Accessory Dwelling Unit (ADU) Explained

Accessory dwelling units (ADUs) are all the rage right now. Let’s dive deep and explain what they are, why people build them, and how you can use them in your life.

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What Is An Accessory Dwelling Unit?

An accessory dwelling unit, simply stated, is an additional living space on your property. Technically, these dwelling units are classified as ADUs because they cannot be legally sold separately from the main house.

Examples Of Accessory Dwelling Units

There are several different types of accessory dwelling units (ADUs) you can create on your property. Examples include:

A Detached Accessory Dwelling Unit

Think of a detached ADU as a small house on your property. This can be a tiny house that you buy or have built in your backyard or converting your existing shed, bungalow, pool house, or carriage house into a place where someone can live.

Converting A Garage Into An ADU

Many people are finding that their garage has just become a place where junk collects, and elect to convert it into a small apartment, home office, or another type of ADU. Just remember as you do this – once you make the conversion, it’s awfully hard to put a car in there again, so make sure that’s what you really want!

Building Or Converting An Attached Accessory Dwelling Unit

An attached ADU can be attached to the side, rear, or another part of your home. They can be a separate wing of your home, attached to the house through a breezeway, or you can build an extra apartment off the back or side of your home. Some also people do this by building an apartment above their garage. They can also be a conversion, where you take a portion attached to your home that you’re no longer using productively and convert it into a separate dwelling unit.

Converting A Portion Of Your Current House Into An Accessory Dwelling Unit

The easiest way to describe this is the term “Mother-in-law apartment” – converting your basement, upstairs, the room(s) already above your garage, or any other portion of your house into a separate place for someone to live. 

Why People Build/Create An Accessory Dwelling Unit

There are two major reasons why people build or create accessory dwelling units.

1. Financial: 

Having an ADU can be a great way to bring in extra income by renting it out to others. Once you’ve paid the initial costs of creating one, most of the income that comes from it, other than the costs of maintaining it, can be added directly to your bank account to use as you wish.

Another key financial benefit of having an Accessory Dwelling Unit on your property is that it increases the value of your home. If you have a history of renting out your ADU for, say $1500/month, you can feature that in your home’s listing, telling potential buyers that they can also enjoy that rental income and increase the asking price on your home accordingly. Plus, oftentimes, creating an ADU creates improvements in your home that increase the value of your property.

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1. To support family members or friends:

Many parents find that their adult children, parents, grandparents, cousins, etc. need a place to live and want to offer a portion of their home to make that happen. But they also realize that everyone will be happier if that person has their own entrance, bathroom, kitchen, etc. so everyone can enjoy privacy and their separate lives. By building an ADU on their property or converting a portion of their home into an ADU, that additional peace and support becomes easier for all concerned.

Plus, once you’ve made this type of conversion, you have the opportunity to turn it into a source of income (who says you can’t charge your adult children rent, right?)

Why Are ADUs Increasing In Popularity?

There are several reasons why accessory dwelling units are becoming more popular right now. 

First, people are seeing opportunities to earn extra residual income, and recognize ADUs as a source of additional cash, particularly with the high rental fees they can charge.

Second, as the Baby Boomer generation ages, they are finding they love the house in which they raised their family, but don’t need all that space. Combine that with a desire for extra income, and adding an ADU sounds like a great idea.

Third, one word – AirBnB – if you can create a cute, popular place for people to stay in a popular market, you can get significant income by renting it out that quaint little cottage out by the pond in your backyard on AirBnB.

Fourth: as cities are becoming more popular and more built-out, there is less available space for building. Limited supply combined with increasing demand results in increased rental costs. As a result, many cities are relaxing their zoning requirements to allow the building and creation of ADUs to increase supply, hopefully reducing rental costs for new residents. Combine that with high interest rates, and low savings due to student loans and you’ve got a perfect formula for more ADUs in many markets.

How Much Does An ADU Cost?

Answering this question is like answering “how much does a vacation cost?” The answer is, it all depends.

If you buy a prebuilt small home and have it placed into your back yard, you might be able to do it for around $25,000.

If you’re handy with carpentry and you’re just adding a separate door to an existing mother-in-law suite in your basement and blocking off access to the rest of the house, you might be able to do it for a few thousand dollars.

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If you have to install plumbing, heating and air conditioning, a full bath and kitchen facilities in your garage, plan on multiple tens of thousands of dollars. 

Do I Need Permits/Permission To Build/Create An ADU?

Yes you do. Because you’re changing the nature of your property from a single dwelling to one that can have additional people living in it, you will need to contact your local municipality to find out what kinds of regulations, zoning and permits are required for you to add an accessory dwelling unit on your property. 

Since some municipalities may still not be open to this idea, we strongly recommend doing this early on, before you start spending money. 

Additionally, if you’re doing remodeling and construction work to make an ADU, you will need to abide by local permitting and inspection requirements for things like electricity, plumbing, construction, etc.

What Is Considered An Illegal ADU?

Basically, any time you add the ability for someone else to live in your home, you have the risk of creating an illegal ADU unless you follow the rules and permitting process in your local municipality. Fines, eviction, and other costly consequences can result, so we strongly recommend you go through proper channels throughout this process.

How Are ADUs Financed?

There are several different types of financing available for ADUs.

If you’re building a detached ADU (a small house in the backyard, for example), you may be able to get a construction loan to pay for the building process, then convert it into a mortgage when it’s completed.

If you’re building something attached to your home, you will usually be seeking either a HELOC (a home equity line of credit), a home equity loan, or a cash-out refinance. 

Pros Of Having An ADU

There are a number of advantages to having an ADU on your property, including:

• Additional income from renting it out or putting it on AirBnB

• Additional home value: 

Future buyers will be willing to pay extra to have the option to have their own additional income stream, which can be added into the asking price when you sell. Plus, the changes you make in creating an ADU oftentimes increase home values.

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• Designing what you want: 

The process of building and creating an ADU gives you many options, depending on the amount of contact you want to have with residences, the look you’re trying to create, and how much you want to spend.

Cons Of Having An ADU

• Having someone else living on your property. 

Remember, renters (even if they’re your own adult children) play music, stomp around on your ceiling, bring in their own guests, have parties, and may not take care of your property in the way you want it to be cared for. This is real, and you need to recognize that you can’t always control them the way you want.

• Having to maintain the ADU. 

You’ll need to budget extra to bring the ADU back up to your quality standards as tenants change. Plus there are always the 3 am calls that their toilet’s flooding the bathroom, only to discover they flushed a diaper, so you now have to pay a plumber and fix the water damage.

• Possibly additional utility expenses. 

Ideally, you’ll be able to separate the electricity, gas, water, internet and sewer for your ADU from that of your house. But many times the expense to do so is cost-prohibitive. If that’s the case, plan on having higher utility expenses (and passing that on in higher rents to your tenants.)

• It will take up more space

The ADU will take up space that used to be yours. Plus, tenants bring an extra car to park in your driveway, bikes, and strollers that live outside your door, and maybe their own grill and patio furniture. 

You should keep all these cons in mind as you consider creating your ADU. You can screen tenants, but once they’re living there, it’s hard to get rid of them unless they’re violating the law or some aspect of your written contract.

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