What Is an ADU? What to Know Before Building This Popular Living Space on Your Property

From how to pay for it, to zoning considerations, consider this your starting guide to your biggest questions on ADUs (accessory dwelling units).

Accessory dwelling units or ADUs — those separate living units tucked inside a single family home or sharing land with one — are having a rock star moment.

Scores of cities and counties in at least 35 states and the District of Columbia, and at least nine states, including California, have changed or adopted laws that make it easier and more attractive for homeowners to build ADUs.

For many homeowners, ADUs can be a great source of rental income or serve as living quarters for adult children or extended family. They can also be a work-from-home space, or a place to escape to or run a home-based business.

Still, there are still enough challenges involved in building one that ADU author and advocate Kol Peterson said they’re usually undertaken only by homeowners with the motivation, money, knowledge and confidence to see the project through.

For those willing and able to build an ADU, he said, the rewards can be substantial.

What is an ADU?

An ADU can be:

  • a newly constructed stand-alone structure
  • a home addition that creates a separate living quarter
  • conversion of an existing space such as garage or basement into a separate dwelling

We commonly hear ADUs called other names, including in-law apartment, granny flat, casita or backyard cottage. Once common prior to World War II, many consider ADUs to be a more affordable source of housing. This is because you can build them without having to purchase land. Land is usually the biggest component of housing prices, especially in expensive coastal cities.

“ADUs are still a unique housing type,” said Peterson, who teaches and writes a comprehensive blog on the subject. He’s also authored “Backdoor Revolution: The Definitive Guide to ADU Development,” a book for homeowners considering building one.

Changes in state and local laws could speed up the construction of ADUs and streamline the process for building them. 

If you’re thinking about building an ADU, or buying a home with the intention of building an ADU for rental income or multi-generational living, here are some important factors to consider.

What is an ADU?

Can I build an ADU on my property? 

Before you start sketching layouts and picking paint colors for an ADU, check with your city or county department that oversees planning, construction or zoning to make sure you’re allowed to build, what you’re allowed to build, and where.

The rules also are in flux as state and local governments across the country adopt new regulations to allow for more of them to be built to help ease the housing crunch. For instance, new law in California allows people to buy and sell ADUs like condominiums.

If your home falls under the governance of a homeowners association (HOA), be sure to check the rules there as well.

How much does it cost to build an ADU?

The cost will depend on the size and type of ADU, and the local wages. For instance, the city of San Jose, California — one of the more expensive cities in America — estimates that “a new, custom-built detached ADU may cost as much as $250,000. Retrofitting an existing attached garage or basement may cost approximately $80,000 to $150,000, depending on size, existing plumbing and how you design the space.”

Peterson says that fixed costs in new construction, such as excavation and laying a foundation, make even small ADUs expensive. Given the fixed costs, some homeowners choose to build to the maximum size allowed in their jurisdiction.

If you’re considering buying land on which to build a home and ADU, this article will give you an idea of what’s involved in purchasing land.

Tips for saving on ADU construction costs

Steering away from custom-built options could help you save money. For example, you could save on design and possibly construction costs by purchasing a manufactured home, which is built entirely in a factory on a fixed, steel chassis and delivered to your building site. The average sales price in 2022 for a manufactured home in the U.S. was $86,400 for a single-wide home and $158,600 for a double wide, according to the U.S. Census Bureau.

Buying a pre-built model or kit home also may offer a way to cut costs. Just be sure to factor in all applicable costs, including utility hookups. Some pre-built models only include the structure itself. You’ll want to factor in the cost of finishing the inside and installing electric and plumbing.

Another way to save is to use pre-approved building plans, which some county and city governments offer for free or for a licensing fee. The plans, which can be customized to a degree, speed up the review process because they already meet the city’s building code and design guidelines.

Keep in mind that converting an existing space into a separate living unit is likely to cost less than new construction. Where things can begin to get pricey is if you choose high-end finishes. However, using doors, cabinets, flooring and windows salvaged from other construction or demolition projects can help you save money. Check your local business listings to see if there are salvage businesses nearby. 

