Introduction to ADU Investments in South El Monte

Why are ADUs popular in California?

With housing costs rising and affordable options in short supply, ADUs offer a practical way to address these challenges. In areas where space for new housing is limited, they allow homeowners to maximize their property’s use. ADUs can serve as housing for elderly parents, and adult children, or even as a source of rental income.

How can an ADU increase property value?

Adding an ADU increases a property's value by creating additional, functional living space. Whether it's used for family, rented out, or repurposed as a workspace, this extra space makes a home more desirable. In California, properties with ADUs are especially appealing because of their flexibility, often leading to higher market value.

Is it possible to sell an ADU in South El Monte?

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 South El Montel, 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 South El Monte

We analyzed multiple projects, and we determined that on average you should expect a 15% ROI for an ADU project in South El Monte. 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 South El Monte 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 South El Monte

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 $49,928, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $392,828. 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 South El Monte is estimated at $500. 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 $450,000 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 $57,172 or 15% 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 South El Monte comes with a total cost of $392,828. Financing with a 6.5% interest rate loan results in a monthly payment of $2,482 or $29,784/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 $27,600 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 the CalHFA ADU Grant Program, which provides up to $40,000 to assist with upfront costs for building an ADU. This funding can be used for tasks like preparing designs, obtaining permits, soil testing, surveys, or energy assessments needed before construction begins.

Building Your Team for the ADU Project

After securing funding, confirm that your property meets ADU requirements and check any size restrictions. If you’re considering renting out or investing in the ADU, hiring professionals such as architects and builders is crucial. Collaborating with experienced local contractors can streamline the project and ensure it progresses efficiently.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC): This allows you to borrow against the value of your home and access funds when you need them, giving you flexibility to cover ongoing expenses.

Home Equity Loan: This is a lump-sum loan based on the equity in your home, which you pay back in fixed monthly payments.

Cash-Out Refinancing: With this option, you refinance your existing mortgage for a higher amount and take the extra cash 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 tailored for ADU projects, often with more flexible terms than traditional banks.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

California laws, including AB 670 and AB 3182, protect homeowners from HOAs trying to stop or enforce unreasonable restrictions on ADU construction. If an HOA attempts to prevent an ADU from being built, it’s illegal and could lead to legal action.

Maximizing Profitability in South El Monte

Marketing Strategies to Increase ADU Investment Returns

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

• Partner with local real estate agents: Provide marketing materials designed to attract potential buyers or renters and create connections.
• Host virtual tours: Allow prospective tenants or investors to view the ADU online, saving time and helping them make quicker decisions.
• Share content on social media: Post informative and engaging content related to ADUs on platforms like Instagram and Facebook to raise awareness and build trust with potential customers.

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