Accessory Dwelling Units: Explained

More and more of my millennial homebuyer clients are finding creative ways to earn extra money using the space they already own. The opportunity to utilize extra space in your own yard may sound too good to be true but is entirely possible with an accessory dwelling unit (ADU). If you have thought about having a private place for visitors to stay or even generating extra income, then building an additional structure or converting a garage into living space may be ideal.

The term ADU sounds like an institutional name, but is really just real estate lingo for a secondary housing unit on a single-family residential lot, like an in-law suite, guest house or a garage converted into living space. ADUs cannot be individually sold as property, but they can provide plenty of value for the property owner.

In big cities and popular areas to live, space is very limited. The United States is currently facing a shortage of affordable housing, and the housing units that are available can be out of financial reach for many people. High prices, limited inventory and rising interest rates are causing homeowners to get creative with their finances in order to find the best solutions to cover housing costs. To address the needs of renters seeking living arrangements, homeowners can construct or convert a space of their property or home into an ADU. Still, there are too few permitted ADUs to add enough housing stock where it’s needed in major cities like my hometown of Los Angeles, but I hope to see that change.

In Los Angeles and many other cities, governments have instructed the building and safety departments to remove previous barriers in order to encourage homeowners to add a second unit to their home. It’s great to see homeowners turning to ADUs to solve their own housing cost dilemmas with solutions in their own backyards. I predict we’ll see an uptick of people building or utilizing accessory dwelling units on their properties to make extra income as a rental or as a permanent home for family members.  

Multigenerational living has been common for parents who want to live close to their children, whether to offer extra support with raising a family or because the parents themselves need some financial help. Communal living has increased recently as young people struggle to pay off expensive school tuitions, and it is common today to live with parents well into adult age. Having an ADU can make this type of living situation much more comfortable and private than trying to squeeze into one house. 

Short-term rentals have opened up new possibilities for homeowners to make the maximum efficiency and earnings from their spaces since the rental prices tend to be higher overall, and there is a chance to increase the nightly costs around popular times of year or local events. This flexibility benefits the people renting the space, but it also benefits the homeowner, who can receive an extra monthly rental income, all without having to share living areas. An ADU can be a great way to bring in some extra income to help offset the costs of owning a home. Some homeowners are going to greater lengths as savvy landlords and moving themselves into the ADU unit while they rent out the main house to tenants. 

An ADU doesn’t have to be a standalone structure; it can be built as an extension to the main house or on top of an existing garage. Homeowners can convert existing structures like a garage or poolhouse to an ADU as long as it has its own entrance, at least one bathroom and a kitchen. If you have plenty of parking space on the street or in the driveway, converting a garage can be ideal as an ADU. 

If the property doesn’t come with a ready-built ADU structure, there may be an option to build one. For ground-up construction, you will want to run the plans by your local department of building and safety. Regulations can vary extensively based on the property location, and you will need to follow local zoning regulations in order to get the necessary permits. The city will issue a certificate of occupancy once they have inspected the completed building to ensure it is livable (aka that the electricity, plumbing and heating work). Taking on a construction project of building a new unit or even ordering a prefabricated one is a significant cost, so homeowners will want to do their research beforehand.

The first step to adding an ADU to your home is to look up local laws, which you can often find on your city government website, or inquire with City Hall for the details. While many local governments are changing laws to make adding an ADU a more accessible option, some are actually making it more difficult by requiring property to be re-zoned. Not all cities will allow the construction of new ADU, or there could be city requirements around the square footage or parking spaces available for the ADU.

The cost of adding a new unit can be upwards of $50,000 depending on the size and factors of your lot. Renting out a unit on a short-term basis may ultimately fetch a higher nightly price, but would mean the unit has to be fully furnished and requires cleaning between every guest. Building a structure may be financed via a construction loan or a line of credit secured by your existing home. Before you build, any interest payments on a loan should be factored in to figure out what profit can be made and how much to charge tenants. In a city like Los Angeles, it may make sense to spend $250,000 on building an additional space if you can secure a steady stream of short-term vacation tenants, whereas that would be more than a house would cost in other cities. One solution does not fit all, so consider your options and expectations carefully.

This post first appeared on Forbes.com. To see the original, click here.