Capy Construction
How to Make My ADU a Profitable Investment in South Pasadena?
Making an ADU in South Pasadena a profitable investment involves addressing several challenges. The main issues include understanding local zoning rules, managing construction costs, and ensuring effective marketing. To overcome these, it is essential to familiarize oneself with South Pasadena’s regulations and budget carefully for construction expenses. Additionally, employing targeted marketing strategies can help attract tenants or buyers. This overview will explore how to navigate these aspects to enhance the profitability of an ADU investment.
Introduction to ADU Investments in South Pasadena
Why are ADUs popular in California?
Home prices in California are rising, and affordable housing options are becoming harder to find. ADUs offer a practical way to address these issues. In areas where space for new homes is limited, homeowners can use ADUs to make better use of their property. These units can provide housing for elderly relatives, and adult children, or even be rented out to generate extra income.
How can an ADU increase property value?
Adding an ADU creates more livable space, which makes a property more attractive to potential buyers. Whether used for family, rented, or turned into a workspace, the extra room increases the property's appeal. In California, homes with ADUs are particularly desirable due to their versatility, often leading to a higher market value.
Is it possible to sell an ADU in South Pasadena?
In California, there’s a law called AB 1033 that allows cities to set up rules letting an ADU be sold separately from the main house, similar to how condos are sold, as long as certain conditions are met. In South Pasadena, for example, selling an ADU on its own might be possible if specific conditions are in place, like when a nonprofit builds it, if there’s an agreement for shared ownership, or if the city approves the ADU and main house being owned separately.
The ROI for building an ADU in South Pasadena
We analyzed multiple projects, and we determined that on average you should expect a 107% ROI for an ADU project in South Pasadena. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making South Pasadena 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 South Pasadena
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 $49,083, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $391,983. 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 Pasadena is estimated at $900. 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 $810,000 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 $418,017 or 107% 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 South Pasadena comes with a total cost of $391,983. Financing with a 6.5% interest rate loan results in a monthly payment of $2,478 or $29,736/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 $1,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.
City regulations require rentals to be at least 30 days long, meaning short-term rentals are not allowed. While platforms like Airbnb can bring in extra income during peak times (for example, $600 for a five-night stay), long-term rentals provide more reliable and steady income. With long-term rentals, you won’t have to constantly find new tenants, clean between guests, or re-list the property, resulting in more consistent earnings and less upkeep.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
California has a program called the CalHFA ADU Grant Program, which offers up to $40,000 to help cover the upfront costs of building an ADU. This funding can be used for tasks like creating designs, securing permits, doing soil tests, and conducting surveys or energy checks before construction begins.
Building Your Team for the ADU Project
After securing the funds, confirm that your property meets the requirements for an ADU and check any size restrictions. If you're planning to rent out or invest in the ADU, it’s important to hire professionals such as architects and builders. Choosing experienced local contractors can help ensure the project goes smoothly and efficiently.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC)
This option lets you borrow money using your home's value and gives you the flexibility to take out funds as needed for ongoing expenses.
Cash-Out Refinancing
In this case, you refinance your existing mortgage for a larger amount and use the extra money to help finance your ADU.
Renovation Loans
These loans are specifically for home improvements and can cover the costs of building an ADU.
Home Equity Loan
This is a one-time loan based on the value of your home, which you pay back in fixed monthly installments.
Private Lender Loans
Some private lenders offer loans tailored for ADU projects, often with more flexible terms compared to 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 HOAs trying to block or impose unfair rules on ADU construction. If an HOA attempts to prevent building an ADU, it’s against the law and could lead to legal issues.
Maximizing Profitability in South Pasadena
Marketing Strategies to Increase ADU Investment Returns
To increase the return on your ADU, consider these strategies:
Collaborate with local real estate agents
Share marketing materials to build connections with potential buyers or renters.
Share valuable content on social media
Post informative and engaging content about ADUs on platforms like Instagram and Facebook to generate interest and establish credibility with potential customers.
Provide virtual tours
Allow interested tenants or investors to view your ADU online, making it easier for them to decide quickly.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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