How to assess your ADU Investment?


Let us show you how to Assess your ADU Investment!

Are you considering building an accessory dwelling unit (ADU) on your property? An ADU can also be known as a granny flat, guest house, mother-in law suite and more.

An ADU is a small home on the same plot of land as your residence that may either be attached to your existing structure or separate. ADUs can be used as guest cottages, in-law units, ADU conversion or rental ADUs. ADUs are also sometimes referred to as "Granny Flats".

You may already know that ADUs bring several benefits to homeowners like you. ADUs help increase the overall value of your property, provide flexible housing options, and ADUs are often income-generating. ADUs allow you to age in place with your family or support your family’s changing needs by allowing you to generate rental income by leasing out the ADU.

ADUs can be costly, but after reading this article, you will have an idea of what factors are important. The cost to build a granny flat in Los Angeles seems expensive, but here’s a smart way to assess your investment.

  • Look up the median value per square foot in your neighborhood. For example, in the Echo Park neighborhood the median home sells for $771 per square foot.
  • Let’s say you build a 550 square foot unit in Echo Park for $365 a square foot.
  • You may spend $200,750 on your project, but you’re gaining about $424,050 in value.
  • That means you’re adding about $223K in equity to your property. And it doesn’t take into account the added value passive rental income brings.
  • In Echo Park, a 1-bedroom apartment will rent for a minimum of $2500 a month. Many rent for far more.
  • Reach out to SKS to see how to quickly calculate a Capitalization rate (or yearly ROI)!

Granny Flats are an Investment

  • To maximize your return on investment, those who build a granny flat should plan to own their property for an extended period. In a city like Los Angeles, where rental prices have skyrocketed, the value of passive rental income is undeniable.
  • We’ve calculated that even a $100,000 garage conversion, maintained over a 30-year period can bring 1.5 dollars in value between rental income and property value increases. That’s a 15x return on investment.

How to Maximize Your Granny Flat

  • Build your granny flat as large as your lot will allow. If you can comfortably fit 800 square feet in your backyard, I recommend our clients to do so.
  • Why?
  • The fixed cost.
  • Relative to what you’re already spending on the fixed cost and ‘expensive’ square foot areas of your ADU, adding 200 more square feet of ‘cheap’ square footage won’t dramatically increase your budget.
  • But it could substantially increase how much rent you can charge, how many bedrooms you have, and how many people can live in your granny flat.
  • Another way to maximize your granny flat investment is to create garden spaces. Gardens and outdoor area is a luxury most renters don’t have access to. In Los Angeles, a patio with an outdoor table can feel like a second living room and be used all year long.
  • This is a very inexpensive space to create but can make your property much more appealing to renters.

SKS can show you how to choose the best granny flat design for your lot and budget. Contact us today!

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