How to finance an ADU

Paying for an ADU can be the biggest challenge, but it could get a bit easier for some borrowers thanks to a new policy adopted by the Federal Housing Administration for FHA-backed loans.

The new policy lets homeowners apply for a rehabilitation loan to build an ADU, and count 50% of the expected rent from that ADU as income when applying for the loan. The rehab loan — known as a 203(k) — requires the ADU be inside or attached to the home where the borrower lives.

Homeowners also can refinance their home with an FHA loan to build an attached ADU, and count 75% of the expected rent from the ADU to qualify for the loan.

Peterson says few traditional lenders offer loans to construct ADUs. When they do, he says, they generally require the work be done by professional contractors, charge higher interest rates and require mortgage insurance.

“Most people put together a patchwork of sources to pay for it,’’ he said. Those include refinancing to tap into home equity, selling investments, borrowing from friends and family and putting some of the cost on credit cards. 

Some funding possibilities include:

  • Existing savings
  • 401K loan
  • Cash-out refinance
  • Second mortgage
  • Home Equity Line of Credit
  • A construction loan
  • A renovation loan
  • A reverse mortgage
  • A ground lease agreement
  • Private money
  • Shared appreciation
  • Shared equity agreement
  • Alternative funds through local government or non-profits

Who can I hire to build an ADU?

If you’re thinking of building an ADU as a DIY project, do a realistic assessment of your skills and how much you’re prepared to take on. While it’s certainly possible to be your own contractor, it requires knowledge, time and coordination. 

If you’re the kind of person who loves the challenge and satisfaction of remodeling or building something from scratch and you’re eager to learn what it takes, you’ve hit the lottery. 

Developing land — and this is basically what you’re doing if you plan to construct a new detached building versus remodeling an existing space — requires attention to things you might not anticipate. This includes construction permits, utility connections and scheduling work at the right cadence. 

More likely, you can expect to hire professionals to do some or all of the work, including the following: 

  • Design: An architect and/or engineer to draw up plans. If you’re considering a pre-fab home or a kit, check with your local building department to make sure the home you’re considering meets local building codes. (Some cities, such as Los Angeles, also have standard pre-approved building plans that you can choose from.)
  • Construction: A general contractor who can act as conductor for the entire project, or individual contractors who for electrical or plumbing work. 
  • Site work: Water, power, sewage and grading, if needed. 

If you’re hiring professionals, get recommendations from people who can vouch for their work. The Federal Trade Commissions has good tips on what to look for before hiring a contractor

Interest and growth in ADU development has given rise to companies who bill themselves as one-stop shops for ADUs. Some offer their own models to choose from, which could make it less expensive than building a custom ADU. 

If you opt for a pre-fabricated or manufactured home that can be delivered to your property, check with your city or county building department to make sure it meets local building codes.

If you’re remodeling an existing space into a separate dwelling, be sure the contractors you’re hiring are licensed and insured.

Does an ADU add value to your home?

Legally permitted ADUs tend to add value to a property, Petersen says. While ADUs don’t promise instant riches, he says, they can be a good way to build wealth.

In cities with high housing costs, rental income can pay for the costs of development in a matter of years. Rental income also can provide a homeowner with future options for downsized living without having to move from their home.

Some localities, such as San Mateo, California, have created ADU calculators to help people determine whether area rents will generate enough to cover monthly expenses.

Beyond that, there are considerations about what is involved in being a landlord.

ADU pros and cons

Pros

  • Generate rental income
  • Provide a possible place for relatives to live
  • Flexibility to change with life’s stages without having to uproot
  • Maximize your investment
  • Help provide a home to someone else

Cons

  • Costs money to build
  • Finding skilled tradespeople or manufactured builder
  • Getting a handle on what’s entailed in new construction
  • You have to acquire knowledge on how to be a landlord
  • Loss of privacy, particularly if the ADU is attached to your primary home

See original article published on Zillow here.