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How to Make My ADU a Profitable Investment in Temple City?
Turning an ADU in Temple City into a profitable investment involves tackling challenges such as understanding local regulations, controlling construction costs, and effectively marketing the property. The key to overcoming these issues is to become familiar with Temple City's specific ADU rules, carefully plan and budget for construction to avoid overspending, and use strategic marketing to attract tenants or buyers.
Introduction to ADU Investments in Temple City
Why are ADUs popular in California?
Affordable housing is becoming increasingly difficult to find in California as home prices continue to rise. ADUs offer a practical way for homeowners to address this issue while making better use of their property, especially in areas with limited space for new construction. These units can provide living arrangements for elderly relatives, and adult children, or even serve as a rental income source.
How can an ADU increase property value?
Adding an ADU enhances a property by increasing usable living space, making it more appealing to buyers. Whether it's used as a rental unit, a family home, or a workspace, the added flexibility often makes the property more valuable. In California, the demand for homes with ADUs is particularly strong, frequently leading to higher property prices.
Is it possible to sell an ADU in Temple City?
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 Temple City, 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 Temple City
We analyzed multiple projects, and we determined that on average you should expect a 129% ROI for an ADU project in Temple City. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Temple City 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 Temple City
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 $49,926, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $392,826. 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 Temple City is estimated at $1,000. 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 $900,000 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 $507,174 or 129% 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 Temple City comes with a total cost of $392,826. Financing with a 6.5% interest rate loan results in a monthly payment of $2,483 or $29,796/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 $38,400 per year. At this rental income, which gives you only $8,000 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?
Yes, the state assists with the CalHFA ADU Grant Program, which can offer up to $40,000 to cover the initial costs of building an ADU. This grant can be applied to expenses like drafting designs, obtaining permits, soil testing, or performing surveys and energy evaluations before starting construction.
Building Your Team for the ADU Project
Once the funding is secured, ensure your property meets the criteria for an ADU and review any limitations on size. If you’re planning to rent or use the unit as an investment, hiring skilled professionals like architects and builders is essential. Partnering with experienced local contractors can help keep the project on track and make the entire process more manageable.
What are some other financing options for building an ADU?
Using Your Home’s Value (HELOC)
A Home Equity Line of Credit allows you to borrow money based on your property’s value and withdraw funds as needed, offering flexibility for ongoing costs.
Refinancing Your Mortgage
By refinancing your mortgage for a higher amount (cash-out refinancing), you can use the extra funds to cover the expenses of building an ADU.
Home Renovation Loans
These loans are designed for home improvement projects and can be used specifically to build an ADU.
Home Equity Loan
This option provides a lump sum based on your home’s value, which you repay in fixed monthly payments.
Private Loans
Some private lenders offer financing tailored to ADU construction, often with more adaptable terms compared to traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
California laws like AB 670 and AB 3182 prevent homeowners’ associations from blocking ADU construction or imposing unreasonable restrictions. If an HOA tries to stop you, their actions are illegal and could be challenged.
Maximizing Profitability in Temple City
Marketing Strategies to Increase ADU Investment Returns
To increase the return on your ADU, consider these strategies:
Engage on Social Media
Post helpful ADU-related tips and updates to raise awareness and interest among your target audience.
Work with Local Real Estate Agents
Share materials to attract potential buyers or long-term renters.
Host Online Viewings
Offer virtual tours to let people explore the ADU without needing an in-person visit, making it easier for them to decide.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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