Introduction to ADU Investments in Torrance

Why are ADUs popular in California?

Rising housing costs and a lack of affordable options have made ADUs an attractive choice for homeowners. These small units maximize existing property space, especially in crowded areas where new homes can't be built. They can serve as housing for elderly parents, and adult children, or as a source of extra income through renting.

How can an ADU increase property value?

Building an ADU adds functional living space, which increases the property’s appeal to potential buyers. Whether it’s rented out, used by family, or turned into a workspace, this additional space adds versatility. In California, homes with ADUs are in high demand, often leading to higher property values.

Is it possible to sell an ADU in Torrance?

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 Torrance, 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 Torrance

We analyzed multiple projects, and we determined that on average you should expect a 119% ROI for an ADU project in Torrance. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Torrance an appealing and promising location for real estate development. 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 Torrance

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 $46,658, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $389,558. 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 Torrance 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 $465,442 or 119% 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 Torrance comes with a total cost of $389,558. Financing with a 6.5% interest rate loan results in a monthly payment of $2,462 or $29,544/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 $33,600 per year. At this rental income, which gives you only $4,000 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.

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Is there financial assistance for building ADUs?

Yes, California provides support through the CalHFA ADU Grant Program, which offers up to $40,000 to help cover the early costs of building an ADU. This funding can go toward designing plans, getting permits, conducting soil tests, or carrying out surveys and energy checks before construction begins.

Building Your Team for the ADU Project

After securing funding, confirm your property qualifies for an ADU and check for any size restrictions. If you aim to rent out the unit or use it as an investment, it’s wise to hire experts like architects and builders. Working with knowledgeable local contractors can simplify the process and ensure the project runs smoothly.

What are some other financing options for building an ADU?

Using Your Home’s Equity (HELOC)
A Home Equity Line of Credit lets you borrow money against your home’s value and take out what you need as costs arise, giving you flexibility.

Refinancing Your Mortgage
By refinancing your mortgage for a higher amount, you can access extra funds to cover the costs of building an ADU.

Home Improvement Loans
These loans are designed specifically for renovation projects and can be used to finance the construction of an ADU.

Home Equity Loan
This loan gives you a lump sum based on your home’s value, which you pay back through fixed monthly payments.

Private Loans
Some private lenders specialize in loans for ADU projects, offering more flexible terms than 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 homeowners' associations (HOAs) trying to block or restrict ADU construction. If an HOA attempts to prevent construction, its actions are illegal and can be contested.

Maximizing Profitability in Torrance

Marketing Strategies to Increase ADU Investment Returns

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

Be Active on Social Media
Share useful ADU-related content to draw attention and interest from potential customers.

Collaborate with Local Realtors
Distribute marketing materials to connect with buyers or long-term renters.

Offer Virtual Tours
Provide online tours of the ADU to let potential tenants or buyers explore the space without having to visit in person, making decision-making quicker.

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