If there’s one area of the home that owners and investors tend to overlook, it’s the backyard. This would be an ideal location for a second residence, allowing you to generate income and improve resale value without having to purchase additional land.
Often referred to as serviced residences, these additional residences are becoming more popular as the demand for housing continues to rise. Here’s how to make the most of this recruitment.
What is a Resource Dwelling Unit?
An accessory living unit (ADU) is a small housing option built on the same lot as a single-family home. You may hear many different terms describing them, such as granny flats, backyard cottages, second suites, and utility apartments. They usually have their own entrance, living area, bedroom, bathroom and kitchen.
Although ADUs are often associated with the backyard, they don’t have to live there. Different types of ADUs include:
- ADUs are connected: A completely separate, self-contained structure, such as a detached backyard unit
- Indoor ADUs: Part of an existing house, such as a basement or garage, that you convert into a separate living space
- Attached ADUs: A new addition to the main home, such as a side extension with its own door
There are at least 1.6 million ADUs in the US right now. Their popularity is probably due to the benefits they provide to homeowners. They can accommodate a family member for multi-generational living, provide additional space, serve as guest accommodation, or provide a well net worth. For many homeowners who are dealing with high taxes and housing costs, having these second properties to rent out is a great financial help.
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How Can You Make Income With ADU?
You can use ADUs for a variety of things. If you are a remote worker, you can use it as a separate home office. Alternatively, a family member can enter. It is an excellent option for elderly parents who want to stay close to their children while maintaining their independence.
ADUs also provide a way for people to earn income by renting them out. Similar to other real estate investments, the financial strength depends on your location, the design of the unit, and the type of rental you choose.
Long-term rentals offer stable living and predictable monthly payments. Due to the shortage of real estate, there is a growing demand for small one-bedroom or studio-style homes. Therefore, ADUs attract students, young professionals, and downsizers.
Temporary employment it can provide you with a high monthly income, especially if your property is located in touristic areas or in demand at certain times of the year. The challenge is to manage more. You may need cleaning support, guest communication, and how to handle reservations. It’s also important to double-check local laws in this situation, as some cities restrict this option.
The type of ADU you plan to build can also affect your income. Attached ADUs, like a small house in your backyard, often offer the greatest value as they provide more privacy.
Because of the rental income it provides, a legally permitted ADU can also increase the value of your property. Even if you plan to sell later, the availability of a ready-to-rent unit attracts buyers who want a solid return from day one.
How Should You Plan Your ADU Project?
The difference between a unit that works well for years and one that struggles to stay busy is good planning. Here’s how you can plan your ADU project.
Know the Rules and Regulations
Start by familiarizing yourself with the rules and regulations. Many states in the US support ADUs because, unlike blocks of flats, they add housing options to an area without changing its characteristics. Some states, such as Vermont and California, have passed laws to allow their cities and towns to be more free these are additional units. Although you usually don’t need to get a special permit, you may need to follow local laws. Some common ones are:
- As a landlord, you may need to live in a main house or a second property.
- There may be requirements for unit size, height, and design to ensure that it is compatible with the entire area.
- There should be dedicated parking for the ADU.
- There may be rules about how big your property must be, how many bedrooms the second space can have, and how many people live in it.
- There is a limit to how many ADUs you can have on one property. Some states, such as Washington, allow you to build two ADUs per residence.
Regulations vary greatly by municipality and state. Some are tougher than others, but the effort is usually worth it, as a well-planned unit offers a reliable way to increase both income and property value.
Build Your ADU Carefully
Once you know the rules, it’s time to build your ADU. For many tenants, these units are notoriously unlivable because they are poorly constructed or maintained. A good unit should provide privacy and be comfortable to live in. Be sure to research the hiring preferences most important to employers. In general, it may include the following:
- Functional kitchen with good storage
- A comfortable bathroom
- Sound installation
- Natural light
If you already have a building, such as a garage, remodeling can be a quick and cost-effective option. Converting an existing space can be as good as a new building if you plan it right. One of the most important things to consider is the structure. It should be functional and livable, so leave enough space for the kitchen, bedroom, and bathroom.
Design is equally important. Painting the exterior and interior of your ADU can improve its marketability and result in a 107% ROI, meaning an easy renovation that pays for itself. A good rule of thumb is to choose a neutral palette that is timeless and modern. If you want to play with optics to change the way you see the interior dimensions of your granny flat, check out our guide to using a wall. paint to change the size of the room.
Tenants also prefer flooring that feels clean and modern. Therefore, choose materials that offer durability and style, such as vinyl plank and laminate wood.
It’s also a good idea to improve insulation over time and add energy-efficient features, as lower utility costs can make a property more attractive to tenants.
How to Get Project Funding?
Renovating or building an ADU is not cheap. Costs may depend on the type of unit, size and amenities you want to install. The good news is that there are a variety of methods available.
Some of the more common funding options include:
In addition to these options, you can check for local grants or seek reduced payments. A few states have statewide grant programs, such as California, Vermont and New York. In Vermont, grants of up to $50,000 per unit are available, while New York offers up to $125,000 to qualified homeowners. Other US cities with ADU promotion programs include Portland, Boston, Santa Cruz, Austin, Montpelier, among others.
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Tips for a successful ADU
Follow these steps to ensure you build an ADU that meets your needs and all local requirements.
Estimate the Budget
When creating your budget, remember to include permits, utility improvements, site maintenance, landscaping, and rental furniture. Property insurance is also important. Notify your insurance before building it. In some cases, your ADU may be covered under your existing policy, or you’ll need to add a new one.
Set the Right Price
It is important to set a competitive price to attract potential employers. Pricing your ADU requires research and understanding of the local market. Find the average rental price for similar properties in your area, and consider factors such as size and amenities.
Use Quality Materials and Keep It Simple
Always use quality materials to lower your long-term maintenance costs. Long-lasting flooring, moisture-resistant surfaces, and durable insulation handle everyday wear and tear better than cheaper alternatives. Additionally, keep your ADU simple. Many tenants prefer a functional space over a high style that is difficult to maintain.
Add Number of Tenants
You can offer benefits that make your ADU more attractive to potential tenants. A fully furnished unit tends to attract a lot of interest, and offering a pet-friendly policy can do the same. Both factors can justify a higher rent because they add tangible value.
Build Your ADU and Generate Income
A well-built ADU is a great investment option. With careful planning and financing, it can help you generate income, increase the value of your property, and provide a flexible environment that supports your changing needs.
Peter Chambers is the editor of Renovated, where he gives practical advice to new buyers to help them get the most out of their investment. His expertise helps them navigate market volatility and build long-term wealth.
