The Southwest Builders
How to Make My ADU a Profitable Investment in San Marcos?
If you're looking to make your ADU a profitable investment in San Marcos, you may face challenges like high construction costs, securing financing, and navigating local regulations. To overcome these hurdles, you can focus on strategies that maximize rental income, control costs, and enhance property value. As a homeowner, it is important to learn how to evaluate the market, optimize your investment, and turn your ADU into a profitable venture in San Marcos.
Introduction to ADU Investments in San Marcos
Why are ADUs popular in California?
Accessory dwelling units (ADUs), often called backyard homes or backyard cottages, are becoming a smart way to address California's housing challenges. With high property prices and fewer homes being built, ADUs let homeowners create extra living space without needing more land. These units offer affordable housing options, bring in extra income, and provide convenient living spaces for young adults, families, or seniors who want to stay close to their loved ones and neighborhood.
How can an ADU increase property value?
Adding an ADU can boost a property’s value by creating additional space with various uses. Whether it's for earning rental income, housing family members, or setting up a workspace, the extra space makes the property more appealing. In California’s competitive housing market, homes with ADUs stand out due to their versatility, making them more attractive to buyers and potentially increasing their market value.
Is it possible to sell an ADU in San Marcos?
In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In San Marcos, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.
The ROI for building an ADU in San Marcos
We analyzed multiple projects, and we determined that on average you should expect a 66% ROI for an ADU project in San Marcos. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is high, making San Marcos 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 San Marcos
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 $36,937 covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $329,437. 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 Marcos is estimated at $606. 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 $545,400 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 $215,963 or 66% 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 San Marcos comes with a total cost of $329,437. Financing with a 6.5% interest rate loan results in a monthly payment of $2,082 or $24,984/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 $39,600 per year. At this rental income, which gives you a $14,000 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 has a program called the CalHFA ADU Grant, launched in September 2021, offering up to $40,000 for eligible homeowners. The funds can cover expenses like permits, design work, surveys, soil tests, and related fees. This initiative helps make ADU construction more affordable while expanding housing options statewide.
Building Your Team for the ADU Project
After securing financial support, ensure your property complies with local ADU regulations, including size restrictions. Decide whether the ADU will be rented or used personally, then hire skilled professionals like architects and contractors to handle the project. To find contractors who understand local requirements, look into similar completed projects in your area.
What are some other financing options for building an ADU?
A Home Equity Line of Credit (HELOC) lets homeowners borrow money against their home’s value. It’s like a credit card, allowing you to take out funds as needed during the construction of the ADU.
A Home Equity Loan offers a lump sum of money upfront, based on the value of your home. The loan comes with fixed monthly payments, making it easy to plan and budget.
Cash-out refinancing involves replacing your current mortgage with a larger one. The difference between the old and new loan amounts is given to you as cash, which you can use for building the ADU.
Renovation loans are designed to cover the costs of home improvements, including ADU construction.
Private lender loans are a more customized option, offering terms tailored to your specific ADU project needs.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, California laws protect homeowners from HOA restrictions that would prevent building an ADU. Laws passed in 2019 and 2020 ensure HOAs cannot stop or overly limit ADU construction. Any attempts to do so are not enforceable and could result in penalties.
Maximizing Profitability in Poway
Marketing Strategies to Increase ADU Investment Returns
To make the most of your ADU investment, consider these marketing strategies:
Research rental prices
Check the rental rates for similar ADUs in your area. Use online resources to understand what potential tenants are willing to pay.
Work with real estate agents
Partner with agents who are familiar with the local market. They can help you attract the right renters or buyers.
Use social media
Post attractive photos and information about your ADU on social media platforms like Instagram or Facebook. This will help you reach a larger audience and generate interest.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
Related Articles
ADU Solutions for Aging in Place in San Marcos
All You Need to Know About Building on Properties in San Marcos Under SB-9
Everything You Need to Know About SB-684 Development in San Marcos
How to get your permits fast or the benefits of using SB-423 in San Marcos