Introduction to ADU Investments in San Fernando

Why are ADUs popular in California?

ADUs are becoming more popular in California due to the ongoing shortage of housing and the high cost of homes. Since there isn’t much land left to build on, adding an ADU helps homeowners maximize the space they already have. These units can house family members, like aging parents or young adults, or be rented out to earn extra money.

How can an ADU increase property value?

Adding an ADU can raise a property’s value by adding extra living space. Whether it’s used for family, rented out, or turned into a home office, the added space makes the property more attractive to potential buyers. In California, homes with ADUs are in high demand because they offer more living options, which can increase the property’s value when it’s sold.

Is it possible to sell an ADU in San Fernando?

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 Fernando, 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 Fernando

We analyzed multiple projects, and we determined that on average you should expect a 36% ROI for an ADU project in San Fernando. 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 Fernando is a risky investment. 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 San Fernando

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 $49,216, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $392,116. 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 Fernando is estimated at $594. 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 $534,600 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 $142,484 or 36% 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 Fernando comes with a total cost of $392,116. Financing with a 6.5% interest rate loan results in a monthly payment of $2,478 or $29,730/year. Ideally, renting out the main house could cover the loan payment, while the ADU provides additional rental income. However, renting out a 2-bedroom, 1-bath ADU long-term in this city could only generate approximately $28,800 annually. At this level of income, the ADU alone would not generate a profit, as its rental income would still fall short of covering its costs.

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.

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Is there financial assistance for building ADUs?

Yes, California offers the CalHFA ADU Grant Program, which gives up to $40,000 to qualified homeowners to cover the initial costs of building an ADU on their property. The grant can be used for expenses such as design, permits, soil testing, fees, surveys, and energy assessments needed before you can start building.

Building Your Team for the ADU Project

After securing the necessary funds, confirm that your property is eligible for an ADU and check for any size restrictions. If you plan to rent or use the ADU for investment, you’ll need to hire professionals like architects and contractors to handle the construction. It’s also a good idea to reach out to local contractors, especially those working on similar projects nearby, as they may be a good fit for your ADU project.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC): This allows you to borrow money based on your home's value, similar to a credit card. You can borrow as needed, offering flexibility for your ADU project.

Home Equity Loan: You can borrow a fixed amount based on your home's value and repay it in regular, predictable installments.

Cash-Out Refinancing: This option involves refinancing your mortgage for a higher amount, letting you take out the difference in cash. It’s an easy way to fund your ADU without applying for a separate loan.

Renovation Loans: These loans are designed for home upgrades and can 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 those from 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 the construction of ADUs on properties zoned for single-family homes. Any HOA rules that try to prevent ADUs are not valid and could lead to penalties.

Maximizing Profitability in San Fernando

Marketing Strategies to Increase ADU Investment Returns

To maximize returns on an ADU investment in San Fernando, consider these marketing strategies:

Build Relationships: Use customized marketing materials to connect with local real estate agents, potentially leading to valuable partnerships.

Provide Virtual Tours: Make it easier for investors to view the property remotely through virtual tours, saving them time.

Share Valuable Insights: Post helpful information about ADU investments on social media platforms like Instagram and Facebook to build credibility and attract more interest.

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