Real Estate Investing | How To & Education
An Accessory Dwelling Unit, also known as an ADU, is an additional living unit built on the same lot as a primary residence.
They can be attached or detached and can range in size from a small studio to a full-size apartment. ADUs are also commonly known as granny flats, in-law suites, or backyard cottages.
The popularity of ADUs has been growing rapidly in recent years as people look for ways to increase the supply of affordable housing and better use the existing property.
According to a report from the National Association of Home Builders, the number of ADU permits issued in the United States increased by 7.6% from 2019 to 2020, with California leading the way with over 15,000 permits.
One reason for the popularity of ADUs is their flexibility. ADU owners can use them to house family members, serve as rental units, or provide additional space for home offices or studios.
ADUs can also help property owners generate additional rental income, which is especially important in expensive housing markets.
For property investors, understanding ADU housing is becoming increasingly important. ADUs can provide a way to increase rental income without having to purchase additional properties and can also increase the overall value of a property.
According to a study from the Appraisal Journal, homes with ADUs average a 51% higher valuation than comparable homes without ADUs.
In addition, ADUs can provide a way for property investors to address the growing demand for affordable housing. With a shortage of affordable housing in many areas, ADUs can help provide additional housing options for renters and homeowners alike.
Overall, the growing popularity of ADUs and their potential benefits for property investors make them an important topic to understand.
As more and more homeowners and investors look to ADUs to maximize their property's value and income potential, understanding the trends and opportunities in this area can help investors make more informed decisions about their real estate portfolios.
Let’s dive in.
Table Of Contents
- Strategies for finding properties suitable for an Accessible Dwelling Unit
- How to market Accessory Dwelling Units to local renters
The Big Picture: What is an Accessory Dwelling Unit?
Accessory Dwelling Units have a long history in the United States. These secondary housing units have provided additional living space for family members, caregivers, or renters.
In recent years, the popularity of ADUs has increased dramatically as a way to address the shortage of affordable housing in many cities and towns across the country.
ADUs have been around for centuries in various forms. In the United States, they were initially used to provide housing for family members, such as aging parents or adult children.
In the 1920s and 30s, backyard cottages were typical in many cities, including Los Angeles and Seattle. During World War II, ADUs were used to house military personnel and their families.
However, in the post-war era, zoning laws became more restrictive, and many cities began to ban ADUs, making it more difficult for homeowners to add additional living space to their properties.
It wasn't until the 1980s and 90s that some cities, such as Portland, Oregon, began to loosen their zoning laws around ADUs.
Today, ADUs are becoming increasingly popular as a way to address the affordable housing crisis. As a result, many cities and states have changed their zoning laws to make it easier for homeowners to build ADUs.
For example, California passed a law in 2017 that required cities to streamline the process for ADU construction and eliminated many of the fees associated with building them.
Similarly, in 2019, Oregon passed a law that required cities to allow ADUs on any single-family lot that met specific size requirements.
Along with eased restrictions came a significant jump in ADU popularity among homeowners and investors alike. The benefits of ADUs for property owners and renters are numerous, so let's break down a few of the most important ones.
What are some of the benefits of Accessory Dwelling Units?
One of the most popular benefits of ADUs is that they provide property owners with flexibility and versatility, making them a popular choice for homeowners who want to maximize the use of their property.
ADUs can be used for various purposes, depending on the homeowner's needs, including:
ADUs can be used as a home office, providing a separate space for work away from the main house, which can be great for those who work from home and need a quiet and private space to focus.
ADUs can also be used as guest houses, providing a separate living space for guests who want privacy and independence. Owners with frequent visitors or out-of-town guests often cite this as one of the best ways to use their ADU.
ADUs can be used as rental units, providing additional rental income for the homeowner. If you live in an area with high rental demand, such as near a university or a popular tourist destination, ADUs can be a great option.
Aging in Place Spaces
ADUs can be used as a space for aging in place, providing a separate living space for elderly family members who want to maintain their independence but still have access to family support.
ADUs can be used for multi-generational living, providing a separate living space for family members who want to live together but maintain some level of privacy.
Understanding different types of Accessory Dwelling Units
Now that we know some of the most common uses for ADUs let's take a closer look at the different types of ADUs:
A detached ADU is a standalone structure disconnected from the primary residence. This type of ADU is typically built in the backyard of a property and can range in size from a small cottage to a full-sized house.
Detached ADUs offer the most privacy and flexibility, as they can be used as a guesthouse, home office, or rental property. However, building a detached ADU can be expensive since it requires utilities and infrastructure.
An attached ADU is connected to the primary residence, either as a separate unit or as an addition to an existing room. Attached ADUs are typically smaller than detached ADUs, but they can still provide additional living space or rental income.
