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How to Make My ADU a Profitable Investment in San Gabriel?
Making an ADU a profitable investment in San Gabriel can be challenging due to high construction costs, financing issues, and market constraints. However, by leveraging local market data, enhancing property appeal, and optimizing rental strategies, you can overcome these obstacles. In this guide, you'll learn how to navigate the challenges of ADU investment and implement strategies that maximize your returns.
Introduction to ADU Investments in San Gabriel
Why are ADUs popular in California?
ADUs are becoming a popular solution in California because of the limited housing options and high home prices. With little available land for new construction, adding an ADU lets homeowners make better use of their property. These units are flexible, providing living space for family members like older parents or young adults, or creating an opportunity to earn rental income.
How can an ADU increase property value?
Building an ADU can boost a home’s value by increasing its usable space. It can serve as a place for a family, a rental unit, or even a home office, making the property more appealing to buyers. In California, properties with ADUs are especially desirable since they offer more versatile living arrangements, which can result in a higher resale price.
Is it possible to sell an ADU in San Gabriel?
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 Gabriel, 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 Gabriel
We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in San Gabriel. 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 Gabriel 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 Gabriel
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 Gabriel 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 Gabriel 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 $30,000 per year. At this rental income, which gives you only $400 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 has the CalHFA ADU Grant Program, which offers up to $40,000 to eligible homeowners to help cover the initial costs of building an ADU. The grant can be used for things like design, permits, soil tests, surveys, and energy evaluations before construction begins.
Building Your Team for the ADU Project
Once you’ve secured the funds, make sure your property is suitable for building an ADU and check for any size restrictions. If you plan to rent out or use the ADU as an investment, you’ll need to hire experts like architects and contractors to manage the construction process. It’s also a good idea to connect with local contractors, especially those working on similar projects in the area, as they could be well-suited to your ADU project.
What are some other financing options for building an ADU?
A Home Equity Line of Credit (HELOC) lets you borrow money against your home’s value and access it as needed, like a flexible credit option.
A Home Equity Loan gives you a set amount of money upfront based on your home's equity, with fixed monthly payments for repayment.
Cash-Out Refinancing allows you to replace your current mortgage with a larger one and take the difference in cash, making it a convenient way to finance your ADU project.
Renovation Loans are specifically designed for home improvements and can be used to fund the construction of an ADU.
Private Lender Loans may provide more adaptable terms than traditional banks, catering specifically to ADU construction 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 from blocking or enforcing unfair rules against ADUs on single-family zoned properties. Any attempt to restrict ADU construction through HOA guidelines is unenforceable and could result in legal consequences.
Maximizing Profitability in San Gabriel
Marketing Strategies to Increase ADU Investment Returns
You can increase your ADU's investment potential with these approaches:
Build Local Connections: Collaborate with nearby real estate agents by sharing targeted materials, which could open doors to partnerships.
Offer Online Property Tours: Use virtual walkthroughs to attract interest from investors who prefer a convenient way to explore the property.
Educate Through Social Media: Share tips and insights about ADUs on platforms like Instagram or Facebook to build trust and gain attention.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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