Introduction to ADU Investments in San Marino

Why are ADUs popular in California?

ADUs are becoming a go-to option in California due to the shortage of housing and the rising costs of homes. With limited room for new buildings, adding an ADU allows homeowners to better utilize their property. These units can serve various purposes, such as housing for elderly parents, and young adults, or generating extra income through rentals.

How can an ADU increase property value?

Adding an ADU enhances a property’s worth by increasing its functional space. Whether it’s used for family, rented out, or turned into a workspace, the added area makes the property more attractive to potential buyers. Homes with ADUs are in high demand in California since they offer flexible living options, which can lead to higher selling prices.

Is it possible to sell an ADU in San Marino?

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 Marino, 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 Marino

We analyzed multiple projects, and we determined that on average you should expect a 107% ROI for an ADU project in San Marino. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making San Marino an appealing and promising location for real estate development. 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 Marino

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 $49,083, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,983. 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 Marino is estimated at $900. 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 $810,000 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 $418,017 or 107% 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 Marino comes with a total cost of $391,983. Financing with a 6.5% interest rate loan results in a monthly payment of $2,478 or $29,736/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 $46,800 per year. At this rental income, which gives you only $17,000 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.

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Is there financial assistance for building ADUs?

California provides financial support through the CalHFA ADU Grant Program, which gives qualifying homeowners up to $40,000 to assist with upfront costs for building an ADU. This grant can cover expenses like planning, permits, soil analysis, surveys, and energy reviews required before construction starts.

Building Your Team for the ADU Project

After securing funding, confirm that your property meets the requirements for building an ADU and be aware of any size limitations. If the goal is to rent or use the unit as an investment, you’ll need professionals such as architects and contractors to oversee the work. Connecting with local contractors who have experience with similar projects nearby can also be beneficial, as they may bring valuable knowledge and expertise to your build.

What are some other financing options for building an ADU?

A HELOC allows you to borrow money using your home’s value as collateral, offering flexibility since you can withdraw funds as needed.

A Home Equity Loan provides a lump sum upfront, based on your home’s value, and is paid back in regular installments with fixed terms.

Cash-Out Refinancing replaces your current mortgage with a larger one, letting you access the extra cash to finance your ADU.

Renovation Loans are tailored for home improvement projects and can cover the costs of constructing an ADU.

Private Lender Loans may offer more flexible terms than traditional banks and are often designed specifically for ADU construction.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

California laws, like AB 670 and AB 3182, ensure that Homeowners Associations cannot prohibit or impose unreasonable restrictions on ADUs in areas zoned for single-family homes. Any such HOA rules are invalid and could lead to legal penalties.

Maximizing Profitability in San Marino

Marketing Strategies to Increase ADU Investment Returns

You can increase your ADU's investment potential with these approaches:

• Collaborate with local real estate agents to create meaningful partnerships through tailored outreach materials.
• Provide virtual property tours to make viewing accessible and convenient for potential investors.
• Use social media platforms to share helpful information about ADUs, building credibility and attracting attention from prospective clients.

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