ADUs: The Best Way to Invest in Your Home

Building an accessory dwelling unit on your property is one of the smartest investments you can make. Read on to discover our top three reasons why an ADU is a financial no-brainer.

1. Instant Property Value Increase

In Los Angeles, the cost to design and build an ADU is around $350-$500 per square foot. Since home values in the area are reaching $700-$1,000 per square foot, the increase in your home value will more than cover the cost of investment. In fact, the returns on an ADU investment are better than the stock market, and carry much lower risk.

When you decide to sell your home, having an ADU on your property makes it more attractive to buyers. Potential home buyers see the value in an accessory dwelling unit as an opportunity to earn passive rental income, which can be used to offset mortgage payments. Alternatively, some might prefer to not rent out the ADU and instead move their extended family in, tapping into the in-law unit’s potential for multigenerational living.

Some homeowners fear that converting their garage into an ADU will deter future homebuyers who want a safe place to park their car. However, research shows no evidence of resale value penalty for replacing enclosed parking with an ADU. In fact, garage conversions offer the best value of any type of ADU, as defined by the value premium per square foot compared to the cost of construction.

2. Sustained Income Opportunity

In addition to increasing your property value and resale potential, ADUs make ideal rental units. The LA County rental market remains strong, even in the face of inflation. At the time of writing, the average rent for a one-bedroom apartment in Los Angeles is currently $1,775/month, and $2,250/month for a two-bedroom. If you rent out your ADU, you'll likely double your investment in seven years or less.

California’s demand for rental units is much higher than its supply, and having tenants provides reliable passive income. You can rent out your new granny flat and use the money you bring in to offset mortgage or construction costs. For even higher returns, consider moving into the ADU and renting out your house. Many of our customers have embraced the tiny home lifestyle, while bringing in $60k+ a year in rent.

3. Financing Options Available

ADUs often come with a big price tag that can seem out of reach for many homeowners on a budget. However, there are many financing options available that can help you achieve your ADU dreams. If you’ve built up some equity in your home, a whole home refinance is a good option. A home refi for $150k with standard terms (5.7% interest over a 30-year period) has a monthly note of about $870/month, or $200k for $1,168/month.

If you qualify for the CalHFA ADU grant, you could take up to $40,000 off the price of your ADU regardless of whether you pay cash or finance the project, making it more more achievable.

For more information on ADU financing, read this blog post.

The Perfect Partner

If you feel ready to increase your home’s value by nearly 20%--and make passive income while you’re at it--contact Otto today for a free consultation. We’ll design the perfect ADU and help you choose the best financing option for your needs. Otto takes care of everything, from plans to permits, floors to fixtures. All you have to do is sit back and watch your assets grow.

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