Introduction to ADU Investments in Rolling Hills

Why are ADUs popular in California?

ADUs, or accessory dwelling units are becoming a go-to option in California because of the ongoing housing challenges. With high home prices and limited land, building an ADU allows homeowners to make better use of their existing property without needing more land. These spaces are flexible, providing housing for family members like elderly parents or young adults, or offering a chance to earn extra income through renting.

How can an ADU increase property value?

Adding an ADU can boost a property’s value by providing more usable space. Whether it's rented out, used for family, or set up as a home office, the extra functionality makes the property more appealing to potential buyers. In California, homes with ADUs are especially attractive because they offer more living options, which can increase the property’s value on the market.

Is it possible to sell an ADU in Rolling Hills?

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 Rolling Hills, 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 Rolling Hills

We analyzed multiple projects, and we determined that on average you should expect a 174% ROI for an ADU project in Rolling Hills. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Rolling Hills an appealing and promising location for real estate development. 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 Rolling Hills

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 $50,646, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $393,546. 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 Rolling Hills is estimated at $1,200. 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 $1,080,000 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 $686,454 or 174% 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 Rolling Hills comes with a total cost of $393,546. Financing with a 6.5% interest rate loan results in a monthly payment of $2,487 or $29,844/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 only $2,500 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?

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

Building Your Team for the ADU Project

Building an ADU requires putting together a reliable team. Once you secure funding, make sure your property follows local guidelines and size restrictions. If you plan to rent or sell the ADU, partnering with experienced architects and contractors will help keep the project on track. Getting advice from local ADU professionals can also help streamline the process and avoid setbacks.

What are some other financing options for building an ADU?

Here are some ways you can pay for your ADU project:

1. Home Equity Line of Credit (HELOC): Borrow money as you need it, using your home’s value as collateral.

2. Home Equity Loan: Take out a fixed amount of money and repay it with interest over time.

3. Cash-Out Refinancing: Refinance your mortgage to release additional funds.

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

5. Private Lenders: Lenders who may offer more flexible payment terms 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 imposing unfair rules on the construction or use of ADUs on properties zoned for single-family homes. Any restrictions they try to enforce on ADUs are not legal and could result in penalties.

Maximizing Profitability in Rolling Hills

Marketing Strategies to Increase ADU Investment Returns

• Network: Contact local real estate agents with custom marketing materials to explore partnership opportunities.
• Offer Virtual Tours: Allow potential investors to tour the property online, making it more convenient for them.
• Share Useful Content: Post valuable information about ADU investments on social media platforms like Instagram and Facebook to strengthen your credibility and attract more interest.

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