One benefit of attached ADUs is that they share utilities and infrastructure with the primary residence, which can reduce construction costs.
As its name suggests, a basement ADU is in the basement of a primary residence. This type of ADU is typically less expensive to build than a detached or attached ADU since there's less construction work associated with them.
However, basement ADUs may have limited natural light and can be subject to moisture problems if not properly designed and constructed.
Garage Conversion ADU
A garage conversion ADU is created by converting an existing garage into a living space. This type of ADU can be less expensive than building a detached or attached ADU, as the structure already exists.
However, garage conversion ADUs may need more space and require additional insulation, ventilation, and other upgrades to meet building codes.
A Junior ADU is a smaller ADU, typically between 150 and 500 square feet. Junior ADUs, such as a spare bedroom or converted closet, are often built inside the primary residence.
This type of ADU can be less expensive to build than other types of ADUs and can provide additional rental income or living space. However, Junior ADUs may need more space and may not be suitable for large families.
A hybrid ADU is a combination of two or more types of ADUs. For example, a homeowner may build a detached ADU and convert the existing garage into a Junior ADU.
Hybrid ADUs offer more flexibility and can provide additional rental income or living space. However, building a hybrid ADU can be more expensive than building a single type of ADU.
Depending on the homeowner's needs and budget, any ADUs can be viable for adding additional living space or rental income to a property. Before building an ADU, it's important to research local building codes and zoning laws and hire a qualified contractor to ensure that the ADU is safe and meets all regulatory requirements.
Regulation and laws surrounding Accessory Dwelling Units
Due to the shortage of affordable housing, ADUs have become extremely popular nationwide. However, with the demand boom has also come the introduction of legislation regulating ADUs.
These regulations can vary widely from state to state and even city to city.
Let's start with some wide-reaching statistics. According to a 2021 report by the National Association of Home Builders, 47% of builders reported that their clients were interested in building an ADU the previous year.
Additionally, the report found that ADU construction increased by 40% from 2019 to 2020. This shows that ADUs have become an increasingly popular option for homeowners who want to add additional living space to their property.
Now, let's dive into the zoning laws around ADUs in different states.
Examples of state-by-state ADU zoning laws
California is one state that has made it relatively easy to build ADUs. In 2017, California passed a law that required cities to streamline the process for homeowners who want to build ADUs. The law also eliminated many fees that cities had previously charged for ADU construction.
As a result, ADU construction has surged in California in recent years. According to a report by the Terner Center for Housing Innovation at UC Berkeley, California saw a 63% increase in ADU permits issued from 2016 to 2019.
On the other hand, some states have much stricter regulations around ADUs. For example, in Illinois, ADUs are only allowed in certain areas and must meet specific zoning requirements.
Homeowners must also obtain a special use permit before building an ADU. In addition, there are limits on the number of ADUs that can be built in a particular area.
Oregon is another state that has relatively lenient zoning laws around ADUs. In 2017, Oregon passed a law which required cities to allow ADUs on any single-family lot that met certain size requirements.
The law also prohibited cities from imposing certain fees on ADU construction. As a result, ADU construction has increased dramatically in Oregon. According to a report by the Oregon Department of Land Conservation and Development, ADU permits increased by 75% from 2016 to 2019.
In conclusion, the zoning laws around ADUs can vary widely from state to state. While some states have made it relatively easy to build ADUs, others have much stricter regulations.
However, the increasing popularity of ADUs suggests that more and more homeowners are willing to navigate the complex zoning laws to add additional living space to their property.
Opportunities Accessory Dwelling Units provide
Additional rental income for property owners
One of the biggest opportunities that come with building an ADU is the potential for additional rental income.
ADUs can be rented out to long-term tenants looking for more privacy and independence than traditional apartments can offer. Or, they used as short-term rentals on platforms like Airbnb, providing a significant source of income for the homeowner.
According to a 2021 report by the National Association of Home Builders, homeowners renting out their ADUs on Airbnb can make an average of $22,000 annually. In some cities, the potential for rental income from an ADU can be even higher.
For example, in San Francisco, homeowners who rent out their ADUs on Airbnb can make up to $42,000 per year, according to data from Mashvisor.
Additionally, those renting out an ADU can expect an average return of 8.6% on their investment, compared to just 3.7% for those who do not rent out an ADU.
Increased affordability and availability of housing for renters
One of the biggest challenges facing renters in many cities and towns is the high cost of rental housing. In some areas, rental prices can be prohibitively high, making it difficult for many people to find affordable housing.
However, by building ADUs, property owners can provide additional housing units that are more affordable than traditional apartments, increasing the availability of affordable housing for renters.
According to a report by the Terner Center for Housing Innovation at UC Berkeley, ADUs can provide up to 50% more affordable housing than traditional apartments.
