Building Your Team for the ADU Project
Building an ADU means putting together a reliable team. After securing funding, make sure your property complies with local rules and size requirements. If you plan to rent or sell the ADU, working with experienced architects and contractors can help keep things on schedule. Seeking advice from local ADU experts can also help make the process smoother and avoid delays.
What are some other financing options for building an ADU?
Here are a few options to fund your ADU project:
Home Equity Line of Credit (HELOC): Borrow money as needed, using the value of your home as collateral.
Home Equity Loan: Take out a lump sum and repay it with interest over time.
Cash-Out Refinancing: Refinance your mortgage to release extra funds.
Renovation Loans: Loans meant for home improvements or construction.
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) stop Homeowners Associations (HOAs) from blocking or creating unfair rules about building or using ADUs on properties zoned for single-family homes. Any rules the HOA sets against ADUs are not valid and could result in penalties.
Maximizing Profitability in Rancho Palos Verdes
Marketing Strategies to Increase ADU Investment Returns
To make the most of your ADU investment in Rancho Palos Verdes, try these strategies:
Build Relationships: Connect with local real estate agents using custom materials to help create potential partnerships.
Offer Virtual Tours: Allow investors to explore the property remotely, making it easier for them to check out the space.
Share Valuable Content: Post informative content about ADU investments on social media platforms like Instagram and Facebook to build your reputation and draw more interest.