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Why You Should Invest In An ADU


ADU conversion, long beach, california, renovation, remodel, investment, property value
ADU MID-BUILD IN LONG BEACH, CA

WHAT IS AN ADU?

An accessory dwelling unit, or ADU, is a secondary house or apartment typically added to a single-family residential lot. It can be a detached garage or a guest house with a rented apartment above.


Depending on where you live, an ADU will fall under various zoning laws and restrictions. They cost money to construct and maintain, as well as raise monthly utility bills.


The unit cannot be purchased or sold separately, but are frequently used to accommodate a family member or supply extra revenue through rent. For example, if you have a young adult ready to move out on their own, they can move into this small unit to avoid renting an overpriced apartment.


PROS OF ADUS

  1. ADUs will add more space and can become a visitor suite or an office.

  2. ADUs will increase your property value.

  3. ADUs can supply you with passive income, in the form of rent.

  4. You can rent an ADU out as an Airbnb for a higher return on investment.



CONS OF ADUS

  1. An ADU that is used as a rental will require upkeep.

  2. An ADU will increase property taxes, require utilities that add to monthly expenses, and cost money to construct.

  3. An ADU may take up room that could be used for another purpose such as a garage, storage, etc.


INVESTING

Adding an ADU to your property can be one of the wisest decisions a homeowner can make because it will boost your overall property equity. You can also rent your ADU out to a tenant and use that passive income to help pay your mortgage.



ADU conversion, long beach, california, renovation, remodel, investment, property value
COMPLETE ADU IN LONG BEACH, CA

For an ADU to be a profitable investment, you should meet the following requirements:


  1. Maintaining an ADU on your property is a suitable lifestyle for you.

  2. You own the property.

  3. There is demand for rental suites in your area.

  4. There's no owner occupancy clause forcing you to stay on the property.

  5. You have home equity or access to capital to aid your build.


If these prerequisites are met, it's very possible that an ADU could be a promising investment for you! But, there are other questions to regard when looking into building an ADU. We break down the most significant considerations to help you understand whether an ADU is a profitable investment for your property below.


#1 IS IT FEASIBLE?

An ADU can only be an acceptable investment if it's legal to build on your property. An illegal ADU will make it extremely challenging to refinance or sell your property in the future. You can also be at risk of code enforcement actions that could subject you to the removal of your ADU and/or fines.


Luckily, in the state of California, ADUs are now legal. Now, the question of viability revolves around what kind of ADU you're looking to build. Community zoning regulations will clarify whether you'll be required to provide extra on-site parking, what kinds of attached ADUs you can build, and limitations on the area of a detached ADU. Make sure you consider all these before undertaking the next step in your plan.


#2 WHAT IS THE COST?

First things first, when evaluating the cost of your ADU, you should consider what you’re building. An independent ADU can cost as much as a small house costs to construct, while attached ADUs are way less costly. After you have an idea of the scope of the project (size and detached or attached), obtaining bids from multiple respected general contractors with ADU building experience will give you a good picture of how much you will spend.


Be mindful that besides the costs of construction, you'll also be required to pay for land use and building permits, as well as added financing and design fees, or costs from working with an attorney, engineer, or surveyor. Residents tend to underestimate these expenses, therefore it's incredibly crucial to explore options in your area. An experienced contractor, like Stay Forever Construction, will include these in your estimate.


#3 HOW WILL I FINANCE MY ADU?

Financing an ADU tends to be tough. There are a few financing options attainable to help property owners construct ADUs. If you have equity in your property, you may be allowed to refinance and withdraw cash to pay construction costs. If you don't have equity in your property, but maintain a steady income, you may be eligible for a renovation loan.


Using a loan to fund your ADU construction will increase your price because you will pay interest and lending fees. Make sure you do your research and compare alternatives from various lenders.


#4 WHAT'S THE RENTAL MARKET LIKE IN MY COMMUNITY?

If you're considering an ADU for rental income, this is the most important question you need to answer. Your answer will tell you whether or not building an ADU is a smart investment for you. You can check Zillow, Craigslist, and other websites to compare rental prices for ADUs in your area. ADUs tend to bring in higher revenue compared to apartments, due to the increased privacy and proximity to other tenants.


Another way to measure the rental market in your vicinity is by looking up the rental vacancy rate, which is the rate of unoccupied rental units. In a profitable market, the rental vacancy rate hovers at about seven percent. In a market with a significantly low rental vacancy rate, landlords commonly demand more for available units.

If you live in a busy city, like Los Angeles, it is very common for people to list their ADUs on Airbnb. This comes with a cost but is a popular choice because you can multiply your monthly revenue. The upkeep cost is higher, but now you'll be charging nightly, instead of monthly, and can accommodate tourists. For example, an ADU in Northridge can rent for almost $300 a night including cleaning fees. Let's say it's occupied 4 nights a week, that's roughly $1,200 weekly and about $4,800 a month. Which with a lease agreement, would generate around $1,800-2,200 a month.


#5 WILL THERE BE TAX CONCERNS?

An ADU may affect your property tax bill and you may have to pay taxes on any rental income obtained. For more precise details and guidance, speaking with an experienced tax professional will help you completely understand the tax consequences that can come with adding an ADU to your property.


#6 WHAT WILL MY ROI LOOK LIKE?

The return on investment, or ROI, can become high, especially if you're committed to your investment long-term. To begin thinking about your ROI, you can use the following rent-to-cost ratio:

Home Value ÷ (12 x Rental Rate) = Rent-to-Cost Ratio


Rent-to-cost ratio instantly relates to cash flow. The better the rent-to-cost ratio, the better your ROI will be. You should be able to get a fair understanding of your ROI by considering designing costs, ADU construction, permitting, rental rates, and home value.


Note that there are other advantages to building an ADU, even if the financial return may not be as high as other investments. Advantages include; a secure communal area for residents to enjoy, offering reasonable housing, increasing your home equity, and an independent space to unwind, work, or retreat.


Keep in mind that rental prices and construction costs will continue to rise over the years so the time to invest is NOW!


WE HAVE THE EXPERIENCE!

At Stay Forever Inc., our expert specialists understand what's required to provide an immediate, cost-effective, and simple procedure for bringing a new addition to your home. Prior to beginning, our team will organize a free consultation at your property and provide you with an estimate to help you determine whether or not you want to go forward with your project. You will receive the entire cost of building an ADU, including permits and design if needed.



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