I just wrote a blog about the financial metrics/returns of building ADUs in Los Angeles & Southern California...thought I would share some of my findings:
The cost of an ADU will depend on a few factors including whether it's a garage conversion or newly built detached/attached ADU, but a good rule of thumb is as follows:
Garage conversion (300-400sf): $70,000-$100,000
New ADU: $200-$350 per square foot. The bigger the ADU size, the lower the cost per square foot.
The numbers above are construction costs, but they don’t include architectural plans and city permits & plan check fees (approx.. $10,000-$15,000)
Studio (0 bedrooms): 300-400 square feet (sf) (most likely a garage conversion):
According to MLS info, in the past year, the rental rates of studio units were $1,200 for ADUs in lower-cost areas and up to $2,500 on the high end for ADUs in portions of LA like Venice and West Los Angeles.
One bedroom: 400-700sf
One-bedroom units have been renting for between $1,400 for ADUs in lower-priced areas up to approx. $4,000 for areas such as Studio City, Santa Monica, and Sunset Strip.
Two-bedroom: 600-1,000sf
ADUs that have two bedrooms range in their rents from $1,800 on the low end to $4,500 in areas such as Westwood & Hollywood Hills.
Three bedrooms: 800-1,200sf
Three-bedroom units have been ranging from a low of $2,400 all the way up to $5,000 in areas like Valley Village and Topanga.
Below is the annual return analysis of investing in building an ADU for rental income, but doesn't consider the increase in your property value by having an ADU when you go to sell your home.
Studio (garage conversion)
Let’s estimate the all-in costs including construction and soft-costs are $100,000. And let’s presume the location is ‘mid-tier’ and we can achieve a monthly rent of $1,500. I would suggest the expenses of operating an ADU are reasonably minimal, so let’s assume they are 15% of annual revenue (and tenant pays their own utilities).
$1,500/month x 12 months = $18,000 annual ADU rental income
$18,000 income – $2,700 expenses = $15,300 net annual revenue
$15,300 net revenue / $100,000 investment = 15.3% annual return
Two Bedroom (700sf)
Lets assume the total cost of this unit is $225,000 ($321/sf) and the rent we can achieve for this nice, new 2 bedroom ADU is $3,000 per month. Again, the tenant pays their own utilities and expenses are 15% of revenue.
$3,000/month x 12 months = $36,000 annual ADU rental income
$36,000 income – $5,400 expenses = $30,600 net annual revenue
$30,600 revenue / $225,000 investment = 13.6% annual return
Here are some things to consider with regard to ADU amenities to optimize rents:
Storage: ADUs are generally pretty small and usually don’t include a garage, so it’s important to include areas for tenants to store their belongings. Storage areas can include built-in cabinets, closets, attic space, and even outdoor sheds, etc.
Laundry: Including a laundry area and machines is a big bonus for tenants, as they compare that with apartment living where they would have to use common laundry machines that require payment.
HVAC: Make sure to include an effective dual heating & air-conditioning system to service the ADU, so your tenant is comfortable in the unit.
Kitchen island: It may be difficult to squeeze in a kitchen island in a small ADU, but it's a big bonus if you can make the space. An island makes a kitchen and the ADU feel elegant and upscale. Beyond that, it's extremely practical as it can double as a kitchen prep area as well as an eating table.
Outdoor area & patio: There are a few major benefits to an ADU over an apartment and a dedicated outdoor space is one of them. Ideally, you should consider creating an outdoor private space just for the ADU, even if it's a small uncovered area. Pouring a concrete patio or installing pavers makes the ideal surface so the tenant can put out some seating, etc. A few potted plants are nice, but a lawn is probably unnecessary. If you want to splurge and add a patio cover, that's a nice touch, but it's not cheap.
Privacy: Make sure to create separation and privacy between the main home and ADU by constructing solid fencing in the appropriate location. Ideally, create a separate gate to be used just by the ADU tenant to access their unit.
Natural light: ADUs are small and one of the best ways to make these spaces feel bigger is to ensure lots of natural light is flowing into the unit. This can be achieved with well-placed windows, skylights, and glass patio doors.
Soundproofing: Especially in the case of attached ADUs, make sure there is appropriate insulation and soundproofing material between the homes so that each occupant doesn’t have to hear noise from next door.
