Why add an ADU?
With the passage of SB 1069, the majority of homeowners in California can now add an ADU to their property in one form or another. But homeowners who are just now learning of this option wonder; What are the benefits?
Generate Rental Income
There is no question that with today’s rental prices, homeowners who build ADUs have the potential to generate substantial income, which in many cases can pay for their entire project in a matter of a few years.
The rise of vacation rental platforms like Airbnb and VRBO have caused more and more property owners who have historically rented to long-term local tenants, to turn to short-term rental models to increase their rental income. This shift has inadvertently had a restrictive effect on rental housing supply as a whole and made more development for long-term, market rate rentals a necessity.
While vacation rentals provide the opportunity for increased profitability, they are also subject to some inconsistency due to seasonality and changing local regulations. Planning to lease your ADU as a long-term market rate rental will generate strong returns that are predictable and fully legalized.
Add Housing Stock
California needs housing more than ever before and ADUs arguably provide the clearest path to add housing in cities across the state. With over 6,000,000 single family households throughout the state, and over 55% being occupied by the owner, ADUs present Californians the opportunity to collectively build millions of homes within our existing neighborhoods. Each homeowner who chooses to build an ADU is not only making a sound financial investment, they are also contributing to solving our state’s housing challenges.
Increase Property Value
A long term benefit of building an ADU is the value that it will add to your home over time. Many homeowners find that the cost to build an ADU, in the end, is actually less than their gain in equity value within a few years and in some cases immediately. While little data currently exists on the ADU market, early signs indicate that the returns homeowners generate could be are higher than that of large scale real estate developers, when both property appreciation, costs for land and rental income are considered.
House Friends & Family
Commonly referred to as in-law suites or granny flats, ADUs provide homeowners with flexible space to support family and friends. Whether that means kids coming home from college or allowing elders to age in place, many homeowners long term plans revolve around supporting their loved ones than a purely financial investment.
What are the options?
With the various types of ADUs that are recognized in the new state legislation, local requirements are now becoming more standardized and allowing ADUs in more forms. Based on the many options, nearly all homes are eligible to add an ADU in at least one form or another.
Better known as backyard cottages or guest suites, Detached ADUs provide complete living facilities, including a full kitchen and bathroom, that are completely separate from the primary home. They can either be new construction or a conversion from an existing detached garage and provide a good option for properties that have a lot of extra yard space. One important requirement in many jurisdictions is that the new ADU’s exterior materials and characteristics must resemble the primary home. Check your city page for the requirements in your area.
An attached ADU is typically a new construction or the remodel of existing space in the primary home that provides separate living facilities. They could be a garage conversion or a new addition to the home. Attached ADUs are almost always required to resemble the primary home on the exterior.
A junior ADU is the conversion of existing space that is entirely contained within the primary home. JADUs are typically required to be under 500 square feet and are allowed to share a bathroom with the primary home.
Estimate Cost & Return
The costs of building an ADU vary widely depending on location, type and requirements. Generally speaking, the conversion of existing space is most likely to be less expensive than new construction of a detached unit. While a garage conversion may cost less than $50,000 to obtain the required permits and make the necessary remodeling improvements to the space, a detached unit will seldom cost less than $100,000 when all project costs are considered, no matter how small the unit is. This is due to the fixed costs of permitting, utility connections and professional services for the project.
The most important thing to do when you are initially estimating your return on investment for your project is to first understand all of your options and evaluate the costs of each compared with the rental income and appreciation they will each generate.