Accessory dwelling units (ADUs) have ascended to unprecedented popularity in recent years amid a desire to squeeze as much juice as possible from existing land in the face of rising real estate prices. Some people build ADUs for rental income. Others simply want to provide affordable housing for a family member that doesn’t involve the costs of purchasing new land or building a full-size house.
These fashionable “mini residences” are dwellings that provide complete independent living apart from a main residence. While they’re built on the same parcel as the main residence, they can be attached or detached.
ADUs are sometimes referred to as tiny homes, mother-in-law apartments, guest houses, granny cottages, granny flats, casitas, carriage houses, or second dwelling units. An ADU can be an easy, affordable way to outsmart rising property values. However, recent debates over zoning laws and regulations regarding these units make it necessary to do some homework before breaking ground.
Key Highlights
- An accessory dwelling unit is a self-contained secondary housing unit built on a single-family residential lot.
- Currently, there are more than 1.4 million accessory dwelling units in the United States.
- While the average cost to build an ADU is around $170,000, units can cost anywhere from $30,000 to $300,000.
- An ADU allows a person to build a second dwelling on land they already own for the purpose of generating rental income, increasing home value, adding livable space, or providing a family member with a place to live.
What Is an Accessory Dwelling Unit (ADU)?
An ADU is a secondary housing unit contained on a single-family residential lot. There’s actually lots of flexibility regarding style and usage. Technically, an ADU must have its own separate entrance. It also generally has much less living square footage compared to the main dwelling. In fact, some local zoning laws demand these two details.
Most people picture a “tiny house” that’s built either behind or beside an existing main home when thinking of ADUs. However, converted basements, above-the-garage additions, bump-out additions, and basement conversions can all technically be considered ADUs. An ADU satisfies the need for additional living space without the need for a major investment in land or construction.
People build ADUs for:
- Rental units
- Home offices
- Home gyms/yoga studios
- Guest homes
- Studios
- In-law apartments
- Accommodations for college students or recent graduates
- Flexible space/game areas
- Downsized living spaces that allow them to rent out or “gift” a main home
The rise in popularity of ADUs holds the potential to increase housing affordability for homeowners and tenants. As cities around the country face housing shortages that are causing rental rates to skyrocket, ADUs may help to open up more housing options within communities without the red tape and lag created by major construction projects. These “small constructions” also help to avoid the need to break new ground in both populated and unpopulated areas by simply allowing existing properties to accommodate more people. Additionally, residents are empowered to take advantage of the existing infrastructure and layout of established neighborhoods without the need to alter the footprint by creating large housing complexes.
Aside from the monetary benefits presented by ADUs, there’s the social benefit. Many families enjoy the fact that their senior relatives can stay close to family members while still enjoying their own space and privacy.
Accessory Dwelling Units (ADUs) Pros and Cons
Here’s a look at how ADUs increase quality of life for individuals and communities:
- ADUs allow homeowners to create an income stream through renting by investing in and improving their own properties.
- ADUs can increase property values.
- ADUs can accommodate the trend of multigenerational living.
- Renters are helped by the fact that increasing supply of available rentals lowers pricing. Secondary units also provide high-quality housing in desirable neighborhoods for less money.
- The smaller size of ADUs can help to create a smaller environmental impact.
- According to data from the National Association of REALTORS®, ADUs can add 35% to a home’s value.
ADUs shouldn’t be mistaken for fairy-tale cottages. Secondary housing units aren’t without their complexities.
- Initial build costs can be higher than expected. Layout, size, location, and special features can all impact price. There’s also the added cost of hiring builders or contractors versus building alone. While the cost of land is canceled out with ADUs, some property owners are surprised to find out that adding an ADU isn’t much cheaper than the cost to build an actual primary dwelling when all is said and done.
- People building ADUs sometimes bump into zoning issues and controversies. As the American Planning Association points out, many cities and counties permit ADUs in one or more single-family zoning districts by right. However, these allowances are often subject to use-specific standards that include owner-occupancy requirements, dimensional and design standards ensuring neighborhood compatibility, off-street parking requirements, and limits on the number of bedrooms. The biggest zoning roadblock is often a minimum lot size requirement. Property owners breaking ground on ADUs may get complaints from neighbors concerned about ADUs changing the character of a neighborhood.
- Insurance coverage can be difficult to navigate for property owners.
- Increasing a property’s value by adding an ADU could result in higher property taxes for the owner.
Types of ADUs
Here’s a look at popular ADU styles:
- Conversion ADUs are created by converting part of a single-family home or accessory building into a new residence. Common launching points for conversation ADUs include attics, basements, garages, pool houses, and sheds.
- Junior ADUs are “mini” ADUs that max out at 500 square feet. Also known as JADUs, these units are always built within an existing single-family home.
- Attached ADUs are at least partially constructed by adding on to a single-family residence.
- Detached ADUs are freestanding, unattached structures that share a parcel with a main residence.
How To Build an ADU
Building a safe, legal, and value-adding ADU takes proper planning. Here’s a look at the steps for going from a bright idea to breaking ground.
Substantial planning is required for both conversion ADUs and new constructions. ADUs can be site-built, factory-built, or modular structures. Endless options exist in the form of blueprints and kits. Many of the same designs and materials used for different types of windows, doors, porches, roofing, and other core features in standard-size homes can be scaled for ADUs. Overall, the biggest limitation is often the amount of space available on a property.
You don’t need to be an architect to be able to dream big with ADUs. A number of reputable resources exist online for purchasing ADU plans, designing blueprints, or hiring a company to construct one for you. Resources to bookmark when beginning the journey include:
- Snap ADU
- Architecturaldesigns.com
- Etsy
- Local licensed builders or contractors
In response to the increase in demand for ADUs, federal regulators have created requirements needed for a property to be classified as a true ADU when seeking government-backed mortgages.