Since ADUs are typically smaller in size and require less land, which can reduce construction costs, they're typically much less expensive to build. Additionally, ADUs can be built on existing lots, which can reduce the cost of land acquisition.
In addition to providing more affordable housing options, ADUs can help increase rental housing availability.
According to a report by the Urban Institute, ADUs can increase the rental housing supply by up to 10% in some areas. This can reduce competition for rental housing and make it easier for renters to find suitable housing.
However, building ADUs may only be a viable option in some areas. For example, some cities and towns have zoning laws that restrict the construction of ADUs, while others require expensive permits or impact fees. Additionally, building an ADU can be expensive, particularly if the homeowner needs to install new utilities or infrastructure.
Potential to increase property value and attract tenants
On top of providing a significant source of income, renting out an ADU can also help ensure financial stability. According to a report by Attom Data Solutions, homeowners who rent out an ADU can expect a higher return on investment than those who do not.
In addition to providing rental income and affordable housing, building an ADU can also increase the value of a property and attract tenants.
According to a 2019 report by the National Association of Realtors, 80% of real estate agents said that ADUs increased the value of a property, while 44% said that ADUs helped to sell a property more quickly.
Challenges or problems that come with Accessory Dwelling Units
It is important to note some risks associated with investing in and renting out an ADU. For example, if a homeowner is renting out their ADU on Airbnb, there is a risk that the property could be damaged or stolen by guests.
Additionally, if the homeowner is renting out the ADU to long-term tenants, there is a risk that the tenants could damage the property or fail to pay rent on time.
To mitigate these risks, screening potential tenants carefully and having a solid rental agreement in place is important. You should also consider purchasing landlord insurance to protect your property and income.
Building an ADU can be expensive, and you should consider the upfront costs before deciding to build. The cost of building an ADU can vary depending on the type of ADU, the size, and the location. For example, a detached ADU in a high-cost area may be more expensive than a Junior ADU in a low-cost area.
Financing options are available to help cover the upfront costs of building an ADU. These include home equity loans, personal loans, construction loans, and even government programs or grants.
As with any investment, it's imperative to carefully consider your financing options and choose the one that best suits your financial situation.
Regulatory hurdles and legal considerations
Building an ADU can be challenging due to regulatory hurdles and legal considerations. Zoning laws, building codes, and permit requirements can vary depending on the location, and you should carefully research these before deciding to build an ADU.
Some cities and towns have strict zoning laws that prohibit or limit the construction of ADUs, while others have lenient zoning laws that encourage their construction.
You should also consider legal considerations, such as rental agreements and landlord-tenant laws, before renting out your ADU. Landlord-tenant laws can vary depending on the location, and you should ensure that they comply with these laws to avoid legal issues.
Design and construction challenges
Design and construction challenges can also make building an ADU difficult. Make sure to carefully consider the design and construction of your ADU so that it meets your needs and complies with building codes.
Design challenges can include choosing the right size, layout, and materials, while construction challenges can include installing utilities and infrastructure.
Additionally, hiring a qualified contractor to ensure your ADU is safe and meets all regulatory requirements is always a smart idea.
Hiring a contractor can also reduce design and construction challenges and keep your project on time and on budget.
You should carefully research these considerations before deciding to build an ADU and seek professional advice to build a safe, compliant ADU that meets your needs.
How to overcome these challenges
Steps to take to address financial considerations
To address financial considerations, you can take several steps:
- Determine the upfront costs of building an ADU, including materials, labor, permits, and utility connections.
- Research financing options, such as home equity, personal, and construction loans.
- Consider government programs and grants that may provide financial assistance.
- Develop a budget and stick to it to avoid overspending.
According to a report by HomeAdvisor, the average cost of building an ADU is $50,000 to $150,000. However, the cost can vary depending on the type of ADU and the location, so always carefully research costs in your area and develop a budget that works for you.
Strategies to navigate regulatory hurdles and legal considerations
To navigate regulatory hurdles and legal considerations, there are several strategies you should consider, including:
- Researching zoning laws, building codes, and permit requirements in the area.
- Consulting with a qualified contractor or architect who is familiar with ADU regulations.
- Considering hiring a lawyer to review rental agreements and landlord-tenant laws.
- Attending public hearings and community meetings to gain support for ADU construction and to learn about local regulations.
According to a report by the National Multifamily Housing Council, many cities and towns are relaxing zoning laws and building codes to encourage the construction of ADUs. While this is a positive step for ADU development, you should still be aware of regulatory hurdles and legal considerations and take steps to navigate them.
Tips for ensuring successful ADU design and construction
To ensure the successful design and construction of ADUs, here are a few tips to consider:
- Hiring a qualified contractor or architect with experience in ADU design and construction.
