Introduction to ADU Investments in Santa Fe Springs

Why are ADUs popular in California?

In California, where affordable housing is limited and home prices are high, ADUs offer a smart solution. With limited land for new homes, adding an ADU allows homeowners to make the most of their existing space. These units can be used to house family members, such as aging parents or young adults, or even rented out to generate extra income.

How can an ADU increase property value?

Adding an ADU can raise a property's value by providing more usable space. Whether it's rented out, used for family, or turned into a home office, the extra square footage makes the property more attractive to potential buyers. In California, homes with ADUs are in high demand because of their flexibility, which can lead to a higher selling price.

Is it possible to sell an ADU in Santa Fe Springs?

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 Fe Springs, 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 Fe Springs

We analyzed multiple projects, and we determined that on average you should expect a 5% ROI for an ADU project in Santa Fe Springs. 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 Fe Springs 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 Fe Springs

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 $43,530, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $386,430. 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 Fe Springs is estimated at $450. 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 $405,000 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 $18,570 or 5% 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 Fe Springs comes with a total cost of $386,430. Financing with a 6.5% interest rate loan results in a monthly payment of $2,443 or $29,316/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?

California offers support through the CalHFA ADU Grant Program, providing up to $40,000 to help with the upfront costs of building an ADU. This funding can cover necessary tasks such as drawing up plans, obtaining permits, conducting soil tests, and completing surveys and energy assessments before you begin construction.

Building Your Team for the ADU Project

Once you’ve secured the funding, ensure your property meets the requirements for an ADU and check for any size restrictions. If you plan to rent or use the ADU for investment, it’s important to hire professionals, like architects and contractors, to oversee the construction. Working with local contractors who have experience with similar projects in your area can also help streamline the process.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC): This allows you to borrow against your home’s value and access funds whenever you need them, providing flexibility for ongoing expenses.

Home Equity Loan: This is a lump-sum loan based on your home’s value, which you repay through fixed monthly payments.

Cash-Out Refinancing: By refinancing your mortgage for a larger amount, you can take the difference in cash and use it to finance your ADU.

Renovation Loans: These loans are specifically for home improvements and can help cover the cost of building an ADU.

Private Lender Loans: Some private lenders offer loans designed for ADU projects, often with terms that are more flexible than those from traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

California laws, such as AB 670 and AB 3182, prevent homeowners associations (HOAs) from blocking or imposing unfair restrictions on ADUs in single-family residential areas. Any attempt by an HOA to stop ADU construction is illegal and could result in legal action.

Maximizing Profitability in Santa Clarita

Marketing Strategies to Increase ADU Investment Returns

To boost the potential return on your ADU investment, consider these strategies:

• Partner with local real estate agents: Share targeted marketing materials to build relationships that may lead to fruitful collaborations.
• Provide virtual tours: Make it easier for potential investors to explore your ADU online, saving them time and effort.
• Share valuable content on social media: Posting helpful information about ADUs on platforms like Instagram and Facebook can attract attention and build credibility.

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