How Much Can You Earn with an ADU in Southern California?

You should already know about the recent boom in ADUs in various states in the USA—particularly, California. Essentially, Accessory Dwelling Units, which are also sometimes called granny houses, are a secondary home (or more technically, a dwelling unit) that is found within the premises/property of your primary home. Think of a secondary bag to your main luggage; it’s that type of situation—hence, its name “Accessory Dwelling Units.”

But you may be asking yourself, why are they so popular when houses and condos/apartments already exist? Well, for homeowners, they can offer a lot of things: housing space for family and guests, rental income, and even a property value increase (if you ever decide to sell your property in the near future).

Now, these three are definitely the good things that you can get once you decide to invest in an ADU, but for this particular guide, let us focus on one aspect of it: rental income.

Rental income is one of the main things that drive homeowners to transform the extra property that they own into an ADU, so let us do a deep dive into what exactly this entails and just how much you can earn from ADU rentals. Let’s get into it!

Average Rental Prices in Major California Counties/Cities:

There’s good money to be made by investing in an ADU. To illustrate this, we’ve compiled a table of average rent prices for different rental types. You can check Rentometer for estimates in specific cities, but we’ve also included a list here for your convenience.

However, we have also compiled a list to make it so much easier for you. Note that this data comes from rentometer, so you can check them out for the specifics of it.

Factors Affecting Rental Prices

Locations

The location of your ADU is perhaps the most significant factor in determining rental income. Here’s why:

• City vs. Suburbs: In cities like San Francisco, Los Angeles, and San Diego, the demand for housing is high, leading to higher rental prices. In these urban areas, renters are willing to pay a premium for proximity to jobs, entertainment, and cultural amenities. On the other hand, suburban areas or smaller towns will generally have lower rental rates.
• Neighborhood Quality: Even within a city, rental prices can vary dramatically. ADUs in neighborhoods with good schools, low crime rates, and plenty of amenities (like parks, shopping centers, and public transportation) will command higher rents. This also applies to areas near big companies and famous universities as people are more likely to rent a place near where their life revolves around (workers and students) so it would cost more as the demand rises.

Size and Amenities

The size and features of your ADU also play a crucial role in rental pricing. Larger ADUs with more square footage generally command higher rents. For instance, a studio ADU will rent for less than a one-bedroom, and a one-bedroom will rent for less than a two-bedroom unit. Modern, updated interiors with features like hardwood floors, granite countertops, and stainless steel appliances can justify higher rents. Tenants are often willing to pay more for high-quality finishes. Extra amenities such as in-unit laundry, private entrances, and outdoor spaces like patios or gardens can significantly boost rental prices. Parking availability, especially in crowded urban areas, is also a big plus.

Economic Factors

The broader economic environment can impact your rental income as well. In regions with strong job markets and low unemployment, people can afford higher rents. Conversely, in areas with high unemployment or economic downturns, rental prices may stagnate or decline. Additionally, as the cost of living increases, so do rental prices, though this also means the cost of maintaining and managing the property might go up.

Seasonal Tourism

Seasonality and tourism can affect rental income, especially in popular tourist destinations. In areas like Santa Monica or Napa Valley, peak tourist seasons can drive up short-term rental prices. During summer months or holiday seasons, you might be able to charge significantly higher rents for short-term stays. Conversely, during off-peak times, you might need to lower rents to attract tenants, requiring careful planning and marketing strategies to ensure steady occupancy rates.

How ADUs Can Pay for Themselves:

Renting out an ADU can be a smart way to help cover your mortgage and even recoup your investment in the unit. Imagine a steady stream of rental income flowing directly toward your mortgage, making those monthly payments less daunting. Over time, this extra income could significantly ease your financial burden and even accelerate your path to mortgage freedom.

Take the inspiring story of one couple featured in a Yahoo blog post. They invested around $354,000 in creating their dream ADU, and now they’re earning at least $4,500 per month in rental income. In just over six years, they’ll have recouped their entire investment! From that point on, it’s essentially pure profit—a reliable passive income stream that keeps delivering month after month.

Additionally, the rental income from your ADU can help you recover the costs of construction. Although building an ADU requires an upfront investment, the revenue generated through renting it out can offset these initial expenses.

Depending on your local rental market, you might be able to fully recoup your construction costs in a few years. For example, couple Alex Mason and Nicole Lemoine converted their old garage into a beautiful ADU. Their primary goal was to generate extra income to help finance their move into a better home. And it worked! “Collecting two years of income from the ADU will allow the couple to consider their future housing possibilities seriously,” the article states.

“ Collecting two years of income from the ADU will allow the couple to consider their future housing possibilities seriously.”

