“I’m a realtor, so I’m always looking for ADUs, whether they’re already in existence or an opportunity to build. It’s a good, good investment,” says Brian Lawson of San Jose.
Brian and his wife completed their ADU in 2021 and couldn’t be happier. They know that as the cost of housing rises, so do the financial benefits of owning an ADU.
In an unpredictable world, an accessory dwelling unit is one of the most reliable long-term investments you can make. They cost a lot to construct, so if you’re looking for short-term ROI on the sale of your house, the numbers are less certain.
But over the long run, an ADU is likely to give you a great return on investment. How great? A 2021 Porch Survey found that in the Pacific region of the U.S., homes with an ADU see an average 35% increase in resale value over homes without an ADU.
As a long-term investment, a housing option for you and your family, and a potential source of passive income, ADUs are hard to beat!
The California ADU calculation
California leads the nation in construction of new ADUs. Our real estate is expensive, so the appeal is clear: the cost per square foot to construct an ADU is almost always significantly less than the average price per square foot to purchase a home.
In addition to long-term ROI, most homeowners have immediate financial incentives for building an ADU. According to a 2021 nationwide realtor survey conducted by Homelight:
- 61% of homeowners build an ADU to house their aging parents
- 35% build an ADU to house their adult children
- 32% build an ADU for rental income
Which ADU is worth the most?
A detached ADU will add the most value to your property. Next in value is an ADU attached to the main house.
An ADU converted from existing space within the primary house, like a master bedroom suite, attic, or basement, will add the least value to your property. But it will still add value!
Let’s look at how an ADU can generate passive income, save you money, increase your personal options, and maximize your property’s value both now and in the future.
House a senior family member
“I wish we had done this five years ago, because previously we’d see my parents maybe once a month. Now that I see them on almost a daily basis, I can see where they’re struggling and where they need help.” —Tony Miley, Los Altos
At 94 and 85, Tony’s dad and mom are in great shape for their age. But living in a two-story San Francisco house at the top of a steep hill became unmanageable and just plain dangerous.
The two-bedroom, one-bath ADU Tony built for his parents has universal design, including a ramp and a no-threshold shower. “Everything was designed around having somebody who is older and less mobile.”
Assisted living homes in San Francisco cost between $4,400 and $6,400 for one person, and more for a couple. The monthly cost of an ADU is a fraction of that amount!
As seniors age, there may come a time when they have no choice but to move to assisted living. If you’ve built an ADU, you can rent it out to defray those costs.
You can also build an ADU large enough to house a caretaker as well as your relative, in which case you’ll be able to save money on a nursing home and keep your loved one close. The more bedrooms the ADU has, the more you’ll be able to charge for rent if you someday go that route.
House your kids!
“Our son is in his early 20s and the cost of housing is prohibitive. We looked at adding an ADU or helping him buy a condo, but there was just no comparison.” —Kate Coyne, San Diego
If you want to help your kids in today’s housing crunch, chances are you’ll come to the same conclusion as the Coynes. Your other choice? Pay at least $2500/month for a two-bedroom, one-bath apartment in San Diego. That’s money down the drain.
Parents of young adults know that it’s common for them to cycle in and out of the family home while they’re in their 20s and 30s. The high cost of housing is at the root of this.
Whether your child needs a place to land after college or somewhere to save up money for a down payment on their own home, an ADU can provide housing while giving both parents and kids the privacy they crave.
The flexibility of an ADU is especially helpful when you’re housing family members. If you’ve rented the ADU and your child needs to move home, you are legally allowed to end the tenant’s agreement because you’re moving a relative into the ADU.
Rent your ADU
“Having an income-producing property right on site where we’re living enabled me to not have to find a full-time job outside of the house. I was able stay home with our son.”—Kylie Meterhouser, Mission Beach
ADUs are an ideal source of passive income, and they keep getting more lucrative.
To get a sense of the income an ADU in your area could generate, research local rents on rentcafe, craigslist, AirBNB, or vrbo. ADUs offer more privacy than apartments, and many have their own outdoor areas, which makes them more appealing to a lot of tenants.
The 2020 California ADU laws were meant to create long-term housing, but depending on your jurisdiction you may be able to rent your ADU on a short-term platform like Airbnb.
The short-term nightly rates may earn you more than monthly rent from a tenant, but short-term rentals also demand a lot more cleaning and maintenance.
If you rent the ADU to a long-term tenant, it’s legal to rent both your main house and the ADU while you live somewhere else. This “no owner occupancy” clause applies to ADUs built between 2020 and 2025 and may be extended beyond that.
You can also rent your ADU to tenants who will only be there for a few months, such as traveling nurses. That counts as long-term rental, and it still gives you a lot of flexibility. When the tenant leaves you can adjust the rent or move a friend or family member into the ADU.
Use your ADU as an office
“I used to pay $3000 a month for an office, plus $200 a month for parking. The ADU added about $500 a month to our mortgage, so compared to the office it was quite a savings.”—Walter G., Los Angeles
According to a report by Upwork, “The number of remote workers in the next five years is expected to be nearly double what it was before COVID-19: By 2025, 36.2 million Americans will be remote.”
That’s a third of all workers in the United States! Millions will need a private work space: therapists and other professionals often don’t want to conduct business in a converted bedroom.
Not only can an ADU save you thousands in office rent as it does for Walter, if you retire you can rent the space and earn passive income.
Live in the ADU, rent your main house
The ultimate in terms of passive income and flexibility is to live in the ADU and rent your main house.
Need extra funds to travel or retire early? Problem solved!
By renting the main house, we don’t necessarily mean you must rent it to a family that will be there for ten years. You can rent it:
- on a short-term rental platform like Airbnb
- for a few months at a time to traveling nurses or other professionals
- for the academic year to a professor who’s on sabbatical
- for top dollar during high season in your area
- for a few years to fortify your savings account, then move back into the main house
Crunching the numbers
If you’re considering an ADU, you’ll want to know how it will impact your mortgage and other monthly bills.
You’ll need to factor in:
- The cost of design, permitting, and building the ADU
- Additional property taxes, which in California average 1.25% the cost of the ADU
- Additional homeowners insurance
When you add up these numbers, you’ll have a monthly sum you can use to weigh your options.
- How much passive income will you earn from rent after you’ve paid the monthly ADU expenses?
- How much will you be saving compared to the cost of an apartment or office?
- How much money would you lose forever if you were paying rent on housing for your parents or kids, or for office space?
- How much will your property value increase?
- How do these numbers compare with the average return from your investment portfolio?
Your ADU is affordable housing and a solid investment
Finding solutions to the housing crisis is one of the main reasons Maxable got into the ADU space. It’s pretty clear there isn’t going to be a glut of housing anytime soon in most California cities.
That makes an ADU a good choice compared to other investments. It also gives you the opportunity to provide affordable housing.
Best of all, your ADU is a flexible investment. This year you might rent out the unit. Ten years from now it could house your parents. And in another ten years, the same ADU could be your ticket to retirement!
It all starts with Maxable’s ADU Planning Phone Call
If you’re curious about ADUs but unsure where to begin, give us a call! Our ADU experts will explain the basic steps of financing and building an ADU in your area.
After helping write state laws, educating thousands of homeowners, and completing hundreds of home evaluations and ADU projects, we know accessory dwelling units better than anyone. Reach out and see if building an ADU makes financial sense for you and your family!