More and more people are choosing to share living spaces in an attempt to account for the latest surge in home values, and accessory dwelling units (ADUs) have helped homeowners accommodate the transition for years. However, it is worth noting that improvements in the economy have seen the use of these alternative living spaces come into question.
The concept of an ADU is nothing new, but these living arrangements’ popularity continues to fluctuate. This leaves a few questions to be answered: What is an ADU in real estate? How much does it cost to build? Is it a worthwhile investment for today’s real estate entrepreneurs? The answers to these questions, and many more, can be found in the following guide.
What Is An ADU?
An accessory dwelling unit (ADU), otherwise known as a “mother-in-law” or “granny flat,” is an additional living quarter located on the same lot as an existing single-family home. While accessory dwelling units may be attached or detached, their purpose is to provide their tenants with complete and independent living facilities. To be classified as an accessory dwelling unit, the living space must include permanent living, sleeping, eating, cooking, and sanitation. In other words, an ADU is essentially a self-sufficient home that happens to be located on the same plot as a single-family home. Zoning laws will vary between each municipality. The criteria that make up an ADU house may differ, so be sure to check with the proper authorities in your area to better understand what an ADU is.
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Benefits Of An ADU
In the past, building an ADU was closely associated with housing close family members or friends. Increasing the occupancy rate of a subject property helped countless families afford their mortgages when the economy was less than forgiving. However, as the economy improved, so too did the usage of ADU real estate. In addition to making homes more affordable for generational families, the benefits have expanded to include the following:
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An ADU home is perfectly capable of serving as an income-producing real estate asset.
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It may increase the occupancy rate of a subject plot of land, allowing more residents to enjoy the same area.
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Higher occupancy rates translate into more affordable living situations for families with multiple incomes.
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The parents of younger families may move into an ADU house to be closer to caregivers and loved ones.
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Homeowners who don’t need the vast confines of their original home may be able to move into an ADU house and rent out the primary unit.
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They offer a way for homeowners to optimize the traditional American home.
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As the concept of the ADU home continues to grow in popularity, so too do the forms of financing that facilitate their development and construction.
Drawbacks Of An ADU
ADU real estate has grown in popularity, and for good reason: the opportunity to generate passive income from an existing piece of property is too good for many homeowners to pass on. That said, accessory dwelling units are not without their own caveats. While they may have become synonymous with several encouraging benefits, there are some drawbacks homeowners need to at least take into consideration:
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ADU real estate isn’t a more basic living arrangement; it requires just as much attention to detail, permitting and care as a traditional single-family home.
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Zoning laws will vary from city to city, which can be confusing for those who have never owned or built an ADU home. For example, in some jurisdictions, ADU-endowed properties must be owner-occupied.
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Building an ADU can be expensive; sometimes as much as buying a brand-new home in some parts of the country..
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When an accessory dwelling unit is built on a property, it inherently increases property taxes.
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Accessory dwelling units coincide with a lot of ”red tape,” which can be confusing and dense to those who are unfamiliar with the concept as a whole.
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Building an ADU will detract from the square footage of usable outdoor living space.
How Much Does An ADU Cost To Build?
The cost of building an ADU is contingent on several factors, the most important of which is whether or not the unit is attached or detached. Detached accessory dwelling units, for example, cost quite a bit more than their attached counterparts. According to AccessoryDwellings.org, detached ADU real estate can cost homeowners upwards of twice as much as attached units. Whereas an analysis of data provided by Portland ADU Owners suggests detached ADUs can cost anywhere from $9,000 to $300,0000 to build, the same data set also tells us that attached ADUs can cost anywhere from $3,500 to $200,000 to build.
Outside of their proximity to the existing property, many factors determine the true cost of building an ADU. The location in which the home is located, the size of the addition, the amenities built into the new unit, the work put into designing the ADU, and the permits required to build the ADU, are a few examples of additional costs.
The upfront costs of building an ADU can be high, but financing options are becoming more available. More importantly, many of the financing options made available make it possible for owners to capitalize on today’s hot rental market.
Financing ADU Construction
The best way to finance your ADU construction will depend on your financial circumstances. For instance, you could take out a renovation loan, use homeowner refinancing if you have any equity, or use any cash you might have on hand. Some homeowners might build an ADU to accommodate a parent who will be living with them to help raise their children, or in their old age, for instance. If you are building out an ADU for the benefit of someone in particular, then perhaps it would be appropriate to ask them to chip in if their finances allow.
