Many California homeowners are interested in building an ADU on their property as a means of generating income. Cities such as San Francisco, San Jose, and Los Angeles have both astronomical rent prices and huge demand for housing. Homeowners in these cities are maximizing their properties by adding accessory dwelling units and renting them out for additional income.
Due to low interest rates and new California legislation, this option has become more appealing and accessible than ever. As of January 1st, 2020, homeowners in the state no longer need to occupy the primary house on their property in order to build and rent out an additional accessory dwelling unit. This allows for the possibility of generating rental income both from the primary home and the ADU.
Are you curious to know if an ADU would be a worthwhile investment for you? Below I’ve outlined some important things to consider when determining whether building an ADU for rental revenue is the right move for you:
Return on Investment
Obviously, the most important consideration for someone looking to invest is the difference between annual gross income and the cost of constructing your unit. In areas with rent prices as high as those in the San Francisco Bay Area, the break-even point can be as little as a few years.
If you’re looking for a good place to start calculating your return on investment, check out this convenient calculator:
When investing in an ADU, it is important to choose a provider who will guarantee you a flat rate. This will make forecasting much more accurate as you will know exactly how much your project will cost from the get go. Once you know this amount and the average monthly rent in your area, you can easily calculate monthly income potential and assess your payback period.
Look for all-inclusive pricing that accounts for every step of the process (i.e. permits, construction, foundation-laying, utilities connections, interior and exterior finishes, etc.) so that there are no costly surprises down the road.
Timing is important, as the quicker your ADU is completed, the quicker it can start generating income for you. Look for a provider that minimizes the permitting, building, and installation processes associated with adding an ADU to your property.
Prefabricated options are almost always more time efficient than a stick-build option. When your ADU is built off-site, the timeline is expedited because weather delays and intrusive on-site work are kept to a minimum.
Something to consider regarding timing: these aforementioned new owner-occupancy regulations are only in effect until 2025. It may be beneficial to build now in order to insure that your ADU is grandfathered into these regulations.
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