First, only one ADU is permitted on a parcel belonging to a primary one-unit dwelling in most places. An ADU must be smaller than the primary dwelling. In addition, an ADU must offer a sleeping area, kitchen, and bathroom facilities that are separate from the primary dwelling. While an ADU can include access to the primary dwelling, a living space is only legally an ADU if it has its own private entry.
Keep in mind that current local zoning laws ultimately decide the legality of any structure built on a property.
Financing Options for an ADU
Many people take advantage of home equity loans and home equity lines of credit (HELOC) to build ADUs with favorable interest rates and terms by tapping into the value of their main dwelling. However, construction loans that work similarly to ordinary mortgages can be used to build ADUs for people who may not have a high level of equity.
Many states and local housing coalitions actually offer grant programs that help people to finance ADUs. For example, the California Housing Finance Agency (CHFA) ADU Grant provides up to $40,000 toward pre-development and non-recurring closing costs associated with the construction of an ADU.
A HomeReady Mortgage from Fannie Mae is also a possibility. With this option, a borrower purchasing a single-unit primary residence with an ADU on the property can count up to 75% of the potential income from the rental property to qualify for the mortgage. The buyer is essentially borrowing against the future potential revenue of the ADU. The stipulation is that rental rates for similar ADUs in the area must be verified during the appraisal.
Very few average people have the cash on hand needed to build an ADU outright. As a result, one of the biggest roadblocks to building an ADU for the average person is lack of access to conventional mortgages. Home equity and construction loans are the two core options on the table. While the first requires a homeowner to have a good chunk of equity in their main home, the second often comes with higher-than-average interest rates. Construction and renovation loans have stringent requirements and large down payments.
Many lenders simply won’t touch ADU constructions due to a poor loan-to-value (LTV) on paper. LTV ratio is used to assess risk when granting mortgages. To determine LTV, lenders use comparable properties. The problem with this is that the “value” of an ADU is usually held in its potential rental income generation instead of its dollar value. Currently, traditional lenders don’t take rental income into account to determine an ADU’s value.
Where Can You Build an ADU?
Some states have been more progressive than others when it comes to welcoming ADUs. Here’s a glance at the easiest and hardest places to build ADUs.
Places That Currently Allow the Construction of ADUs
Most ADU regulations are determined on the town, city, or county levels. That means that local zoning requirements ultimately determine the if and how of being able to build one. In some places, zero residential building restrictions of any kind exist for people with parcels exceeding a specific number of acres.
Washington is one of the places leading the way in regulating in favor of ADUs at the state level. In 2023, Senate Bill 5235 passed with the goal of lifting local restrictions on ADUs in order to increase the amount of affordable housing within the Evergreen State. Most notable about the bill is the fact that it allows for ADUs within urban growth areas.
California recently welcomed flexible legislation that allows two-stories ADUs, creates more flexibility regarding where ADUs can be placed, and streamlines the process for obtaining ADU permits.
In 2021, the Connecticut Senate passed legislation allowing single-family homeowners to convert parts of their dwellings or detached garages into ADUs without needing special permission from local officials. However, towns are able to opt out of the law.
New Hampshire, Oregon, Rhode Island, Vermont, Florida, and Hawaii have state-level laws on the books that attempt to make building ADUs easier for property owners. The list of the most ADU-friendly cities around the country includes Anchorage, Atlanta, Austin, Denver, Honolulu, Houston, Philadelphia, Phoenix, and Seattle.
In addition to easing the strain of housing shortages, flexible laws for ADUs help states and municipalities to generate more revenue in property taxes.
State laws that ease requirements for ADUs shouldn’t be seen as free passes to build. Diligence is required when reading all state and local zoning laws and regulations. Homeowners in places where ADUs are permitted are still subject to rules regarding structure size and dimensions, housing styles, distance from property lines, setback rules, parking restrictions, occupancy, and much more.
Places That Either Do Not Allow or Heavily Regulate ADUs
Some cities are notoriously unfriendly to ADUs. While ADUs solve many problems, they create their fair share of housing woes. For example, the overabundance of homeowners converting structures for short-term rental profit is contributing to overcrowding and traffic without actually offering relief in terms of housing availability in some cities. This is an especially big problem in major cities and tourist towns. What’s more, many people living in historic or culturally important neighborhoods feel that short-term rentals rob their communities of character.
Los Angeles is one city that’s taken a hard stand against the problem of ADUs being used for short-term rentals. While ADU construction is allowed in the city, owners are prohibited from using these structures as short-term rentals.
Chicago has been moving toward reintroducing the ADUs that were once popular in the city before being banned in 1957. Current zoning ordinances put some of the tightest restrictions on secondary residential structures in the entire country.
In response to Connecticut’s loosening of ADU regulations, the cities of Stamford, Derby, Waterbury, Meriden, and East Haven all prohibited ADUs entirely.
Final Thoughts
There’s a hunger for flexible housing options. ADUs will become increasingly popular as frustrations over housing shortages grow. Homeowners, renters, and local governments are seeing an increase in ADUs as a win-win situation that creates affordable housing while driving revenue. Like anyone planning a home addition, homeowners eyeing ADUs need to think about the best way to get the project done.
Anyone considering adding a secondary dwelling to a property must be familiar with current local zoning laws and regulations surrounding the addition of an ADU to their existing property before going down this road. Consulting with a local real estate attorney can be a great way to establish feasibility before investing time and money into a plan.
