What It Could Cost You To Build an Accessory Dwelling Unit - Shawnluong Team

What It Could Cost You To Build an Accessory Dwelling Unit

Building an ADU can help you save money for your retirement.

If you’re seeking ways to bolster your retirement savings, consider the benefits of constructing an Accessory Dwelling Unit (ADU). In today’s real estate market, ADUs present an excellent investment opportunity with attractive returns. Let’s delve into the financial aspects and advantages of building an ADU to secure your financial future.

When it comes to constructing an ADU, the costs can vary depending on the type of project. A new detached ADU would typically cost around $200 per square foot, while converting an existing garage to an ADU would average around $150 per square foot. Suppose we consider an 800 to 1200-square-foot detached ADU built at $200 per square foot. With an average rental income of $2400 per month, the math translates to $3 per square foot per month, or $36 per square foot per year. This equates to an impressive 18% gross return on investment.

“In the current real estate market, ADUs are a great investment opportunity.”

While the gross return may appear enticing, it’s essential to factor in additional costs that could affect your net return. Increased property taxes and insurance premiums are some of the expenses to consider, reducing your net return to approximately 15%. However, securing financing for your ADU through a second mortgage or a home equity line of credit can provide favorable interest rates, typically around 9%. Even with this interest rate, you can still maintain a 6% margin.

Leaving your money in the bank won’t yield significant returns, as savings accounts typically offer low-interest rates. Conversely, car loans often have interest rates of around 3.99%, generating profit for banks. By choosing to invest in an ADU, you can transform an 18% gross margin into a 15% cash-on-cash return, with a total cost of funds at 9%. This results in a respectable net return of 6%, outperforming traditional banking options.

Aside from the financial benefits, constructing an ADU also enhances the overall value of your property. Depending on the location, the square-foot value for homes generally ranges between $500 and $600. Consequently, your property value will increase by a similar per-square-foot amount, amplifying the long-term benefits of your investment.

If the idea of constructing an ADU has piqued your interest, securing financing through a second mortgage or a home equity line of credit is a viable option. For more information and to discuss potential ADU projects, please don’t hesitate to contact us via email or phone. We’re always delighted to assist you in making informed investment decisions.

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