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How to Make My ADU a Profitable Investment in Rosemead?
Making an ADU in Rosemead a profitable investment can be challenging. To address this, focusing on strategic upgrades, understanding local market trends, and implementing effective management practices can significantly enhance profitability. This approach involves selecting the right improvements, staying informed about market demands, and maintaining the property’s appeal to maximize returns.
Introduction to ADU Investments in Rosemead
Why are ADUs popular in California?
ADUs are becoming increasingly popular in California due to the housing shortage and high home prices. Since available land is limited, building an ADU allows homeowners to maximize the use of their current property. These units are versatile, offering housing for relatives like aging parents or young adults, or providing an opportunity to generate extra income through renting.
How can an ADU increase property value?
Adding an ADU can increase a property's value by adding more functional space. Whether used for family, rented out, or turned into a home office, the added space makes the property more attractive to buyers. In California, homes with ADUs are in high demand because they offer more living options, which can raise the property's market value.
Is it possible to sell an ADU in Rosemead?
In California, AB 1033 gives cities the option to create rules that allow an ADU to be sold separately from the main house, much like how condos are sold, as long as certain requirements are met. For example, in places like Rosemead, selling an ADU separately might be possible if certain conditions are met, such as when a nonprofit organization builds it, if there’s a shared ownership agreement, or if the city approves separate ownership for the ADU and the main house.
The ROI for building an ADU in Rosemead
We analyzed multiple projects, and we determined that on average you should expect a 106% ROI for an ADU project in Rosemead. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Rosemead 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 Rosemead
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 $50,402, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $393,302. 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 Rosemead 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 $416,698 or 106% 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 Rosemead comes with a total cost of $393,302. Financing with a 6.5% interest rate loan results in a monthly payment of $2,486 or $29,832/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 $31,200 per year. At this rental income, which gives you only $1,000 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.
Is there financial assistance for building ADUs?
In California, homeowners can apply for the CalHFA ADU Grant Program, which offers up to $40,000 to cover costs like permits, design, and property evaluations for single-family homes. This program has been around since 2021.
Building Your Team for the ADU Project
Creating an ADU involves putting together a trusted team of professionals. After securing funding, make sure your property follows local rules and size limits. If you plan to rent or sell the ADU, working with experienced architects and contractors can help keep the project moving smoothly. Seeking advice from local ADU experts can also help make the process easier and prevent issues.
What are some other financing options for building an ADU?
Here are some ways you can pay for your ADU project:
Home Equity Line of Credit (HELOC)
Borrow funds as needed, using your home’s value as security.
Home Equity Loan
Get a lump sum of money, which you’ll pay back in installments with interest.
Cash-Out Refinancing
Refinance your mortgage to access extra cash.
Renovation Loans
Loans designed specifically for home improvements or new builds.
Private Lenders
Lenders might offer more flexible 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 making unfair rules about the construction or use of ADUs on properties zoned for single-family homes. Any restrictions they try to impose are not valid and could lead to penalties.
Maximizing Profitability in Rosemead
Marketing Strategies to Increase ADU Investment Returns
Network
Connect with local real estate agents using custom marketing materials to explore potential collaborations.
Offer Virtual Tours
Give potential investors the chance to view the property online for more convenience.
Share Helpful Content
Post informative content about ADU investments on social media platforms like Instagram and Facebook to build trust and attract more interest.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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