Alternatively, you may be constructing an ADU to secure rental income from a tenant. Be sure to run a thorough cost analysis; your tax bill could go up, thus eating into your profit. It may take a while before the rental income can offset any costs.
What Are The Different Types Of ADUs?
There are three primary types of ADUs: detached structures completely independent of the primary residence attached external apartments with their own entrances, and attached internal units with communal and/or separate entrances.
As their names suggest, detached structures are ADUs built somewhere else on the same plot of land as the existing home. Detached ADUs do not share any primary residence walls and must have their own utilities in most municipalities. That means detached ADUs will need their own utility hookups and mechanical appliances. As a result, detached units are typically more costly to build, but they may also award their inhabitants more privacy, which bodes well for landlords intent on renting the space out.
Unlike their detached counterparts, attached external units share at least one wall with the primary residence. However, it is worth noting that the wall may be the only thing they share. Most attached external units have their own entrances and utility connections to function as thrown independent units. That said, attached units typically cost a lot less to build, which may allow more homeowners to attempt to construct their own.
The last type is the attached internal unit. As their names suggest, these units are fully integrated into the existing structure. From the outside, it may not be obvious the home contains an ADU. However, the extra units may take the form of basement or attic units. Either way, the walls of the ADU are all shared with the primary house. More often than not, they share utility services and mechanical appliances with the main unit. Due largely to the fully integrated nature, these units are the most common ADU homes.
Is An ADU A Good Investment?
Determining whether or not an ADU is a good investment is entirely dependent on current market conditions and the amount required to get the unit “up and running.” Again, building an ADU may require some homeowners to part ways with an exorbitant amount of money. Therefore, ADUs may be worth the investment if the owner can recoup the initial investment in a reasonable amount of time. Likewise, this particular investment strategy is more geared towards long-term commitments. However, it is worth noting that building an ADU may take time, so profits may not come in immediately. Investors considering building an ADU should account for the time it takes to build the unit and get renters into it.
Do ADUs Increase Home Value?
ADUs add value to your home, but this will vary by the market the property is located in. ADUs add livable square footage to an existing property. Home appraisers will use this additional square footage to calculate how much the property is now worth. However, converting an existing space to an ADU may decrease the property’s value if the intended use of the space is lost. This is common when property owners convert garage spaces into an ADU, as the intended garage space is lost in the transition.
According to a report conducted by experts at HomeLight “the value of ADUs, given their increased use for multi-generational housing during the pandemic and functional ability to add living space to a property, increased 38% nationally since pre-COVID times, from $47,597 to $65,908.”
Legal Considerations
When building an ADU, there are two primary legal considerations: zoning laws and building codes. Zoning laws are set at the local level, meaning the exact requirements will depend on where you live. Some cities promote ADU’s while others do not. Be careful, as some cities appear to endorse ADU’s but have prohibitive zoning preconditions.
For the most part, cities will only allow an ADU to be built as part of a single-family home. If you consider building an ADU, research your area’s zoning laws and review the paperwork with a lawyer before getting started. If you consider purchasing a property with an ADU already added, it is also a good idea to confirm that it was zoned correctly.
Some common zoning building preconditions include:
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The construction of an additional parking space may be required, which may be difficult in urban areas.
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Homeowner occupancy may be required in one of the two units on the lot. In layman’s terms, this means that the owner must live in either the main property or the ADU. This would prevent an investor from implementing a rental property strategy unless they lived in one of the units.
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Some cities may only approve the construction of an ADU if the plan is approved by neighbors.
In terms of building codes, many cities have legal requirements to guarantee the safety of an ADU. In most cases, this means ADUs are required to have a lockable entrance and exit. They also typically must have a window in the bedroom as part of fire safety requirements. Again, the specific building codes will vary depending on your city, so it is crucial to look them up before drafting any construction plans.
Summary
The idea of adding an accessory dwelling unit to an existing property gained notoriety as the latest depression took hold of the country. The ability to increase property occupancy rates awarded savvy homeowners with a lower cost of living. However, today’s economic conditions have once again increased the popularity of ADUs. More and more homeowners ask what is an ADU in real estate? Consider how an ADU could be added to your home; you may find ADU real estate strategies complement your long-term rental portfolio.
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