ADU for Rent: Housing Unit for Passive Income

Each homeowner has their own motives for building an accessory dwelling unit. Some decide to implement this project because of the need for an additional residential area, someone to solve urgent household problems, and others to realize long-standing plans for an ideal home. However, there is one point that unites all property owners in the intention of ADU building, and this is the opportunity to rent it and generate passive income on a continuous basis.

Especially for such homeowners, we have prepared a comprehensive guide on renting out ADU. Today we will tell you how to manage ADU for additional income generation, how to prepare a residential area for rental purposes, what factors a tenant pays attention to when picking an apartment and much more.

ADU Rental: Basic Principles

Before getting into the details, it makes sense to determine what an ADU rental is. As we know, there are many types of ADUs, the most common of which are detached ADU, attached unit, garage conversion and junior ADU. Each of these additional housing options can become a rental apartment.

In other words, subject to all legal rules, you can rent out your ADU for both short-term and long-term rentals. Thus, every square foot of your property will bring you dividends, which means that you will at least pay off construction costs much faster.

Rental ADU & High Demand Causes

In any city in California, from Sacramento to San Diego, the owners of the accessory dwelling units will tell you that the demand for renting out ADU does not fall either in winter or summer, neither on holidays or on weekdays. What is the reason for such high demand? 

We identify five key aspects that can explain this trend:

• Competitive price tag

It does not matter for what purpose a person came to California; whether it’s a work trip or a vacation, they will try to search for accommodation. Classic apartments are expensive, unlike accessory dwelling units. Picking the ADU as a rental unit is a much more profitable solution in terms of price-to-quality ratio, so the demand for this always stays the same.

• Versatility of living apartment

Standard apartments have plenty of limits, for example, a high floor, stuffy rooms, or windows that overlook a noisy street. When we talk about ADU, we immediately dismiss all these inconveniences. For this reason, this rental unit is suitable for both a student and an elderly couple with a pair of dogs, which means it will not be difficult to find a renter.

• Availability of all amenities

Any luxury hotel can envy the conditions of accommodation in the accessory dwelling unit. When people want to rent a living space, they necessarily study it for a comfortable bed, a safe bath, a modern kitchen, or a laundry room. Modern ADUs have a full set of necessary amenities for a comfortable stay and this is another strong advantage.

• Property value upgrade

The presence of an accessory dwelling unit on the site is a sign that your property will begin to grow in value. Therefore, if you want to sell your home, it will not only be easy, but also very profitable, because buyers will always choose a house with ADU than without it.

• Additional income source

The final factor is a combination of all the above points. Given the demand for ADU in the real estate market and the fact that the income from renting it out helps property owners cover tax or renovation costs, both supply and demand for this housing are always high.

Short-term Rental ADU

Any landlord who has thought about the possibility of renting ADU knows that it can be short-term and long-term. A short-term rent is a rent for less than 30 days that occurs when a person comes to your city for a few days, e.g., to attend a Clippers game in Los Angeles, Balboa Park in San Diego, or the B Street Theatre in Sacramento.

However, despite the alluring prospect of renting out an ADU every weekend, local authorities very often limit homeowners in this intention. For this reason, to verify the opportunity of ADU renting for a period of less than 30 days, we recommend requesting assistance from professionals, because only they know all the legal subtleties.

Long-term Rental ADU

If you want to rent out an ADU in your backyard in the long term, you should understand that this is a more complex issue that requires in-depth analysis. Therefore, we will separately consider the advantages, disadvantages and legal rules of renting an ADU for a period of more than 30 days.

Long-term ADU rental benefits

The first point that comes to the mind of a property owner when discussing a long-term rent is guaranteed stable passive income for several months or even years.

However, the benefits do not end there:

• Reduction of maintenance costs. During the period of tenant change, homeowners carry out cosmetic repairs, buy new appliances and prepare an ADU for a new renter. The more often the tenants change, the more the landlord will spend on ADU maintenance costs. However, this is definitely different than the scenario if we are talking about long-term rent.
• Reduction of marketing costs. After completing the ADU renovation, you will have to search for a new renter. This action requires additional costs, namely, marketing service and a realtor’s fraction. The same logic works here: the more often you change tenants, the more you will spend on such expenses.
• Creating a strong neighborhood. Over time, the people who live in your additional residential unit become not just customers but real friends. Such close contact at least eliminates problems with communication and trust and, at most, contributes to the creation of strong relationships for many years.

However, in order not to create illusions around a long-term rent, let’s explore the disadvantages of this format.

