The Ins and Outs of ADUs

It is no secret that Accessory Dwelling Units (ADUs) are popping up all over, especially in areas where the population is growing rapidly, such as in the south or on the west coast. Homeowners who are looking to make passive income, expand their square footage, or host friends and family are turning to ADUs as a way to address these pain points.

Even though there has been a huge rise in popularity, many people who may be interested in exploring the possibilities of ADUs may feel intimidated by the perceived ambiguity in the industry. Maybe this sounds like you?

We've asked experts in the real estate and mortgages industry to answer your questions about the following ADU basics:

1. What is an ADU?
2. What are ADUs used for?
3. How much does an ADU cost?
4. How can ADUs provide additional income?
5. What are ADU pros and cons?

Bonus: Testimonial of a ADU homeowner/real estate broker

1. What is an ADU?

An Accessory Dwelling Unit, or ADU, is a secondary unit either attached or detached to a single-family home. ADUs typically tap into the utilities of the primary house located on the same property. For a space to be considered an ADU it must have its own kitchen, living area/bedroom, and a private entrance. Common ways to refer to an ADU may be an in-law unit, secondary dwelling unit, guest house, granny flat, pool house, converted garage, etc. 

While standard ADUs can vary in square footage, a homeowner may choose to create a Junior Accessory Dwelling Unit (JADU), which is a living unit with a maximum of 500 square feet, generally converted from within the walls of the primary residence. A Junior ADU may include a small kitchen and usually have interior access to the primary home.

Given the liberalization of ADU permitting across the West Coast, professionals in the housing market, such as Unison, expects the number of ADU units to grow over the coming months and years. Renters want the housing, and homeowners want the income and flexible living to help combat the housing crisis. Building an ADU is one way that people are attempting to combat the housing crisis.

2. What are ADUs used for?

Accessory dwelling units work so well because their use is flexible. Real estate experts Brian Davis and Paul Dashevsky give a comprehensive list of what ADUs are typically used for:

• Guest space
• In-law unit
• Adult child housing
• Long-term rental housing
• Short-term Airbnb-style rental housing
• Fitness studio
• Home office
• Home for returning college kids
• Additional source of income onto a rental property

Even folks looking to help pay for reitrement are turning to ADUs as an option. Dashevsky observes that the industry is seeing more "seniors build ADUs with the intention of moving into the ADU and are renting out their main houses as a source of income to finance their retirement."

The options go as far as your unique situation and imagination. The purpose and utility of your ADU does not have to remain stagnant; it can transform overtime to meet your circumstances. Perhaps your ADU starts as an office space, but then turns into a rental property. Whether you are wanting extra space, extra income, or both, there is a lot of initial appeal attached with ADUs. However, how you're going to use the space could influence whether or not you create a detached ADU or an attached ADU. For example, renters may appreciate some extra privacy, so if your intention is to rent then a detached ADU could be a good choice, whereas an attached ADU could perhaps serve your purposes otherwise.

3. How much does an ADU cost?

The general estimate is that an ADU will cost typically around $100,000-$140,000, although this cost could extend up to $180,000. The cost however will vary greatly by region, labor expenses, square footage, materials etc.

For example, in regions where the cost of living is more expensive, like California, the average cost per ADU tends to be more expensive. Dashevksy explains that, "in Los Angeles, you can expect costs to average about $300-$400 per square foot; so a new 500 square foot one-bedroom ADU might cost $150,000-$200,000."

It is important to note that besides the general geographical location of your property, the cost of labor is the second most varying cost factor to take into consideration. The bulk of your money will be going to pay contractors and laborers. If you are looking to cut costs, consider the opportunity cost of taking the time to do some of the labor yourself that doesn't require specialty training.

Another way to cut the cost of labor is to buy prefabricated ADUs. Prefabricated ADUs are built in a highly streamlined, factory-like process, similar to how products are developed by an assembly line. While prefabricated ADUs will help to mitigate the cost of labor, you will lack major customizable elements. ADU expert Davis adds that, "the cost (of a prefabricated ADU) can range anywhere from $15,000 kits on Amazon up to $100,000 or more for custom stick-built structures." 

Davis continues, "Whether your ADU is more high end or not, given their popularity and income potential, ADUs often pay for themselves relatively quickly if you rent them out. Sometimes the income from them can cover these costs within a few years. And they often add instant equity, as the value of your property spikes upward given its extra living space and income potential." 

Contact your local real estate agent or contractor for a better understanding of what an ADU may cost to construct in your neighborhood on your property. 

