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How to Make My ADU a Profitable Investment in Unincorporated San Diego County?
Building an ADU in Unincorporated San Diego County can be a smart investment, but it can also present some challenges. Homeowners often struggle with making the most of rental income, controlling expenses, and dealing with local rules. However, with the right approach, you can boost the financial success of your ADU. This involves pricing rents correctly, managing costs effectively, and following zoning and building regulations. This article offers useful tips for improving the profitability of your ADU project.
Introduction to ADU Investments in Unincorporated San Diego County
Why are ADUs popular in California?
ADUs, also known as granny flats or backyard cottages, are becoming more popular in California as a solution to the housing crisis. With high home prices and limited new housing options, ADUs allow homeowners to add extra living space without needing additional land. These units can serve many purposes, such as earning rental income, providing affordable housing, or offering space for family members, young professionals, or seniors. They also allow people to stay close to family and remain in their communities.
How can an ADU increase property value?
Adding an ADU can boost a property's value by providing extra living space that can be rented out or used for other purposes. Homes with ADUs are often more attractive to buyers because they offer rental income potential, space for multiple generations, or private areas for work. In California's competitive housing market, having extra space and flexibility makes properties with ADUs more appealing.
Is it possible to sell an ADU in Unincorporated San Diego County?
In California, AB 1033 allows local authorities to create rules for selling an ADU and the main house separately as condos, as long as ADU regulations are followed. In Unincorporated San Diego County, it's possible to sell an ADU separately under certain conditions. The ADU should be built by a qualified nonprofit organization, there must be an agreement between co-owners, or the city must approve selling the ADU and main house as separate condos.
The ROI for building an ADU in Unincorporated San Diego County
We analyzed multiple projects, and we determined that on average you should expect a 56% ROI for an ADU project in Unincorporated San Diego County. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. 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 Unincorporated San Diego County
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 $325, resulting in total hard costs of $292,500. 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 $37,671 covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $330,171. 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 Unincorporated San Diego County is estimated at $571. 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 $513,900 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 $183,728 or 56% ROI. At this level of return, the investment in an ADU to sell it offers a modest return relative to the total project cost and the market value. In addition to the modest 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 Unincorporated San Diego County comes with a total cost of $330,171. Financing with a 6.5% interest rate loan results in a monthly payment of $2,087 or $25,044/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 $41,052 per year. At this rental income, which gives you a $16,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
City rules state that rentals should be for at least 30 days, so short-term stays are not allowed. While renting through sites like Airbnb can bring in extra money during busy times, long-term rentals offer more stable and dependable income. With long-term rentals, you won’t need to keep searching for new tenants, cleaning between stays, or re-advertising the property, leading to steady earnings and less maintenance.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, California offers financial assistance through the CalHFA ADU Grant Program, which started on September 20, 2021. This program provides up to $40,000 to qualified homeowners to help cover the initial costs, such as permits, design, surveys, soil tests, and impact fees. The aim is to make building ADUs more affordable and increase housing availability.
Building Your Team for the ADU Project
Once you've secured funding, make sure your property meets the necessary ADU requirements, including size restrictions. Decide how you plan to use the ADU—whether for renting or other purposes—and hire professionals like architects and contractors to oversee the project. It's a good idea to work with contractors who understand local regulations, which you can identify by looking at similar projects in your area.
What are some other financing options for building an ADU?
1. Home Equity Line of Credit (HELOC)
A HELOC lets you borrow against your home’s value, like using a credit card. You can withdraw money as needed, offering flexibility for ADU costs.
2. Home Equity Loan
This loan gives you a lump sum upfront based on your home's value, with fixed monthly payments, making it a straightforward option to finance your ADU.
3. Renovation Loans
These loans are specifically for home improvements, including ADUs, and can help cover construction costs.
4. Cash-Out Refinance
With this option, you refinance your mortgage for a larger amount and take the difference in cash. This gives you the funds needed for your ADU without taking out a second loan.
5. Private Loans
Private lenders may offer loans designed for ADU building, with terms tailored to your specific needs.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, California laws (AB 670 and AB 3182) prevent homeowners' associations (HOAs) from blocking or setting unreasonable rules for ADUs in single-family homes. If an HOA tries to stop an ADU, their rules will not be enforced, and they could face fines.
Maximizing Profitability in Unincorporated San Diego County
Marketing Strategies to Increase ADU Investment Returns
To increase the profitability of an ADU, try these marketing strategies:
1. Work with Local Realtors
Collaborate with local real estate agents to help attract potential tenants or buyers by providing marketing materials.
2. Understand Local Rental Prices
Research what other ADUs in your area are renting so you can set a competitive price. Online tools can help you analyze local trends and demand.
3. Leverage Social Media
Use platforms like Facebook and Instagram to promote the benefits of your ADU, reaching a larger audience and building trust with potential renters or buyers.
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