Cali ADU Design+Build
How to Make My ADU a Profitable Investment in San Dimas?
Due to competition and market dynamics, investing in an accessory dwelling unit (ADU) in San Dimas can be challenging. The key to profitability lies in selecting the right property, optimizing rental features, and targeting the right tenants. To address these challenges, focus on property locations with high demand and low competition. Improve your ADU with modern amenities and attractive features to command higher rents. By implementing strategic property choices, you can significantly boost your investment’s profitability and secure a steady income stream in San Dimas.
Introduction to ADU Investments in San Dimas
Why are ADUs popular in California?
ADUs are gaining popularity in California because of the ongoing housing shortage and high real estate prices. With limited land available, building an ADU allows homeowners to make the most of their existing space. These units can be used for family members, like elderly parents or young adults, or rented out for extra income.
How can an ADU increase property value?
Adding an ADU can boost the value of a property by increasing its usable space. Whether it's used by the family, rented, or turned into a home office, the extra room makes the property more appealing to potential buyers. In California, properties with ADUs are highly sought after because they offer more living options, which can increase the property’s resale value.
Is it possible to sell an ADU in San Dimas?
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 San Dimas, 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 San Dimas
We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in San Dimas. The ROI does not account for the property's acquisition cost. This ROI value is low and it signals a risky investment. Consequently, unless you have personal goals you want to achieve, we consider that an ADU project in San Dimas is a risky investment. 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 San Dimas
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 $47,576, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $390,476. 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 San Dimas is estimated at $500. 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 $450,000 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 $59,524 or 15% ROI. At this level, building an ADU to sell it provides a relatively low return compared to both the costs and the market value. In addition to the low 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 San Dimas comes with a total cost of $390,476. Financing with a 6.5% interest rate loan results in a monthly payment of $2,468 or $29,616/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 $42,000 per year. At this rental income, which gives you only $12,000 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?
Yes, California offers financial help through the CalHFA ADU Grant Program. This program provides up to $40,000 to eligible homeowners to assist with the upfront costs of building an ADU on a single-family property. The grant covers expenses like design plans, permits, soil testing, fees, surveys, and energy assessments needed before construction can begin.
Building Your Team for the ADU Project
Once you have the funding, make sure your property allows for an ADU and check for any size restrictions. If you plan to rent or use the ADU as an investment, hire professionals like architects and contractors to manage the construction. It's also helpful to connect with local contractors who are familiar with the area, especially those working on nearby projects, as they might be a good fit for your ADU.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC): This lets you borrow money based on your home's value, much like a credit card. You can take out money as needed, making it a flexible choice for ADU projects.
Home Equity Loan: You borrow a fixed amount of money, based on your home’s value, with a set monthly repayment schedule. It’s straightforward and predictable.
Cash-Out Refinancing: This option involves refinancing your mortgage for a higher amount, allowing you to take out the extra cash. It’s an easy way to get money for an ADU without taking out a separate loan.
Renovation Loans: These loans are designed for home improvements and can be used to cover the cost of building an ADU.
Private Lender Loans: Some private lenders offer loans specifically for ADU construction, often with more flexible 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 unreasonable rules on the construction of ADUs on properties designated for single-family homes. Any attempts to block ADUs are not enforceable and could result in penalties.
Maximizing Profitability in San Dimas
Marketing Strategies to Increase ADU Investment Returns
To maximize returns on an ADU investment in San Dimas, consider these marketing strategies:
Network Smartly: Use tailored marketing materials to connect with local real estate agents, which can lead to valuable partnerships.
Offer Virtual Tours: Make it easier for potential investors to view the property remotely through virtual tours, saving them time and effort.
Share Knowledge: Post helpful content about ADU investments on social media platforms like Instagram and Facebook to build trust and attract more potential investors.
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