4. How can ADUs provide additional income?

One of the most appealing things about an ADU is the income potential. Some people build an ADU with the intention of renting it out to others, some consider building an ADU to live in themselves, then rent out their main house as a way to both downsize and provide a steady source of income.

Davis explains this additional income source as house hacking: "Homeowners who rent out their ADU, whether long-term or to short-term vacationers, add an income stream to cover some or all of their housing costs. It’s a strategy known as house hacking — finding a way to reduce/eliminate your housing costs through someone else paying them.” 

This sounds great, but maybe you're a bit skeptical about how easy it is to actually rent out an ADU? Real estate expert Connie Heintz  dives into the appeal of ADUs from a potential renter's point of view. "Because an ADU is an entire dwelling space, you can easily rent it out for additional income as a home, but charge accordingly. You might take a few hundred off the price because it’s on your property, so your renters won’t have the privacy that they’d get from having a property to themselves. But in most places, the cost of rent will still pay for the cost of the ADU in less than a decade.

If you do plan on renting out your ADU, I recommend not to attach it to your house. As long as you have the space for a standalone unit, it’s a much better option. You’ll save some money because you won’t have to pay to attach it to your house, but renters are likely to pay more for it because they’ll have extra privacy.” 

If you price your ADU according to the size and privacy restraints that often are characterized by ADUs then yes, renting out your ADU is a very appealing option for many renters. Think newlyweds, single professionals, or even empty nesters as prime renter candidates.

5. What are ADU pros and cons?

If an ADU sounds like a potential solution to your situation, consider weighing these basic characteristics as you begin looking into building an ADU more seriously:

Issues of zoning, permits, and property laws seem to be the biggest roadblock that homeowners face when trying to build an ADU.

Heintz warns that “the downsides of ADUs are mostly related to insurance and zoning laws, which can vary greatly by state, county, or neighborhood. There are all kinds of rules and regulations related to adding structures onto your property. For example, if you add a standalone unit, you might also have to add parking for another car. This is common in some areas, so you should do your research before you commit to building an ADU.” 

In addition, if you decide to rent out your space, short or long-term, you take on the role of becoming a landlord. You are now responsible to pay for any damages that renters may cause to the space, as well as relinquish a bit of your privacy to your close ADU renters. Whether you are running a short-term Airbnb-style rental or a long-term rental, the stress and lack of control that is common with the role of a landlord can be a major deterrent for many.

Bonus: Testimonial of an ADU homeowner/real estate broker

Broker, investor, and house hacker in Los Angeles, Rick Albert, is not only a real estate expert but an ADU owner and dweller himself. He shares below his unique perspective on turning his garage into a converted ADU.

“The main reason I own and live in an ADU unit is because it offsets the cost. By living in the ADU and renting out the main house, 69.5 percent of my mortgage, property taxes, and insurance is covered by the tenant.  In an expensive city like Los Angeles, it is a creative way to make it work.

The cost is up to about $100,000 for our garage conversion. You are spending close to $10,000 alone on permits, architectural fees, engineering, and utility fees before even touching the garage. I am the only one out of everyone I know that is actually living in the ADU. Otherwise, everyone I know is renting theirs out.  

The major pro is the rental potential. I know people who are renting out their converted garages as ADUs for anywhere from about $1,500 to almost $2,200 per month depending on location.

The main con, besides lack of storage, is making sure that you do the conversion right. This includes no windows facing the main house, adding washer/dryer hook ups, and creating a yard space for the unit.  When these things lack, it makes it tougher to rent out for a good price. This is especially true for studios, because you may get higher turnover versus a true one to three bedroom place.”  

The bottom line

If you are looking for additional space and/or income, building an ADU is worth looking into. Download our free ADU guide to help you decide whether or not an ADU is right for you.

Another mainstream trend in the affordable housing market is the rise of tiny homes. Tiny homes are an up and coming solution to the housing affordability crisis as well. Check out this article if you're interested in finding other non-traditional ways to make your housing more affordable.

Expert Contributors: 

• Paul Dashevsky, co-founder of GreatBuildz, a Los Angeles-based free service that simplifies the contractor search by directly connecting homeowners with reliable renovation contractors.
• Rick Albert, Broker Associate with LAMERICA Real Estate, and investor/house hacker in Los Angeles. 
• Connie Heintz, real estate agent working in Toronto and founder of DIYoffer.
• Brian Davis, real estate investor and co-founder at Spark Rental, where we focus on financial independence, personal finance, real estate investing, and passive income.