Long-term ADU rental weaknesses

As with the strengths, we highlight three disadvantages here:

• Household stiffness. When you sign a long-term ADU rent contract, then you should understand that this action will restrict you in the context of additional space usage for personal purposes. That is, if family members come to you, then you will no longer be able to place them in the ADU.
• Strained relationship with renter. In the last paragraph of the previous part, we described the ideal history of relations with residents. However, the opposite situation is also possible when the tenant behaves in an inappropriate way, does not demonstrate a responsible attitude, or shows outright rudeness. On par with this, the procedure for terminating a contract with such an individual is much more complicated than that of a short-term renter.
• Problems with restoring home. The longer residents live in the ADU, the more damage they can cause to the building, especially if pets live with them. In this case, after a couple of years of living, the cost of preparing an ADU for new residents will resemble the process of reconstructing the old garage, in which people have been saving up unnecessary things for decades.

Nevertheless, these factors should in no way stop you from intending to rent the ADU for a long period because you can eliminate the vast majority of these problems at the stage of concluding the contract.

Long-term ADU rental legal issues

The image of a money stream that will come after putting the ADU on a long-term lease very often blurs the eyes of homeowners, while at the stage of signing the contract, it is necessary to show maximum rationality.

The issue of legal registration of a long-term rent has the following properties that each landlord should take into account:

• General provisions. The ADU rent agreement should include all common points such as the size and timing of payment, the deposit amount, the possibility of keeping pets and using common areas, e.g., laundry.
• Conditions of eviction. As we mentioned earlier, the behavior of some tenants may border on eviction, and in order to uphold the rules of Sacramento, California, the contract should specify the conditions under which you can terminate the agreement with the renter.
• Payment terms. The financial issue is key, so it is critically important to specify the payment date, which tenants cannot violate under any circumstances.

Finally, to avoid problems with the authorities, it makes sense to check your ADU for compliance with local jurisdictions, which include such items as fire safety, electrical wiring, building codes and safety service.

Rental ADU: Tenant’s Side

We often talk about how important it is for a property owner to find a good tenant for his apartment. However, not only you pick a tenant, but the renter also chooses between several alternative neighborhoods.

Among the many parameters, the following four points have the most weight for any potential tenant:

• ADU location

The location of your ADU in the city can play a crucial role in the selection process. Situations may be different, for example, if the tenant has children, then he will prefer ADU next to schools, if he came to rest, then the proximity to the beach will be essential. The close distance of your neighborhood to the points of renter’s interest is the key to signing a profitable rental deal.

• ADU complete privacy

Renting an ADU implies living on one site. However, it is important for each tenant to feel personal space and boundaries. That is why homeowners with detached ADUs or garage conversions are in an advantageous position. However, if you have an attached ADU, then you can resort to various simple tricks to maintain a sense of full privacy, such as installing decorative partitions.

• ADU interior design

When renting out a living space, you position your ADU as a brand, and the most important thing in brands is the visual component. Perfect cleanliness, furnished rooms, the presence of decorative elements, beautiful tiles, and many other design techniques will create the image of an ideal rental home.

• Laundry & kitchen availability

Practicality in everyday life is another crucial factor for any tenant. This aspect has a clear expression, namely, the availability of kitchen and laundry/dryer room in your ADU. The presence of these facilities or the possibility of using them in some cases outweighs all other positions.

Rental ADU Boost Strategies

Every property owner who wants to rent out an ADU asks how to attract the attention of potential renters. There are many strategies to increase the attractiveness of your home on the market. To save you time, we will tell you about the three most effective methods. First, make a high-quality finish because this is the first thing a person will pay attention to when viewing a photo of your ADU.

Secondly, buy high-quality household appliances. Everyone appreciates practicality in performing household tasks, and if the washing machine in your ADU does not leak and the dishwasher does not break every three days, then a potential renter will value it. Finally, some luxury elements should be added in a way that does not turn the living space into kitsch but rather entices future tenants.

Frequently Asked Questions — FAQ

What is the importance of concluding an ADU rental agreement?

The rental agreement is a key document that defines the rights and obligations of the two parties. In this document, you can specify the amount of the monthly fee and its terms, the rules of eviction, the security deposit, or the possibility of living in ADU with pets, in particular cats or dogs.

What aspects are of the greatest importance to tenants?

Each renter forms its own list of properties, however, we can highlight the most common ones. Namely, the ADU location, especially near schools and kindergartens for renter with family, the ADU privacy, the general security of the neighborhood, as well as the interior and functionality of your ADU.

What are the legal specifics of renting an ADU in Sacramento, CA?

As in other cities, when renting out an ADU, the property owner undertakes not to discriminate against the renter on any basis, respect his rights, and provide housing that meets safety standards. In addition, we recommend consulting with a specialist to determine whether your ADU meets the requirements for renting it out.

Can you name three effective ways to promote ADU for rent?

First, study the target market. This will help you set competitive prices, as well as understand who your target audience is and what these people are willing to pay for. Secondly, make investments in media and social marketing, as this will help promote your ADU in the real estate market. Third, create an ideal image of your ADU, enhance the decor, add a furnished element or refresh the design.