For Alex and Nicole, building and renting out an ADU has provided the financial stability they needed to achieve their dreams.

Challenges and Risks in Achieving Financial Self-Sufficiency

However, achieving financial self-sufficiency through an ADU isn’t without challenges. One major risk is fluctuating rental demand. If the local rental market declines or if you have difficulty finding tenants, your expected rental income may fall short, leaving you with a gap in your budget.

Another challenge is the initial cost of building the ADU. Construction can be expensive, and if costs run higher than expected, it might take longer to break even. But there are a lot of things that can help you with financing the initial costs. One great example are FHA loans which according to author AJ Latrace, are now available to ADUs. However, he said, there are some restrictions and they are as follows:

“Only 75% of the estimated rental income on an existing ADU will be included in the borrower’s debt/income ratio, while borrowers seeking additional funds to build a new ADU via a 203(k) loan will only be able to include 50% of the estimated rental income in their calculation. “

Moreover, unexpected repairs or maintenance issues with the ADU can add to your expenses, eating into your rental income. So, it would be in your best interest to create good quality and lasting ones with the help of professionals like us here at YDS Architects!

Lastly, local regulations and zoning laws can affect your ability to rent out the ADU as you planned. It’s important to research and understand these laws before you invest, as they can impact how much you can charge in rent or even whether you can rent out the unit at all. You can check out our article here to read more about them as we have given a very comprehensive guide on it.

By being aware of these potential risks and planning carefully, you can increase your chances of making your ADU a successful and financially rewarding investment. So, do thread carefully as it can never hurt to be extra careful and meticulous especially in something as big as investing hundreds of thousands of dollars!

Calculating ROI for Your ADU:

When trying to estimate how much you can earn from an ADU, there are several key factors to consider. Let’s take the Peterson family as an example. They were able to significantly boost their income by converting their single-family home into a duplex-style ADU, renting out two units separately. This success story highlights the importance of several ROI factors:

1. Location and Market Demand: The Peterson’s success likely depended on their property being in a high-demand area. Understanding your local market is crucial. The rent you can charge will vary greatly depending on where your property is located. High-demand areas with limited housing supply can fetch higher rents, boosting your ROI. Understanding your local market is crucial
2. Construction and Maintenance Costs: Your upfront investment, including construction and any ongoing maintenance, will directly impact your ROI. Understanding these costs is crucial to determine how quickly you can recoup your investment. Converting a single-family home into a duplex involves significant construction costs. The Peterson family had to carefully manage these costs to ensure profitability.
3. Rental Rates:  By creating two rental units, the Petersons were able to double their potential rental income compared to a single ADU. Researching local rental rates is essential. Research the going rates for similar ADUs in your area. Online calculators and rental estimation tools can give you a better idea of what to expect.
4. Occupancy Rates:  With two units, the Petersons likely had to manage occupancy for both, impacting their overall income stability. Consider how often your ADU is likely to be occupied. In areas with seasonal demand, like vacation spots, your income might fluctuate, affecting your annual ROI.
5. Financing Options: If you’re financing the ADU, the terms of your loan, such as interest rates and loan duration, will also play a role in your overall profitability.

Another success story is the Pilgrim couple, who found innovative financing by securing tenants who were willing to pay rent in advance for several years while the ADU was being built. This strategy helped them maximize profit and demonstrates the importance of considering creative financing solutions.

By carefully considering these factors and learning from successful ADU owners like the Petersons and Pilgrims, you can make informed decisions to maximize your ADU’s ROI

Strategies to Maximize Your ROI

We understand that not everyone really knows how to maximize the income the get from the ADU rentals they have– of course, you have to be able to maximize your ROI so you can offset the expenses brought by the initial cost for your ADU and actually start earning money with “no strings attached”. Here are some quick tips on how you can do this:

• High-Quality Finishes: Investing in durable, attractive materials can justify higher rent and reduce long-term maintenance costs.
• Smart Marketing: Utilize online platforms and professional photography to market your ADU effectively, attracting more potential tenants.
• Flexible Rental Options: Offering both long-term and short-term rentals can help you adapt to market changes and optimize income.

Long and Short Term ROI Goals

Finally, your approach to renting the ADU will depend on whether your ROI goals are long-term or short-term. For steady, reliable income, long-term rentals are typically the best option, offering lower turnover and management costs. Think of this a a more steady stream of water– like a slow trickle that accumulates overtime. With long term rentals you can make sure that you can a more steady income stream that you can rely on.

