ADU HOMES

How to Make My ADU a Profitable Investment in Signal Hill?

Making an ADU a profitable investment in Signal Hill involves overcoming challenges such as understanding local zoning rules and managing construction costs. By leveraging Signal Hill’s favorable ADU policies, carefully budgeting to control expenses, and effectively marketing the ADU, investors can enhance their returns and increase property value. Understanding these strategies will help in maximizing the ADU’s profitability and overall success.

Introduction to ADU Investments in Signal Hill

Why are ADUs popular in California?

In California, where affordable homes are hard to find and prices are high, ADUs present a practical solution. With limited space to build new houses, homeowners can use ADUs to make the most of their property. These units can be used to house family members, such as elderly parents or adult children, or rented out for extra income.

How can an ADU increase property value?

Building an ADU can raise a property's value by adding more functional living space. Whether used for family, rented out, or turned into a home office, the added space makes the property more appealing to potential buyers. In California, homes with ADUs are particularly attractive due to their versatility, which can increase their selling price.

Is it possible to sell an ADU in Signal Hill?

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 Signal Hill, 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 Signal Hill

We analyzed multiple projects, and we determined that on average you should expect a 39% ROI for an ADU project in Signal Hill. 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 Signal Hill is a risky investment. 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 Signal Hill

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 $46,810, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $389,710. 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 Signal Hill is estimated at $600. 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 $540,000 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 $150,290 or 39% 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 Signal Hill comes with a total cost of $389,710. Financing with a 6.5% interest rate loan results in a monthly payment of $2,463 or $29,556/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.

Check if the market value of your ADU covers the construction costs.

Is there financial assistance for building ADUs?

California provides support through the CalHFA ADU Grant Program, which offers up to $40,000 to help cover initial expenses for building an ADU. This money can be used for things like creating plans, securing permits, doing soil tests, and conducting surveys or energy checks before you start construction.

Building Your Team for the ADU Project

Once you have the funding, make sure your property qualifies for an ADU and check if there are any size limits. If you plan to rent out or invest in the ADU, it’s essential to hire experts like architects and builders to manage the project. Working with local contractors familiar with similar projects can make the process more efficient and help things go smoothly.

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 withdraw funds as needed, giving you flexibility to cover ongoing costs.

Home Equity Loan: This is a one-time loan based on your home’s equity, which you pay back through set monthly payments.

Cash-Out Refinancing: This involves refinancing your current mortgage for a larger amount and taking the difference in cash to fund your ADU project.

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

Private Lender Loans: Some private lenders provide loans specifically for ADUs, usually with terms that are more flexible than those offered by traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

California laws like AB 670 and AB 3182 protect homeowners from HOAs that try to block or set unreasonable rules for ADU construction in single-family neighborhoods. If an HOA attempts to stop ADU development, it’s against the law and could lead to legal trouble.

Maximizing Profitability in Signal Hill

Marketing Strategies to Increase ADU Investment Returns

To increase the return on your ADU, consider these strategies:

Work with local real estate agents: Share tailored marketing materials to create connections that could open doors to profitable opportunities.

Offer online tours: Let potential investors view your ADU virtually, saving them time and making it easier to evaluate.

Post useful content on social media: Share valuable ADU-related information on platforms like Instagram and Facebook to generate interest and establish credibility with potential buyers or renters.

Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.

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