What Is an Accessory Dwelling Unit (ADU)?

Positively, an ADU can provide the following advantages: 

• A source of rental income 
• Accommodations for your family members 
• Affordable housing for your community 
• Added value to your property 

If you have family members who are looking for housing options, an ADU might be a better arrangement than trying to live together within the same house.  

On the other hand, an ADU comes with some drawbacks: 

• Must meet local zoning requirements 
• Owners must pay utilities on the second living space 
• An unauthorized ADU can jeopardize your ability to refinance 
• Shared walls may create noise 

This is to say nothing of any upfront costs that may go into constructing or converting an ADU. Add in any fines for zoning violations, and you may find yourself facing steep costs that can be recovered only by renting. 

Start by thinking about the reason you’re building an ADU. For instance, if you’re trying to provide housing for an aging family member, a loft apartment over the garage might present accessibility issues. And if you’re hoping to rent out the space, you and your tenants may prefer a completely detached structure for added privacy.   

Keep in mind that the nicer you make the property the easier it will be to find interested tenants. 

There are several possible ways to finance an ADU, including: 

• A cash-out refinance of your primary residence 
• Home equity loan or home equity line of credit (HELOC) 
• Home renovation loan

Some states may even offer financial assistance. California, for example, offers an ADU grant program with values as high as $40,000 to aid in ADU construction. 

Once you lock in your needs and your financing options, you’re ready to start building. But make sure to rely on qualified contractors who understand your needs as well as any local zoning ADU requirements and restrictions that may apply to certain residential areas.  

Your contractors will also be responsible for pulling any permits needed to complete the job, and they will assume liability for the work they perform. 

Your ability to make money from your ADU will largely depend on your ability to keep the property filled. Advertise your rental unit in places like: 

• Real estate websites (under apartments/rentals) 
• Social media marketplaces 
• Colleges or community centers 

Don’t neglect your own personal network. Your family and friends may know of individuals looking for a place to rent. 

Make sure to create a rental application to screen tenants for financial history and lifestyle choices (smoking, having pets, etc.). This will ensure that you’ll fill your unit with the most reliable renters. 

How much should you charge for rent? While some landlords adopt the 2% rule (where rent is 2% of the property value), this gets tricky with an ADU. You might look into similar dwellings in your area. For example, if your ADU is a fully-detached living space, you could charge a rent price that’s comparable to other houses in your area. 

Make sure to account for any amenities or benefits you include in the rental agreement. For example, if you cover the cost of certain utilities, you may be able to charge more for the monthly rent. 

As a landlord, you’re ultimately responsible for all of the maintenance and repair. The advantage is that an ADU is physically on your property, so it’s easier to do things like cut the grass or repair a plumbing fixture. And if you already use a groundskeeping or maintenance service, you can simply have the same companies take care of the ADU.