04/18/22 8:38 AM
Many homeowners have a great opportunity right now to add value to their property and begin generating investment income by converting a garage to a studio apartment or adding a small detached unit. Previously, this was difficult for most homeowners due to restrictive zoning laws. Recently that’s become much easier. In an effort to address the housing shortage in California, the legislature passed a package of bills in October last year that make it easier to build new housing units in California. A recent Los Angeles Times article says the package effectively eliminates single-family zoning, which means adding one or more units to existing single-family properties won’t be as limited by zoning designations.
In addition to zoning restrictions, financial limitations also hold back some homeowners from creating an additional dwelling unit (ADU), but there is help available on the financial side as well. California Housing Finance Agency (CalHFA) is offering up to $40,000 in grant money for pre-construction costs of building an ADU, including site preparation, architectural designs, permits, soil tests, impact fees, surveying, and energy reports. The grant is combined with a loan for constructing the ADU, which means it’s possible to build one with much less cash than was previously required.
The program targets helping moderate and low-income households, and below are the income limits for Southern California Counties as of 6/1/2021. If you’re a homeowner, and your household income is below the limit for your county, the CalHFA program might be a good option for you.
For the complete list of income limits by county, you can visit https://www.calhfa.ca.gov/homeownership/limits/income/income.pdf.
Here’s an example of how the numbers could come together for you. Let’s say that the total project to build the ADU would cost $140,000 with $40,000 of preconstruction costs and $100,000 of actual construction costs. Let’s also assume a lender will lend up to 75% of the construction cost, or $75,000. The CalHFA program could cover $40,000 in preconstruction costs, which leaves just $25,000 of actual construction costs for the homeowner. Lastly, let’s assume the lender will charge 10% interest on the loan and require that it be fully amortized (zero balance at the end) in 10 years. The homeowner would have $25,000 cash invested and a principal and interest payment of $991 per month. Adding in an increase in property taxes for the additional $100,000 in value would bump it up to about $1,074 per month ($100,000 x 1% tax rate ÷ 12 months). We recently helped a client rent an ADU in Glendora that had one bedroom, one bathroom, and 360 square feet of living space for $1,600 per month, so if that homeowner had just built the ADU under these assumptions, they would be cash-flowing about $526 per month. That’s $6,325 per year, which is a little over 25% annual return on the $25,000 cash invested to build it. While this is a simplified illustration, a homeowner could still make a really good return if it required a greater cash investment and/or had additional expenses.
If you’d like to explore whether or not building an ADU would work for you, send us a message, and we’ll help you with the following three initial steps:
- Conduct a rent survey for you to find out how much rent you could probably get from an ADU.
- Connect you with a lender who can help you find out if you qualify for the construction loan and CalHFA grant program.
- Connect you with a contractor who can help you ballpark the cost of building an ADU on your property.
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For more details on the CalHFA program, you can visit their website at https://www.calhfa.ca.gov/adu/.