- Considering the ADU's size, layout, and materials, ensure it meets the homeowner's needs and complies with building codes.
- Installing efficient appliances and fixtures to reduce energy and water costs.
- Ensuring the ADU is well-ventilated and well-insulated to maintain a comfortable living environment.
According to a report by the Joint Center for Housing Studies at Harvard University, successful ADU design and construction requires careful planning and attention to detail. We recommend working closely with contractors or architects to ensure the ADU meets your needs and complies with building codes.
Strategies for finding properties suitable for an Accessible Dwelling Unit
Finding a potential property for ADU development can be challenging, but several resources will help you consider all your options.
These include online listings, real estate agents, and networking. A tool like PropertyRadar can also help you identify properties suitable for ADU development.
First, let’s review some property criteria to evaluate during your search for an ADU development site.
Factors to Consider When Selecting a Property for ADU Development
When selecting a property for ADU development, you should consider several factors:
- Lot Size - The size of the lot will determine the size of the ADU that can be built. Therefore, you should ensure the lot is large enough to accommodate the ADU without violating zoning laws.
- Zoning Laws - research zoning laws in your area to confirm that ADUs are allowed on the property.
- Utility Connections - consider the cost of connecting the ADU to utilities, such as water, sewer, and electricity.
- Access and Parking - confirm that the ADU has access to the street and that there is sufficient parking for both the main house and the ADU.
- Design and Construction - consider the design and construction of the ADU, including the size, layout, and materials. Hiring a qualified contractor or architect with experience in ADU design and construction is recommended.
Resources for Finding Potential ADU Properties
PropertyRadar - PropertyRadar's powerful search tools enable you to identify potential properties for ADU development. We give you access to over 250 property data points, including lot size, zoning information, and owner contact information.
Online Listings - Websites like Zillow, Redfin, and Realtor.com can provide access to a wide range of properties suitable for ADU development. You can filter your search to show properties with a large lot size or an ADU on the premises.
Real Estate Agents - Real estate agents can help homeowners identify properties suitable for ADU development. Agents can access property listings and inform their clients about their area's zoning laws and building codes.
Networking - Networking with other homeowners or real estate professionals can help you identify potential properties for ADU development. You can attend local meetings or events to meet other homeowners who may be interested in selling or renting out their property.
How to market Accessory Dwelling Units to local renters
Effective marketing strategies for ADU properties
Online Listings - online listings are an effective way to market ADU properties to potential renters. You can list your ADUs on websites like Zillow, Redfin, and Craigslist to reach a wide audience of renters. Always make sure your listings include high-quality photos and detailed descriptions of the property.
Social Media - social media can be an effective way to market ADU properties to potential renters. You can use social media platforms like Facebook, Instagram, or LinkedIn to share information about your ADUs and reach a wider audience.
Word of Mouth - word of mouth is a powerful marketing tool that can help attract tenants for your ADUs. You can start by asking friends, family members, and colleagues to spread the word about your ADUs to potential renters they may know.
Property Management Companies - working with property management companies is another great way to market your ADUs to potential renters. Property management companies have access to a wide range of marketing tools and can help you attract high-quality tenants for their ADUs.
Ways to attract tenants and maximize rental Income
Competitive pricing strategy - always start with developing a competitive pricing strategy with other rental properties in the area. You should research rental prices in your area and adjust prices accordingly.
High-end amenities - you should consider offering attractive amenities to renters, such as high-speed internet, a washer and dryer, or private outdoor space.
Full furnishings - sprucing your ADU up with furnishings can help attract renters who are looking for a move-in-ready space.
Consistent property upkeep - always make sure that your ADUs are well-maintained and in good condition. This can attract high-quality tenants who are willing to pay a premium for a well-maintained property.
In conclusion, Accessory Dwelling Units (ADUs) have become increasingly popular in recent years due to their many benefits, including providing additional rental income for property owners, increased affordability and availability of housing for renters, potential to increase property value, and flexibility and versatility.
However, building an ADU comes with financial considerations, regulatory hurdles, and design and construction challenges.
To address these issues, you should take steps to carefully research zoning laws and building codes, explore financing options, work with experienced professionals, and plan their design carefully.
When selecting a property for ADU development, consider factors such as zoning regulations, lot size, utility connections, and access to public transportation.
Investors looking to market to ADU owners can use effective strategies such as online advertising, direct mail, networking, hosting seminars and workshops, partnering with ADU builders, and social media marketing.
If you’re looking to attract tenants and maximize rental income, develop a pricing strategy, offer amenities, consider furnishing the property, ensure property maintenance, and use targeted marketing strategies.
With careful planning and attention to detail, you can build an ADU that provides significant benefits for themselves and their communities.