Garage apartments and mother-in-law suites have surged in popularity over the past two decades, adding more than 1.4 million living spaces since 2008.
So, should you as a homeowner jump on the bandwagon? Should you be one of the estimated 4% of owners with an "accessory dwelling unit" (ADU) on your property? Could you earn useful income by renting it out?
Consider these three factors to decide whether an ADU is right for you.
ADUs offer modest income, but they're more about affordable housing
ADUs are especially popular now, but they've offered affordable housing for many years, especially in times of need.
For example, ADUs sprang up in the New Deal years to house workers and again during World War II for factory workers. They went by various names, such English basements and garage apartments. They provided necessary housing at critical times.
Today, the law keeps the focus on affordability by placing limits on homeowners.
Typically, you can't charge rent exceeding the median rents in the community, no matter how much money you invested in building or renovating the space.
Also, most cities and counties limit ADU size to 750 square feet, enough for a one-bedroom, one-bathroom apartment. It typically can be only one story. It's part of your primary residence, so you can't sell it as a separate parcel or condo.
You also may face setback restrictions, with ADUs set back at least six to ten feet from the property line and at least 60 feet from the front lot line. Again, this is to limit size. Nevertheless, some jurisdictions will allow several ADUs on one property so long as the zoning is residential, even R-1 (single-family).
> Related: What Is a Mother-in-Law Suite?
Do the math: low permitting fees but high construction costs vs. income
Your city or county may want to encourage ADUs, so they often offer streamlined construction permits of about $5,000, compared to $20,000 for a single-family home.
That's good, but it pales in comparison with construction costs. This is where you must do your math to see when your costs would be offset by your rental income.
This isn't just an academic exercise for me. As a realtor and son, I'm working on converting my mother's two-story barn into an ADU in Berkeley, California.
We’re looking at about $300,000 in permitting, architectural and construction costs for a 1,000-square-foot unit with two bedrooms and one-and-a-half baths. (Berkeley is grandfathering us in under the ordinance, so we're allowed the larger size.)
A fellow realtor friend in nearby Oakland spent $200,000 to raise his two-story home to allow a basement ADU. We think the math will work out for both of us because median rents are so in our areas. The average rent in Berkeley is $3,300, and average rent in Oakland is $2,800.
Another factor: Your ADU investment also raises your home value. So depending on your situation, you may consider that in addition to the cost vs. rental income calculation.
You really need to drill down into the construction costs to see if it's worthwhile. For example, if your ADU is attached to the main house, you’re likely to need a 200-amp electrical panel to handle the increased load of two kitchens with all the same appliances as well as a washer and dryer.
Add in a separate HVAC with its own thermostat, AC split or wall unit and a heater and hot water heater. Or if you are on natural gas, adding more gas lines for heating and cooking and washing.
If your ADU is going to be a separate unit as my mom’s will be, you’ll have to extend plumbing and gas lines underground from the main house to the unit. That means digging, and digging means more permits and informing the county to mark utility lines before you dig.
In addition, most cities want power lines underground as much as possible for safety and aesthetic reasons. Moreover, your existing home may not be tall enough to have a safe drop to the detached ADU. (Most must be 12 feet high or more.)
If you want to create a basement apartment, you’ll likely have to dig out the slab, which can be expensive ($20,000 or more), Add waterproofing if the water table is too high or the site has drainage issues.
Indeed, part of the expense of constructing our ADU is replacing a concrete slab that has an inch-wide crack going down the middle of the barn as a result of sitting virtually on the Hayward Fault for nearly 100 years.
Bottom line: While the permitting climate for ADUs is friendlier, the construction costs aren't. Do the math.
Are you ready to be a landlord with landlord headaches?
You might get a great tenant who rarely asks for anything. You might spend very little on maintenance.
But don't count on it. Not everyone is cut out to be a landlord, with the patience and persistence to keep on top of everything.
Common landlord headaches include finding a suitable tenant, running credit checks, drawing up leases, collecting rent, maintenance, repairs and unfortunately, going through the eviction process if needed. (That becomes much more awkward if the tenant is on your property.)
Of course, you could hire a property manager to handle these duties, but cuts into your profits with a typical 5 to 8% monthly management fee.
Also, keep in mind that some jurisdictions limit rent increases yearly, unless the tenant moves out and you can reset the clock.
Your bottom line
Think of the ADU as the $5 table of real estate investing. It's lower stakes than leaping into single-family homes or multi-family homes.
You may earn a modest income stream that helps your finances, but you must watch the upfront costs for construction or renovation.
You might be lucky enough to already have an ADU that's not being used, or could be cleaned out for a tenant. In that case, your costs might be pretty low. Just consider if you're up to the landlord role.
In any case, you won't get rich with an ADU, but you might find the income helpful. And you'll be creating affordable housing for someone.