Introduction to ADU Investments in Torrance

Why are ADUs popular in California?

With home prices going up and affordable housing becoming scarce, ADUs have become a practical solution for homeowners. These small units help make better use of limited space, especially in areas where building new homes is not an option. They can house aging parents or adult children, or be rented out for extra income.

How can an ADU increase property value?

Adding an ADU creates extra usable space, making a property more attractive to potential buyers. Whether used for renting, family or as an office, the additional space adds more flexibility. In California, homes with ADUs are in high demand, which often increases property value.

Is it possible to sell an ADU in Vernon?

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 Vernon, 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 Vernon

We analyzed multiple projects, and we determined that on average you should expect a 4% ROI for an ADU project in Vernon. 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 Vernon 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 Vernon

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 $45,528, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $388,428. 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 Vernon is estimated at $450. 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 $405,000 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 $16,572 or 4% 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 Vernon comes with a total cost of $388,428. Financing with a 6.5% interest rate loan results in a monthly payment of $2,455 or $29,460/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 $9,600 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.

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 offers assistance through the CalHFA ADU Grant Program, which can provide up to $40,000 to help with the initial costs of building an ADU. This money can be used for things like designing plans, obtaining permits, doing soil tests, or conducting surveys and energy assessments 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 important to hire professionals like architects and builders. Choosing experienced local contractors can help make the process easier and ensure everything runs smoothly.

What are some other financing options for building an ADU?

Using Your Home’s Equity (HELOC)

A Home Equity Line of Credit allows you to borrow against your home's value, taking out funds as needed, and giving you flexibility to cover ongoing expenses.

Refinancing Your Mortgage

By refinancing your current mortgage for a higher amount, you can free up extra cash to help pay for the ADU construction.

Home Improvement Loans

These loans are specifically meant for home renovations and can help pay for building an ADU.

Home Equity Loan

This loan provides a one-time lump sum based on your home’s value, which you pay back with fixed monthly payments.

Private Loans

Some private lenders offer loans specifically for ADU projects, often with more flexible terms than 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 homeowners' associations (HOAs) that try to block or put unnecessary rules on ADU construction. If an HOA tries to stop your project, it’s illegal and can be challenged.

Maximizing Profitability in Vernon

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 content to attract potential buyers or renters.

Partner with Local Realtors

Distribute marketing materials to connect with potential buyers or long-term tenants.

Provide Virtual Tours

Offer online tours to let interested parties explore the ADU without visiting in person, making it easier for them to make a decision quickly.

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