Source: abodu
How to Make My ADU a Profitable Investment in Westlake Village?
In Westlake Village, turning ADUs into profitable investments can be challenging. To address this, it's important to focus on effective rental management, controlling expenses, and understanding the local market. By adopting these strategies, an ADU can be developed into a reliable and lucrative income source.
Introduction to ADU Investments in Westlake Village
Why are ADUs popular in California?
As home prices continue to climb and affordable housing becomes harder to find, ADUs provide a practical solution for homeowners looking to maximize their property. These compact units are ideal in areas where new construction is challenging. They can serve as extra living space for elderly family members or adult children, and can also be rented out to bring in additional income.
How can an ADU increase property value?
Adding an ADU increases the livable area of a property, making it more attractive to buyers. Whether it’s used as a rental, a family space, or a home office, the additional space offers more options. In California, homes with ADUs are in high demand, which can lead to a rise in property value.
Is it possible to sell an ADU in Westlake Village?
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 Westlake Village, 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 Westlake Village
We analyzed multiple projects, and we determined that on average you should expect an 81% ROI for an ADU project in Westlake Village. This ROI does not account for the property's acquisition cost. Compared to other areas, this ROI is quite high, making Westlake Village 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 Westlake Village
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 $54,802, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $397,702. 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 Westlake Village is estimated at $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 $720,000 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 $322,298 or 81% 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 Westlake Village comes with a total cost of $397,702. Financing with a 6.5% interest rate loan results in a monthly payment of $2,513 or $30,156/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 $32,400 per year. At this rental income, which gives you a $2,000 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, California has the CalHFA ADU Grant Program, which can offer up to $40,000 to assist with the early stages of building an ADU. This funding can cover expenses like designing plans, obtaining necessary permits, conducting soil tests, and carrying out surveys or energy reviews before starting construction.
Building Your Team for the ADU Project
Once you have the funds, confirm that your property is eligible for an ADU and check if there are any size limitations. If you plan to rent out or invest in the ADU, it's essential to hire qualified professionals, such as architects and contractors. Partnering with local experts can help streamline the process and ensure everything goes smoothly.
What are some other financing options for building an ADU?
Home Equity Line of Credit (HELOC)
This option lets you borrow against your home's value, giving you the ability to take out money when you need it to pay for ongoing project costs.
Refinancing Your Mortgage
You can refinance your existing mortgage for a larger amount, using the extra funds to help finance the construction of your ADU.
Home Improvement Loans
These loans are specifically meant for home upgrades and can be a good way to fund an ADU project.
Home Equity Loan
This gives you a one-time lump sum based on your home's value, which you repay through monthly payments.
Private Loans
Some private lenders specialize in ADU financing and may offer more flexible repayment 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 HOA rules that try to block or restrict ADU construction. If an HOA interferes, their actions are illegal and can be challenged.
Maximizing Profitability in Westlake Village
Marketing Strategies to Increase ADU Investment Returns
To increase the return on your ADU, consider these strategies:
Engage on Social Media
Post content that highlights your ADU to attract potential renters or buyers.
Collaborate with Local Realtors
Use their local connections to reach more interested buyers or tenants.
Offer Virtual Tours
Allow prospective renters or buyers to explore the ADU online, making it easier for them to make a decision.
Get the ADU Analysis to attract buyers and close quickly. It's 10x cheaper.
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