Introduction to ADU Investments in Whittier

Why are ADUs popular in California?

Accessory Dwelling Units (ADUs), often called granny flats or backyard cottages, are becoming more common in California due to the housing crisis. With rising home prices and fewer new homes being built, ADUs offer a practical way for homeowners to add extra living space without needing more land. They provide affordable housing options, extra income through rentals, and flexible living arrangements for groups like young professionals, families, and seniors. ADUs also allow people to stay connected to family and their communities.

How can an ADU increase property value?

Adding an ADU can make a property more valuable by creating additional rentable space, which is appealing to buyers looking for income opportunities or adaptable living setups. In California, homes with ADUs tend to have higher values because they offer flexibility for uses like rentals, family accommodations, or even a home office. By increasing the functional space on the property, an ADU makes it more desirable in the competitive housing market.

Is it possible to sell an ADU in Whittier?

In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In Whittier, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.

The ROI for building an ADU in Whittier

We analyzed multiple projects, and we determined that on average you should expect a 37% ROI for an ADU project in Whittier. 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 Whittier 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 Whittier

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 $51,493, covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $394,393. 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 Whittier is estimated at $600. 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 $540,000 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 $145,607 or 37% 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 Whittier comes with a total cost of $394,393. Financing with a 6.5% interest rate loan results in a monthly payment of $2,492 or $29,904/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 $31,200 per year. At this rental income, which gives you a $1,000 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?

California offers financial support through the CalHFA ADU Grant Program, which, starting September 20, 2021, provides up to $40,000 for eligible homeowners. This funding covers early expenses like permits, design planning, surveys, soil analysis, and impact fees, making it easier for homeowners to start building an ADU and expanding housing options.

Building Your Team for the ADU Project

Once funding is secured, check if your property qualifies for an ADU and understand size restrictions. Determine the purpose of the ADU, whether for renting or personal use and hire professionals such as architects and contractors to take care of the design and construction. It’s often helpful to work with local contractors who are familiar with the area’s building rules, and you can find potential hires by observing ongoing construction projects in your neighborhood.

What are some other financing options for building an ADU?

Using a Home Equity Line of Credit (HELOC):
A HELOC lets you borrow against your home's equity and works like a credit card. You can withdraw funds as needed, making it a flexible choice for covering ADU expenses.

Home Equity Loan:
This option provides a lump sum upfront based on the value of your home’s equity. With fixed monthly payments, it’s a predictable way to finance an ADU.

Cash-Out Refinancing:
Refinance your existing mortgage for a larger amount and use the extra cash for the ADU project, avoiding the need for additional loans.

Renovation Loans:
Tailored specifically for home improvement projects, these loans can help fund ADU construction costs.

Private Lenders:
Some private lenders offer customizable loans designed for ADU construction, providing more flexible terms to fit your project.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, under California laws AB 670 and AB 3182, HOAs cannot impose unreasonable rules or deny ADU construction on single-family properties. Attempts to enforce such restrictions are invalid and may lead to penalties.

Maximizing Profitability in Whittier

Marketing Strategies to Increase ADU Investment Returns

To maximize returns on an ADU investment, consider these marketing strategies:

Know the Local Market: Research rental rates for ADUs nearby using online tools to price yours competitively and attract tenants.

Work with Realtors: Build relationships with real estate agents who can help connect you with renters or buyers interested in properties with ADUs.

Promote Online: Use social media platforms to share posts about the benefits of ADUs, creating interest among potential renters and building credibility.

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