ADUs: The Best Investment You Can Make in 2021

By Samuel Schneider

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05.02.2021

Building a granny flat on your property is one of the smartest investments you can make. Between the instant value it adds to your home and its potential for generating passive income, an ADU is a financial no-brainer! Here’s why.

Instant Property Value Increase

According to research by MIT data scientists, building an ADU increases a property’s value by an average of $158,000. Since garage conversion ADUs cost about $100-150k, the increase in your home value will more than cover the cost of investment. You'll outperform the stock market, with almost no risk! And 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. But that’s not the case! According to the research, there appears to be no 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. And let’s be honest; plenty of people store junk in the garage and park their cars on the street or driveway anyway. A hip little granny flat is a much better use of that space!

Rental Market

In addition to increasing your property value and resale potential, ADUs make ideal rental properties. And the LA County rental market is higher than ever! The average rent for a one-bedroom apartment in Los Angeles is currently $1,775/month, and $2,250/month for a two-bedroom. Don’t worry, we did the math: if you rent out your ADU, you'll double your investment in seven years!  And USC’s Lusk Center for Real Estate forecast projects that LA rent prices will continue to rise over the next two years, at a pace of about 3% a year, so who knows? It might even happen sooner. Everyone needs a place to live, and having renters provides reliable passive income. You can rent out your new granny unit and use the money you bring in to offset mortgage or construction costs. Or if you want to make some serious cash, move into the ADU and rent out your main house! Many of our customers have embraced the tiny home lifestyle, while bringing in $60k+ a year in rent.

Financing

ADUs often come with a big price tag that can seem out of reach for many homeowners on a budget. But don’t get discouraged! There are lots of 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 (3% interest over a 30-year period) has a monthly note of about $632/month, or $200k for $843/month.

If you don’t want to go through the trouble of a refi or haven’t built up enough equity, you can borrow a comparable amount of money with our financial partner, RenoFi. RenoFi allows you to borrow against the projected value of your home post-renovations, which makes it a great option for newer homeowners who haven’t accumulated much equity yet. Their loans offer fixed rates starting at 4.12% and repayment terms of up to 20 years. For more information about financing options, check out this post.

If you feel ready to increase your home’s value by nearly 20%--and make passive income while you’re at it--contact Homestead today for a free consultation. We’ll design the perfect ADU and help you choose the best financing option for your needs. Homestead 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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About The Author

Sam is a graduate of MIT's School of Architecture and Planning. He became fascinated with ADUs in 2017 when he realized that they were the fastest solution to California's housing crisis. Now, Sam is focused on helping Los Angeles homeowners add ADUs through his work with Homestead.
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