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How to Make My ADU a Profitable Investment in Sierra Madre?
To make an ADU a profitable investment in Sierra Madre, it’s essential to address challenges such as navigating local regulations and managing construction costs. The solution involves taking advantage of Sierra Madre’s supportive ADU policies, planning carefully to keep expenses under control, and ensuring effective tenant management. By focusing on these strategies, investors can enhance their ADU's profitability and overall property value.
Introduction to ADU Investments in Sierra Madre
Why are ADUs popular in California?
In California, where affordable housing is limited and homes are expensive, ADUs offer a practical solution. With little space available for new homes, adding an ADU allows homeowners to make better use of their existing land. These units can provide housing for family members, like aging parents or grown children, or be rented out to generate extra income.
How can an ADU increase property value?
Adding an ADU increases a property’s value by providing additional usable space. Whether it’s used by the family, rented out, or converted into a workspace, the extra square footage makes the home more attractive to potential buyers. In California, homes with ADUs are highly sought after due to their flexibility, often leading to higher sale prices.
Is it possible to sell an ADU in Sierra Madre?
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 Sierra Madre, 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 Sierra Madre
We analyzed multiple projects, and we determined that on average you should expect a 117% ROI for an ADU project in Sierra Madre. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Sierra Madre 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 Sierra Madre
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 $51,765, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $394,665. 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 Sierra Madre is estimated at $950. 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 $855,000 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 $460,335 or 117% 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 Sierra Madre comes with a total cost of $394,665. Financing with a 6.5% interest rate loan results in a monthly payment of $2,494 or $29,928/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 $58,800 per year. At this rental income, which gives you only $29,000 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.
Is there financial assistance for building ADUs?
California offers help through the CalHFA ADU Grant Program, providing up to $40,000 to cover the early costs of building an ADU. This funding can be used for tasks such as drawing up plans, obtaining permits, conducting soil tests, and completing necessary surveys and energy checks before construction begins.
Building Your Team for the ADU Project
After securing funding, confirm that your property meets the requirements for an ADU and check for any size restrictions. If you intend to rent or invest in the ADU, it’s important to hire professionals like architects and contractors to oversee the project. Collaborating with local contractors who have experience with similar projects can help ensure everything runs smoothly.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC): This option allows you to borrow money based on your home’s value and take out funds as needed, offering flexibility for ongoing expenses.
Home Equity Loan: A lump sum loan based on the equity in your home, which is repaid with fixed monthly payments.
Cash-Out Refinancing: This involves refinancing your current mortgage for a larger amount, giving you the extra cash to use for your ADU project.
Renovation Loans: Loans specifically designed for home improvements, can help cover the costs of building an ADU.
Private Lender Loans: Some private lenders offer loans specifically for ADU projects, often with more flexible repayment terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
California laws, such as AB 670 and AB 3182, protect homeowners from Homeowners Associations (HOAs) that try to stop or impose unreasonable limits on ADUs in single-family neighborhoods. Any HOA attempt to block ADU construction is illegal and could lead to legal consequences.
Maximizing Profitability in Sierra Madre
Marketing Strategies to Increase ADU Investment Returns
To increase the return on your ADU investment, try these approaches:
Collaborate with local real estate agents: Share customized marketing materials to build relationships that could lead to valuable opportunities.
Offer virtual tours: Allow potential investors to explore your ADU online, making it easier for them to view the property without visiting in person.
Share helpful content on social media: Post informative content about ADUs on platforms like Instagram and Facebook to attract attention and build trust with potential buyers or renters.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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