ADU and ROI: The Best Property Tandem

It is obvious to anyone in the US that the housing market nowadays faces a difficult period with soaring prices and limited inventory. At the same time, homeowners here and there are looking for new and innovative solutions to the problem that could help them kill two birds with one stone and boost property value along with generating additional income from the property. One of such versatile solutions is ADUs in all their shapes and forms.

Accessory dwelling units (ADUs) have long been on the radar of homeowners in California, as it is easier than ever to build an accessory dwelling unit on the lot. They represent a structure located near the main house, but which is not any higher or larger than the house itself. Existing in different forms, these units can be a perfect solution for any housing problem, from the necessity to accommodate the elderly to finding dwellers who pay monthly rent.

ADUs, however, may be quite expensive, so in order to alleviate the burden a little bit, the government allows a substantial return on investment (ROI) for ADU owners. Today, we will delve deeper into the world of returning your money for an ADU, figure out what it can actually mean for your budget, and determine how you could participate in this program in particular.

Popular ADU Types

Even though general contractors can build an ADU for your specific needs, there are some ADU types that are popular among homeowners. Therefore, they tend to pick one of them when choosing which accessory dwelling unit to build. Let’s take a look at adu construction options.

Attached ADU

The name says it all, as the attached units represent a building connected with the main unit. We see it as a perfect opportunity to create intergenerational housing for your young adults as well as the elderly. Many homeowners prefer it for convenience, as they can easily visit this new part of their house through the door connecting them without even leaving the comfort of the current property. It may not be as luxurious as a detached ADU, but it still has huge value.

Detached ADU

Adding an ADU on your lot significantly increases the number of options on how you can use your housing quarters, as well as boosts property value. You can enlarge the existing space by simply building an ADU next to your primary residence. Detached ADUs are highly profitable as they allow you to find dwellers and charge rent, making an ADU a good investment. The usage can vary depending on how you want to generate money with your unit, be it accommodating a family member or transforming it into one of the guest houses available for dwellers.

Garage Conversions

Instead of building an ADU, everyone can try something new with already existing property. Any ADU can generate potential rental income, producing property value, even your garage that has not been in use for some time. You can ask to retrofit it and add all the needed amenities, giving you a chance to use it in a different way. Remember that even an old garage can become a hot commodity for potential renters.

ROI Potential of ADUs

Building an ADU is not cheap and everyone understands that, however, having found money for the construction, you can expect a return of your investment in the subsequent year or two. To do so, you need to pay attention to certain features of this touchy subject.

The reasons you might invest in an ADU are the following:

1. It is no secret that having additional quarters on your lot can significantly boost your property value. Working with professional general contractors can add from 10% to 30% to the home’s value. The range is possible because of the location, size, and amenities in the ADU. However, even poorly created additional units can bring extra property value, giving you additional benefits when selling the whole lot.
2. The return on investment can also work within the idea of an ADU as an income generator. With the current state of the rental market, it is important to provide supply by any means, and ADUs deal with this problem quite effectively. Hence, if you convert some of the property into a rental unit, you will be able to create a stream of income that will offset mortgage payments, property taxes, and other possible expenses. A win-win situation for you and the renters.
3. What is more, state governments can also provide certain tax incentives or grants that would encourage ADU building. Therefore, all this can lower your personal expenses and enhance the ROI. So, before you start an ADU project, do research on active local and federal programs to determine if you qualify for any benefits.

As you can see, accessory dwelling units have the potential for a return on investment that would cover construction costs and add resale value to your lot at the same time.

Factors Affecting ADU ROI

Adding an ADU to your lot is definitely an awesome idea, but you should pay attention to whether an ADU addition provides cash flow or is limited by certain factors. Here, we will figure out what can affect this long-term investment, such as ADU.

Here are the factors that can influence the ROI of your new ADU:

• We all live in society, so the demographics of your neighborhood can impact the success of your unit. For example, the average income in the state, age, or family size has to be in your mind when choosing what ADU you are going to build. You will also choose the rent rate accordingly, as making it really high will not bring you any profit, simply because no one will be able to pay for the unit. Also, the demand for rental units in the area is highly important as you should bear it in mind. Remember that a high demand for units means you can charge premium rates. On the contrary, with the abundance of them, you can make rates lower.
• Size and layout play an important role in the ROI of an ADU. Larger units with more space provide you with more flexibility in terms of design, while smaller ones are better for an attached ADU. What is more, the latter option is great if you are looking for single renters. As for larger units, family members can fit in there. After all, it depends on the property owner, but taking into consideration the existing structures, orientation of the home, square footage, or location of utilities can add up to a better ADU and, as a consequence, to your ROI.
• You cannot simply put your money in the ADU and wait until affordable housing becomes such a scarce commodity that people pay any sum just to buy it. The current economic situation in the country also significantly influences your chances of getting ROI. You should consider not only the situation at the moment but broader economic trends and the dynamics of things, so your granny flat would become an important asset on the market.

Potential Income Sources With ADUs

We often hear the question about how much value an ADU adds to the total cost of the lot, and we would like to say that it all depends on how you use the unit. Asking prices for similar units, figuring out how much short-term rentals cost, or whether your place is a tourist destination influences the value of a unit in Southern California.

You can order advertisements and attract potential buyers, which allows you to increase the cost of the unit or accommodate your aging parents there, who will not pay any money at all. It is all about your choices here. We at A+ believe that all in-law suites have the potential to be sold at least for an average price, but correct property appraisal can help determine real ADU value and contribute to future passive income.

Frequently Asked Questions — FAQ

How much value does an ADU project bring?

To determine ADU value, you can order a free consultation from our experts at A+. They check several factors, including the location of the primary residence, square footage, possible maintenance costs, and permit costs, to see how much rental income your ADU can add to the family budget. Moreover, it will depend on the location of the additional unit and whether you prefer short- or long-term rentals, which are better for detached ADUs and worse for attached ones.

What is the most popular way of using an ADU, apart from renting it out?

ADU is a good investment not only because it works as a rental property and generates passive income for you but also because an accessory dwelling unit is really versatile. Every square foot of an accessory dwelling unit is valuable; no matter how much value you think it brings, you can use it however you want. For example, after you build an ADU, a family member can live there, giving your kids, for example, a headstart for an independent life. Your adult children will like the square footage in the unit as an accessory dwelling unit, which is an awesome opportunity to build family ties.

Is an ADU a good investment overall?

We have said it multiple times already, and we want to assure you once more: yes, ADUs are a wonderful investment and perhaps the best investment decision you can ever make. Because of its versatility, you will get ROI one way or another. Can an ADU increase property value? Yes, significantly. Does ADU add value to any unit in California? Definitely, we have never seen an ADU that would decrease the total value of the lot. Will my property become cheaper in certain circumstances? No way!