Introduction to ADU Investments in Redondo Beach

Why are ADUs popular in California?

ADUs, or Accessory Dwelling Units, are becoming a popular choice in California due to the state’s housing issues. With high home prices and limited land, adding an ADU helps homeowners make the most of their property without needing extra space. These units are versatile, offering room for family members, like older relatives or young adults, or providing a way to earn extra income through renting.

How can an ADU increase property value?

An ADU can increase a property’s value by adding extra, functional space. Whether it’s rented out, used for family, or turned into a home office, the added versatility makes the property more attractive to buyers. In California, homes with ADUs are especially desirable because they offer more living options, which can raise the property’s market value.

Is it possible to sell an ADU in Redondo Beach?

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 Redondo Beach, 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 Redondo Beach

We analyzed multiple projects, and we determined that on average you should expect a 61% ROI for an ADU project in Redondo Beach. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Redondo Beach 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?

Please enter a valid address

Case study: 900 sq. ft. ADU built in Redondo Beach

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 $47,667, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $390,567. 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 Redondo Beach is estimated at $700. 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 $630,000 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 $239,433 or 61% 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 Redondo Beach comes with a total cost of $390,567. Financing with a 6.5% interest rate loan results in a monthly payment of $2,469 or $29,628/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 $46,800 per year. At this rental income, which gives you only $17,000 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.

Please enter a valid address

Is there financial assistance for building ADUs?

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

Building Your Team for the ADU Project

Creating an ADU requires assembling a dependable team. Once you have funding, make sure your property meets local rules and size limits. If you plan to rent or sell the ADU, working with experienced architects and contractors can help keep everything on track. Consulting local ADU experts can also make the process easier and help avoid delays.

What are some other financing options for building an ADU?

Here are a few options to fund your ADU project:

1. Home Equity Line of Credit (HELOC): Borrow funds as you need them, using your home’s value as security.

2. Home Equity Loan: Borrow a set amount of money and pay it back over time, with interest.

3. Cash-Out Refinancing: Refinance your home loan to free up extra cash.

4. Renovation Loans: Loans specifically for home repairs or construction.

5. Private Lenders: Lenders who may offer more flexible repayment plans compared to 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 Redondo Beach

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment in Redondo Beach, try these strategies:

• Build Relationships: Reach out to local real estate agents with personalized materials to create potential partnerships.
• Offer Virtual Tours: Let investors explore the property remotely, making it easier for them to view the space.
• Share Valuable Content: Post helpful content about ADU investments on social media like Instagram and Facebook to build your reputation and attract more interest.

Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.

Please enter a valid address

Related Articles

ADU Solutions for Aging in Place in Redondo Beach

All You Need to Know About Building on Properties in Redondo Beach Under SB-9

Everything You Need to Know About SB-684 Development in Redondo Beach

How to get your permits fast or the benefits of using SB-423 in Redondo Beach

What are the requirements to build ADU in Redondo Beach?

More articles ...

Resources

Redondo Beach Municipal Code