Accessory Dwelling Unit: Your Property's Hidden Potential

Your backyard could be hiding a goldmine. No, not buried treasure - we're talking about accessory dwelling units (ADUs). These compact living spaces are turning unused property into income-generating assets. But is an ADU right for your situation?

ADUs generate rental income, boost property value, and provide flexible living solutions that are in high demand. As they grow in popularity, these units are emerging as smart investments with the potential for strong returns while addressing critical housing needs.

This guide explores various ADU types and examines the pros and cons of investing in them. We'll cover state-specific regulations and explore financing options to help you decide if an ADU is the right move for your property.

Definition of an accessory dwelling unit

An accessory dwelling unit (ADU) is a secondary living space on the same lot as a primary residence. ADUs refer to spaces within a single-family home, not multifamily buildings. Other names you might hear people use are carriage house, guest house, or casita.

An ADU has everything someone needs to live independently, including a bathroom and kitchen. It also features a separate entrance from the primary house, providing privacy for both the main home occupants and ADU residents.

Types of accessory dwelling units

You might think of an ADU as a completely separate building on a property, but there are several different options.

Detached accessory dwelling units

Detached ADUs are standalone structures separate from the main house. People build them to house family members or to earn rental income. You have two options for adding one:

1. Convert an existing structure, like a detached garage, into a living space.
2. Build a new structure on your existing lot.

Whichever route you choose, you'll need to navigate local zoning regulations, get building permits, and collaborate with city inspectors throughout the construction process.

Attached accessory dwelling units

You don't always have to build separate structures on existing property. With enough space, you can get creative with your single-family home and add an ADU without building a new structure. Examples include:

• Basement apartment ADU
• Garage conversion
• Side or rear addition
• Second story addition
• Attic conversion

Tiny houses

A tiny house is a small, separate living unit usually measuring less than 400 square feet. You can build tiny houses on a permanent foundation or on wheels. Those on wheels may be considered RVs, which fall under different zoning regulations than ADUs.

Pros and cons of adding an accessory dwelling unit

Building an ADU isn't always easy, so considering the pros and cons can help determine if it's the right investment for your property.

Pros

• Rental income: Adding an ADU to your property lets you rent out the space and make additional income. Most cities allow long-term tenants, but short-term rentals can be trickier. Some places might require a minimum stay, like 31 days. Cities have different rules, so check what's allowed in your area before you start an ADU development.
• Increased property value: An ADU can bump up your property value. Potential buyers often consider ADUs a major plus since they offer flexible extra space. It's like getting two properties for the price of one, which can make your home stand out in the real estate market.
• Space for family members: Many people build ADUs with family in mind. They're ideal if you have an elderly family member who wants to maintain their independence while still being close enough for easy care and support.

Cons

• Construction costs: Building an ADU isn't cheap. You'll have a large investment, whether you're converting existing space or building from scratch. For reference, Reddit user Dommichu from California shared their experience: "Most of my friends have paid $200-$300k with an existing garage. ADUs are pricy, even with a premade plan, because of the cost of hooking up electrical and plumbing." These costs are just one example and can vary based on your specific situation and local market.
• Zoning and permitting: Local regulations can be challenging. Each city has its own rules about ADU size, placement, and design. Zoning regulations consider areas like setbacks, parking, and building height.
• Increased property taxes: Adding an ADU increases your property value, which is positive but comes with the drawback of higher property taxes. Since you're expanding your property's living space, the assessed value and your tax bill go up. You'll need to factor this cost into your return on investment calculations for the investment.
• Maintenance and management: Adding another living space to your property means more maintenance. You're essentially doubling up on many home systems - two kitchens, two sets of appliances, more plumbing to keep an eye on, and so on.

ADU development regulations

Each state and local government has different rules around ADUs. Some examples of states that support ADUs as a way to address affordable housing include:

California

The Golden State makes it easier to build ADUs with recent laws to speed up the approval process and expand options for property owners. For example:

• SB 9 allows homeowners to split single-family lots and build up to four units.
• AB 68 and AB 881 simplify the ADU approval process.
• SB 13 makes ADUs more affordable by cutting fees and relaxing parking requirements.

New York

New York recently passed legislation to make it easier for homeowners to build an ADU at their primary residence. These regulations state:

• Cities must approve or deny ADU development plans within 60 days.
• Permit fees cannot exceed $1000.
• You can use ADUs for rental housing stays of more than 30 days.

Washington

Washington state is addressing local housing affordability through two key pieces of legislation:

• HB 1923 provides grants to cities that pass ordinances supporting ADUs.
• SB 6617 requires cities to allow ADUs in single-family home zones and prohibits local restrictions such as owner occupancy requirements.

Financing your ADU

If you want to add an ADU to your primary residence but aren't sure how to pay for the development, here are some available funding options:

• Renovation loan: This type of loan allows you to borrow based on the future value of your home once you have the ADU. It can have more flexible terms than traditional mortgages and is an option if you don't have much equity in your property yet.
• Home equity loan or HELOC: These options allow you to borrow against the equity you've built in your property. A home equity loan provides a lump sum with a fixed interest rate, while a HELOC works more like a credit card with a variable interest rate.
• Cash-out refinancing: You can refinance your existing mortgage for more than you currently owe, take the difference in cash, and use those funds for your ADU project.
• State or city grants: Some states or cities offer grants to help residents add ADUs. For example, California offers the CalHFA ADU grant program, which provides funding to eligible homeowners. In New York, grants are available through the ADU Plus One Program.

Managing an additional housing unit

If you add an ADU for rental income, you'll need a way to manage the property and tenants. Azibo offers an integrated platform with everything you need all in one place, including:

• Rental applications: Collect information from prospective tenants to evaluate their suitability.
• Tenant screening: Verify a tenant's background, credit history, and rental history to assess risk.
• Lease agreements: Create state-specific, legally compliant agreements outlining the terms and conditions for your ADU.
• Rent collection: Easily collect rent online and direct deposit into your banking account.
• Maintenance and messaging: Tenants can submit maintenance requests online so you can review and track their status.
• Accounting: Track and manage financial transactions like expenses and income for your ADU.
• Financial management: Report on your property's finances and plan out your budget.
• Document storage: Securely store important rental documents and records.
• Landlord insurance: Easily purchase policies for your ADU to protect your investment.

What is an ADU

ADUs can be a strategic investment for your property. They offer the potential for increased rental income and property value appreciation while also providing housing flexibility. However, like any investment, they come with initial costs, ongoing responsibilities, and regulatory considerations.

Evaluating ADU types, local regulations, and financial projections can help you decide if this investment aligns with your property goals and risk tolerance. Your property may hold untapped investment potential, so it's worth exploring to see if an ADU could enhance your real estate portfolio.

Accessory dwelling unit: FAQs

Are ADUs allowed in Texas?

Texas permits ADUs, but regulations vary because there isn't a statewide law governing accessory dwelling units. Individual cities establish their own rules regarding zoning, size restrictions, and usage guidelines.

Do ADUs have bathrooms?

ADUs include bathrooms since they function as self-contained living spaces. These units provide all required amenities for occupants, including bathroom facilities and kitchens.

Are ADUs allowed in Colorado?

Colorado allows ADUs and passed legislation like House Bill 24-1152, which states that cities of more than 1000 people must allow ADUs.