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ADU’s From Investor’s Perspective

Are you an experienced real estate investor looking to grow your investment portfolio or a
homeowner that just wants to earn some extra cash from renting out your property? You’re in
the right place. This article will give you an insight into how seasoned investors consider ADUs
as a valuable investment that gives you the bang for your buck.

 

Understanding Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADU)

Accessory Dwelling Units (ADUs) — also known as Mother-In-Law (MIL) suites, Granny flats are
secondary housing units built on the same property or attached to the main building. On the
other hand, Junior Accessory Dwelling Units (JADUs) are smaller dwelling units no more than
500 square feet and contained entirely within a single-family residence.

ADUs and JADUs are often used as rental space to provide additional income for family
members or private investors. These tiny cottages usually come with their kitchen, bathroom,
and living space. The units cannot be purchased or sold separately; for example, most ADUs
make use of the main house’s water and power connections.

With the growing demands and shortage of residences in the country, Investors are increasingly
considering undergoing garage conversion projects and building ADUs on their properties,
especially now that ADU laws & regulations in various cities are more relaxed than ever.
Recently, changes in zoning laws in more and more states in the United States have contributed
to the increase of ADUs. These zoning laws are generally development standards restricting the
size and style of any additional unit and require the owner to live on the property.
You should know that building an ADU can come with several overheads, including high taxes
and fees that can limit overall profits.

 

Pros & Cons of Investing in an ADU

One of the smartest real estate investments you can make as a homeowner is adding an
Accessory Dwelling Unit (ADU) to your property. A new granny’s apartment will not only
increase your property’s resale value, but you can also earn extra money to pay off your
mortgage if you choose to rent it out. We even have clients in their retirement age (50s – 60s)
building ADUs now for future caregivers. This makes them feel at ease and safe in the future.

However, before you start planning your ADU, there are a variety of factors that need to be
considered, including local zoning regulations, upfront costs, maintenance costs, potential tax
consequences, and general activity involved in the rental and housing market. House owners
should investigate their zoning regulations, which can be complicated, or consult an attorney
who specializes in the field (Lolark contractors provide free consultation for ADU regulations and
projects).

Pros of Investing in an ADU
Cons of Investing in ADUs

How much does it cost to build an ADU?

The cost of building an ADU is dependent on several factors, the most important being the type
of ADU you want to build — attached or detached. Building an attached ADU on an existing
structure, such as a garage costs around $55,000 to $100,000 which is lesser compared to
building a detached unit which ranges from $85,000 to $150,000 from start to finish.

However, the cost varies a lot depending on the region, labor, square feet, materials, and the
permits required to build ADUs. Investing in an ADU might seem quite expensive at first but
you’re likely to recover the costs via years of steady rental income. Moreover, you could rent out
the ADU as a short stay apartment which is gradually becoming popular in Seattle. Rental sites
like Airbnb, Flipkey, and HomeAway allow you to post it up for potential tenants to rent.

 

How to get funding for building an ADU?

The cost of building an ADU can be high. If you don’t have money for a new investment
property, or are looking to tap into the growing ADU market but lack enough funding. The good
news is that you can get funding for your project via ADU loans.
ADU loans are short-term, temporary loans designed to help house-owners finance their
Accessory Dwelling Unit (ADU) projects. Regulatory authorities allow their owner-occupied
properties to generate income or provide free or reduced family occupancy.

Loan Term:

ADU loans are interest-only and are paid in advance every month, with a maximum period of 12
months.

 

Type of Property:

For single, permitted single-family houses that meet ADU eligible standards, where the owner
occupies the primary residence.

 

Types of ADU loans:

If you are considering building an ADU, you should know that having a rental property requires
work and risk. We gathered information from experienced Real Estate Investors and discovered
that investing in an ADU can provide you with an average of 6% – 12% ROI per year.

 

BREAKDOWN OF ADU RETURN OF INVESTMENT(ROI)

Let’s assume you built a detached ADU of 600-square feet which will cost you approximately
$132,000. That’s about $220 per square foot including design, labor, engineering, permit fees,
and all construction expenses.

Your taxes will go up around $1400 per annum, and liability insurance will cost around $20. You
might decide to pin the rent at $1350 per month. Subtract maintenance and miscellaneous
expenses, and you’re left with an extra $680 per month.

Summarily, if you had invested $132,000 in building the ADU. With an annual rent of $16,200 —
property tax of about $1,400 and insurance of $240. Then your ROI would be approximately
11%. If you’re considering building your ADU in your basement, attic, or attached to your house, the
investment cost will be lower.

Lolark contractors have been quoting a budget of $55,000 – $100,000 for a complete garage
conversion to ADU, including the kitchen, bathroom, and living area. The entire ADU project
takes about 3-6 months to complete from start to finish.
Book a free consultation with us today and get a quote.