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What Is an Accessory Dwelling Unit, and Is It the Right Investment for You?


Apr 17, 2020 by Lena Katz

The umbrella term for a garage apartment, guesthouse, or any other small secondary home on a single-family lot is accessory dwelling unit (ADU). Some homeowners add an ADU to their primary house as an income-generating opportunity, and some do it to have more room to accommodate family, but no matter what the reason, this type of addition has always been popular among those who can afford it and have the available square footage on their single-family-zoned lot. Accessory dwelling units will likely become more popular as the trend toward multi-generational living intensifies.

If you're thinking of adding a guesthouse, in-law apartment, studio, or other small living quarters to your single-family property, here are the basics to consider -- from budget to zoning hurdles to our gentle warning against unpermitted additions.

What features/characteristics determine an accessory dwelling unit?

The Essential Characteristics of an ADU What Doesn't Determine an ADU

• A room or set of rooms that comprise a self-contained living space on the same lot as a single-family home.

• An ADU must be located in a single-family-zoned neighborhood.

• In the estimation of the market, it is not recognized as a full-fledged second unit -- and probably not in the eyes of the city or county either.

• It can be rented out separately from the primary residence.

• Separate metering (although most ADUs are on the same meter as the primary home).

• Whether the unit is attached to the main house or freestanding.

• Separate addresses.

• The existence of a kitchen.

What is a junior ADU?

A junior ADU is also an independent living unit, but with a much smaller size allowance (typically 500 square feet), located inside the walls of a single-family home, but with a separate entry from the primary residence. So, a smaller garage unit or ground-floor efficiency with a bathroom and private entrance could fall into the "Junior ADU" category. This unit can have an efficiency kitchen but not a full kitchen.

As a homeowner looking at adding an ADU to a single-family residence, be aware that a junior ADU, or JADU, is probably an easier home improvement to undertake, since several small spaces within a home can be approved for conversion. However, in order to add a JADU as an income stream, you will need to occupy the primary residence. You cannot rent out the primary residence to one tenant and the JADU to another.

How many occupants are allowed?

The maximum number of occupants in an ADU varies according to municipal or county zoning code, but it's typically capped at two to three. This number may be higher for the few ADUs that are two-bedroom, but since these are typically expensive and complex to build, they do not account for a huge percentage of ADUs.

Most-often seen types and their average costs

ADU Type Category Building Cost
In-law Attached ADU or detached ADU $44,000 for attached to $100,000+ for detached full dwelling
Cottage Detached ADU $60,000 to $185,000 (for 400 to 600 square feet, simple layout vs. complex)
Casita Attached ADU or detached ADU $34,400 to $83,200 (for 400 square feet)
Efficiency Attached ADU or Junior ADU $32,000 to $80,000
Garage or carport conversion Junior ADU $6,000 to $21,174
Above-garage apartment (lower end for 1-room addition; high end for full unit) Attached ADU $40,000 to $120,000
Basement apartment Junior ADU $22,000 to $46,000

Data sources: HomeAdvisor (NASDAQ: ANGI), Fixr, and HomeGuide

What sort of single-family home lots can or should not add an ADU?

Not all homeowners are eligible to build any sort of ADU addition. Whether an ADU will be allowed is determined by local zoning ordinance. There are all sorts of constraints that may impact whether/how your property can add on an ADU. These include but are not limited to:

  • Age and size of pre-existing residential structure.
  • Conflicting zoning (e.g., other ground-floor spaces in the neighborhood are zoned for retail).
  • Water availability.
  • Septic system -- can the existing one also serve the new addition?
  • Minimum and maximum height requirements in relation to existing structures.
  • Whether your ADU will remove existing parking spaces.

Keep in mind that if the local law does not think you should build an ADU on your property and you decide to anyway, you are most likely violating the building code and may find an official paying you a visit and demanding that you tear it down and/or pay a fine.

Permits

All ADU additions need to be treated as major residential construction projects, meaning they will need to be permitted at every step. The first crucial step is getting your overall ADU addition plans approved by your city. Additional to the basic building permits, you may also need an encroachment permit, electrical permits, and a variety of other permits. Pulling these can entail substantial cost. Once you have the permits, construction can commence. Then you'll also need to get all finished construction checked off as being up to code in order to be compliant.

Different states, and different municipalities within states, have different laws that govern ADUs. Generally, if a state decides to implement a policy allowing for ADUs on single-family residential lots, as California did, that regulation becomes the minimum baseline. Cities can expand on what's allowable, but they can't rule against the state and disallow. So check with your city and then your state before approving a building plan. This site provides a starting point for researching other cities, although it is crowd-sourced and not 100% maintained across all states.

Cautions against adding an unpermitted ADU

There's a contingent of homeowners and even some real estate and residential construction industry folks who don't see the harm in converting the garage or other constructing some other junior ADU unit without getting the proper building permits. The logic tends to be that this is work you're doing on your own property, and whatever happens inside one's own four walls is one's own business.

This is only true, however, until and unless something goes awry in the new construction. If unpermitted modifications to electrical wiring or plumbing result in an incident, such as a flood or electrical fire, the insurance won't cover anything found to be caused by unpermitted work. And likely it won't cover areas that were built unpermitted in any event, even if there's no proof the problems stemmed from the unpermitted work.

Pros and cons of having an ADU

If you get an ADU that's well designed and built and within your budget, the biggest thing to check off in the "pro" column is that you have more livable space for family or renters. ADUs do not necessarily add much value to a property, and they can be fairly expensive and time-consuming to build.

That said, a nicely finished and furnished ADU on a desirable property can often be rented for slightly more than the value of comparable apartments. For a renter who wants to be in a certain neighborhood, finding such a rental means gaining access to a place where standard-size single-family homes are too expensive or unavailable to rent.

And from the community planning standpoint, ADUs allow for a way to increase housing density proportionally to the amount of single-family residences, allowing homeowners to share in the increase and the income without making major zoning changes.

Still worth it? Most people say yes

Although building an ADU addition to a single-family home can be costly and time-consuming, their popularity is evergreen and continues to rise, especially in areas with strict residential zoning and little housing availability. While we recommend staying on a strict budget and planning things very carefully, homeowners who follow these measures typically find ADUs to be a worthwhile long-term investment in a family home.

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Lena Katz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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