Introduction to ADU Investments in West Hollywood

Why are ADUs popular in California?

With rising home prices and fewer affordable options, ADUs offer homeowners a smart way to make the most of their property. These small, efficient units are especially useful in areas where building new homes is difficult. They can provide living space for aging parents or adult children, and can also be rented out for extra income.

How can an ADU increase property value?

Building an ADU adds usable space to a property, which can make it more appealing to potential buyers. Whether it's used for renting, family, or as an office, the added space increases the property's versatility. In California, homes with ADUs are in high demand and often see a rise in value.

Is it possible to sell an ADU in West Hollywood?

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 West Hollywood, 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 West Hollywood

We analyzed multiple projects, and we determined that on average you should expect a 310% ROI for an ADU project in West Hollywood. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making West Hollywood 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 West Hollywood

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 $52,086, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $394,986. 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 West Hollywood is estimated at $1,800. 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 $1,620,000 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 $1,225,014 or 310% 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 West Hollywood comes with a total cost of $394,986. Financing with a 6.5% interest rate loan results in a monthly payment of $2,497 or $29,964/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 $67,200 per year. At this rental income, which gives you $37,000 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 offers financial aid through the CalHFA ADU Grant Program, which can provide up to $40,000 to help with initial costs when building an ADU. This money can be used for tasks like creating designs, getting permits, performing soil tests, and conducting surveys or energy assessments before construction begins.

Building Your Team for the ADU Project

After securing funding, make sure your property qualifies for an ADU and check for any size restrictions. If you plan to rent the unit or use it as an investment, it's important to hire skilled professionals such as architects and contractors. Working with experienced local experts can help keep the project organized and running smoothly.

What are some other financing options for building an ADU?

Using Your Home's Value (HELOC)
A Home Equity Line of Credit lets you borrow against your home's worth, giving you the flexibility to withdraw money as you need it to cover ongoing costs.

Refinancing Your Mortgage
You can refinance your mortgage for a larger amount, using the extra funds to help cover the cost of building an ADU.

Home Renovation Loans
These loans are specifically designed for home improvement projects, making them a good fit for funding an ADU.

Home Equity Loan
This loan gives you a lump sum based on the value of your home, and you pay it back through regular monthly payments.

Private Loans
Some private lenders focus on funding ADU projects and may offer more flexible repayment options 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) that try to block or impose unfair rules on ADU construction. If an HOA tries to interfere, their actions are illegal and can be challenged.

Maximizing Profitability in West Hollywood

Marketing Strategies to Increase ADU Investment Returns

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

Use Social Media
Post relevant content to catch the attention of potential renters or buyers.

Partner with Local Realtors
Tap into their networks to reach more people interested in buying or renting your ADU.

Offer Virtual Tours
Let potential renters or buyers view the ADU online, 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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