Introduction to ADU Investments in Santa Clarita

Why are ADUs popular in California?

ADUs are a practical solution in California, where housing is scarce and homes are expensive. Since there’s not much space for new buildings, adding an ADU helps homeowners make better use of their property. These units can provide housing for elderly parents or young adults or bring in extra income as rentals.

How can an ADU increase property value?

An ADU increases a home's value by offering additional living space. This extra space can be rented, used by family members, or turned into a home office, making the property more appealing to buyers. In California, homes with ADUs are highly desirable due to their versatility, often resulting in a higher market price.

Is it possible to sell an ADU in Santa Clarita?

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 Santa Clarita, 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 Santa Clarita

We analyzed multiple projects, and we determined that on average you should expect a 26% ROI for an ADU project in Santa Clarita. 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 Santa Clarita 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 Santa Clarita

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 $48,444, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $391,344. 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 Santa Clarita is estimated at $550. 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 $495,000 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 $103,656 or 26% 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 Santa Clarita comes with a total cost of $391,344. Financing with a 6.5% interest rate loan results in a monthly payment of $2,474 or $29,688/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 $31,200 per year. At this rental income, which gives you only $1,500 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.

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Is there financial assistance for building ADUs?

Yes, California helps homeowners through the CalHFA ADU Grant Program, which offers up to $40,000 to cover the initial costs of building an ADU. This funding can be used for essential steps like getting plans drawn, permits issued, soil testing, surveys, and energy assessments before construction begins.

Building Your Team for the ADU Project

Once funding is in place, check if your property qualifies for an ADU and review any size rules. If you’re planning to rent or invest in the unit, it’s a good idea to hire experts like architects and contractors to handle the construction process. Partnering with local contractors familiar with similar projects in your area can also help make the process smoother and more efficient.

What are some other financing options for building an ADU?

• Home Equity Line of Credit (HELOC): This option lets you borrow against the value of your home and use the money as needed, offering flexibility for ongoing expenses.
• Home Equity Loan: A one-time loan amount based on your home’s value, repaid through set monthly payments.
• Cash-Out Refinancing: You can refinance your mortgage for a higher amount and take the difference in cash, which can be used to pay for your ADU.
• Renovation Loans: These loans are designed to cover costs for home improvement projects, including building an ADU.
• Private Lender Loans: Some private lenders provide loans specifically for ADUs, often with more adaptable terms than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

State laws, such as AB 670 and AB 3182, protect homeowners by prohibiting HOAs from stopping or placing unfair limits on ADU construction in single-family neighborhoods. Any attempt to block ADUs violates these laws and may result in legal consequences.

Maximizing Profitability in Santa Clarita

Marketing Strategies to Increase ADU Investment Returns

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

• Build relationships with local real estate agents by sharing customized materials, which can lead to beneficial collaborations.
• Offer online tours of your ADU, allowing interested investors to view the space without needing to visit in person.
• Share insights about ADUs on social media platforms to attract attention and establish trust with potential buyers or renters.

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