On the other hand, if you’re aiming for higher returns over a shorter period, short-term rentals like Airbnb might be more profitable, though they require more frequent tenant turnover and higher management efforts. While Long term rent is more of a slow trickle, this is one is huge amounts of water laddled in big increments– you can expect to gain big income but you can never be quite sure if it will be steady as you will need to constantly find tenants.

You should definitely carefully consider these factors in the event that you rent out our ADU as these will decided how often you will be collecting rent and the re,atiive amount of money you can get from it.

Fiction To Reality: Homeowner Stories

As you may know, it is an undeniable fact that ADUs are becoming so much more accessible to the people which is why you will find nothing short of a lot of stories about them. One such story is of Jing Guo and Gabriel Taylor Russ– you can read more about them here. With that, like many of us during the pandemic, found themselves rethinking their living situation. They left Chicago for California, dreaming of a home with character that they could truly make their own.

But after facing the high costs of the Bay Area and losing out on multiple bidding wars in Los Angeles, they finally found a fixer-upper in Eagle Rock—a 1923 Spanish bungalow that needed some serious love. Instead of being discouraged by the work ahead, they saw potential, especially with the idea of adding an ADU (Accessory Dwelling Unit) to boost the property’s value.

Living in the house before renovations wasn’t easy—they had no heat, the kitchen barely worked, and it felt more like camping indoors than living in a home. But this experience gave them the insight to make smart renovation decisions that truly suited their needs. They worked with an architect and contractor to transform their space, expanding the living room and creating a beautifully designed ADU that complements the main house.

Now, they rent out the ADU at around $4000 a month (big money, if you  consider that it comes monthly and very easily too) to help cover their renovation costs and enjoy a home that’s not only functional but also a place they love. Their journey shows that with patience and a bit of vision, you can turn even the toughest situations into something amazing—and maybe inspire others to take on their own projects too.

Of course, some people don’t build ADUs purely for the sake of an income– to some, like the family of a certain Adrian Perez, it is to keep a disabled person, like himself safe, despite the challenges that they face. It was not all sunshine and rainbows as his family faced significant challenges in securing long-term care for their disabled son.

Worried about his future, especially since Adrian is nonverbal and extremely vulnerable, his mother, Andrea Villicana, explored various housing options but found them lacking. The solution came in the form of an ADU (Accessory Dwelling Unit), which she discovered could be built in their backyard. This idea offered a way for Adrian to live close to his family while having around-the-clock care.

The family invested in the project, attending classes to understand the complexities of building an ADU, and eventually hired a consultant to manage the process. Despite the challenges, including cost overruns and delays, they successfully built a 500-square-foot ADU designed to meet Adrian’s specific needs.

The journey was not easy, but it was worth it. The ADU provides Adrian with a safe, accessible space close to his family, ensuring that he has a stable living environment even after his parents are no longer able to care for him directly. For Villicana and her husband, the project brought peace of mind, knowing they had secured their son’s future while keeping the family together.

The experience also taught them the importance of planning ahead, understanding the costs involved, and seeking professional help to navigate the complexities of such a significant project. Ultimately, the ADU became a symbol of hope and security for the family, illustrating how thoughtful planning and perseverance can overcome daunting challenges.

There are many other stories like these existing and being made as we speak. But the fact still stays the same that we are all just people trying to survive and make life a little more worth living. That said, there are tons of places that you can connect with like minded people if you have any questions about ADUs or just want to share some personal stories. You can go to places like reddit or even facebook groups like this one! Give them a visit and you might just make some new friends or gain some more valuable lessons.

Conclusion:

ADUs (Accessory Dwelling Units) offer significant financial benefits, from generating rental income to increasing property value. As we’ve seen through real-world experiences, homeowners like Jing Guo, Gabriel Taylor Russ, and Adrian Perez’s family have transformed their living situations and secured their financial futures by investing in ADUs. They have also created a separate space that they acn use as they wish– whether it be allowing and inviting guests to stay over or simply rent out the place so they can have a bit of extra income.

However, success with ADUs requires careful planning and a deep understanding of your local market. Rental prices, construction costs, and occupancy rates vary, making it crucial to research thoroughly and explore financing options that suit your needs. By learning from the experiences of others and taking a thoughtful approach, you can make an ADU a rewarding and profitable addition to your property.

But you cannot do all of these just because you have a dream and some money– a lot of research, manpower, and even money goes into just one ADU project. So, it is in your best interest to do your research on the market (to make sure you are making the right businesses move) and even explore some financing options like the ones we mentioned before to help fund the ADU.

Nevertheless, if you need assistance with the conceptualization of your dream ADU or even just need help in getting permits– we are professionals at this and might just be the answer to all your questions! If you are interested, schedule a discovery call now or call us at 626-660-0206.