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It is a well-known fact that real estate prices have skyrocketed in the last few years. Many potential investors are struggling to justify investing in real estate due to rising mortgage rates and rising home prices. Fortunately, there is a solution to this dilemma. If the municipality allows it, you can build another residential/rental property on the existing land. It could be an ADU that houses your aging parents, another office, a gym, or even a source of income.
This is exactly what we do. My husband and I are currently building her ADU, a detached house in our backyard, which we will use as an office for the time being, but we also have the option of having the kids live there when they grow up. You also have the option to rent it as a short-term rental in the future, providing income for your retirement.
Short version:
- Attached housing units (ADUs) are growing in popularity as the housing crisis continues.
- These dwellings can be backyard cottages, lofted garages, or additions to existing homes.
- Many families invest in ADUs to provide temporary housing for aging parents and adult children.
- ADU’s real estate investment allows you to expand your real estate portfolio without looking for new properties.
Pros and cons of building ADU
Strong Points
- family home: You can provide housing for your aging relatives or help your kids save after college so they don’t have to deal with astronomical rents elsewhere.
- rental income: One of the main benefits of investing in ADU real estate is to generate additional income streams. There are many options for how to monetize this new space.
- MeIncreased your property value: It goes without saying that adding a brand new property to an existing property increases the value of the property. This comes with tax implications, but it can also increase your property value so you can make more money for your home when you’re ready to sell it.
Cons
- cost: Adding another structure to the property, or adding another structure, can be very costly. In addition, there may be ongoing costs for additional taxes, insurance and utilities.
- Cannot be sold separately: If you own a rental property and want to buy another house or condo on your property, you can always sell it. When you build something on your land, you are bound to it as long as you own the house.
- Potential loss of privacy: If you rent an ADU, it means someone lives in your backyard.
What are ADUs?
What exactly is ADU? Attached housing units, commonly referred to as ADUs, are smaller homes built on the same lot as the main occupied residence. These tiny homes can be back alley houses, in-laws apartments, carriage sheds, casitas, or grandma’s apartments.
For example, building a small house on your property is considered ADU. Building a loft over a garage or converting a garage into a studio apartment is also ADU. Of course, you can also build another independent structure on your property.
There are approximately 1.5 million ADUs nationwide, with an increase of approximately 100,000 units each year. The top ADU states are California, Florida, Texas, and Georgia. Los Angeles, Portland, and Houston are the most popular cities for his ADU across the country. Interestingly, his number of ADU permits in Los Angeles jumped from 80 in 2016 to 5,064 in 2021. This means that one of his four new homes built in the city in 2021 was his ADU.
The introduction of zoning prohibited the building of these small houses in the backyard. There was a time in history when these units were more common. This is because it allowed people to live in communities they normally could not afford.
What is ADU used for?
You might be wondering what happens to ADU when homeowners set up this additional unit.
>You can let your aging parents live in your house
According to 2021 A survey conducted by Homelight, 61% of homeowners built ADUs to house aging parents, and 32% built ADUs to house short-term tourists for additional rental income. Instead of putting your parents in a nursing home, you can build a hideout in your backyard.
>alternative options for adult children
Due to housing affordability issues, young people spend more time at home with their parents. If you want to support adult children without having them live under your roof, ADUs can be added to your property.
This is also an option to consider when the two teens are grown up. With housing prices as they are, we love the idea of saving on rent while still offering more private space.
> Rent income
The third most common use of this space is rental income. Additional or separate spaces can be built and rented out. This may be a long-term rental where someone actually lives there full-time. Or a villa to rent out every night.
There is also an intermediate that is used as a corporate rental. Traveling nurses and business people often need a place to stay for weeks or months.
If you want to know how much you can earn from short-term rental income, check Airbnb or Vrbo to see what similar units in your area are looking for. Please note that there are ongoing costs associated with vacation rentals.
>> Related: Advantages and disadvantages of real estate investment
separate space for office
according to national census, the number of telecommuters tripled between 2019 and 2021. If he’s one of over 27 million people who work from home, he’d like to switch up his space instead of looking for coffee in her shop or office for her workout. You might think that. of.
This is how ADU is used. Anyone who works from home understands the pros and cons of this arrangement. Having loved ones nearby is great, but it can also be a huge distraction. Having a completely separate space in your backyard gives you the best of both worlds.
You can also save a lot on office rent if you see your clients have another space. Therapists, massage therapists, accountants, hairdressers, realtors, and even personal trainers could do business from ADU and didn’t have to pay rent for their office space. Your options are endless.
How much does it cost to build ADU?
How much does it cost to build ADU? Simply put, it depends on many factors. Upgrading your garage is much cheaper than adding an entirely new structure to your backyard, but the price depends on many factors.
Call a few contractors and get a quote. They can come over, look at the space, and explain what you’re looking to build. They can provide a rough verbal estimate during an appointment.
Long story short, I live in Phoenix and our costs are about $400 per square foot. But of course what you’re going to do has a lot to do with it.
> Hire the right help for ADU construction
Before you start investing in ADU real estate, consult the following professionals.
- RealtorI would like to see my options and what types of ADUs are common in my community.
- surveyorYou have to make sure you can make the necessary changes to your land.
- ContractorI have to find a company to build this new residence.
- designerYou may want to work with some sort of designer to make sure your new location is aesthetically pleasing.
>Construction cost
It seems basically impossible to give an average price for building an ADU. Because it depends on the kind of structure you are trying to add and the size of the space. In addition, the role of current raw material prices and labor costs cannot be ignored.
According to a survey conducted by Bill AnADUthe closest to the average ADU price was about $180,000.
- Design work
- application for permission
- New utility connections to supply the space with sufficient electricity and plumbing
- Full construction cost
- your sweat equity
If you ask a contractor, they will take care of everything. Including hiring architects and dealing with the city for permits and inspections. We also hire, coordinate and pay all subcontractors such as electricians and carpenters.
>Additional costs to consider when building an ADU
tax effect: Adding another unit to your property increases the value of your property, so you’ll probably have to spend more on property taxes. Depending on where you live, this could be a little or more.
Increased Homeowners Insurance: As your wealth grows, you will have to spend more money on homeowners insurance.
Providing a new location: Must be fully furnished and decorated by ADU, unless rented out as a long term rental. Even for long-term rentals, you will need additional equipment such as blinds and appliances.
Increased utility: Depending on your zoning law, you may or may not be able to add separate utility sets. This means you can add your new His ADU to your main house’s electricity, water, and trash.
How much does ADU increase asset value?
I can’t say how much your exact wealth will increase. A local real estate agent can tell you how much your project will add to your home.
When I contacted my real estate agent they said it should increase with the average price per square foot. The addition should increase the property value by approximately $100,000.
Of course, it may not be that simple. If a buyer in your area appreciates his ADUs, more may be added. If not, you may add less. Not everyone wants to work from home or become a landlord.
If knowing exactly how much ADU will increase the value of your property is a key factor, work closely with your realtor to make sure you aren’t spending more than you get back at the time of sale. Please give me.
Is ADU legal everywhere?
All states and local governments have different laws regarding residential zoning and construction.
Your contractor or local zoning ordinances will provide the necessary information as to whether the construction of ADUs is legal where you live. I need to make sure this extra unit is legal so I don’t create problems for myself in the future. It is your responsibility to determine if it is legal to build this residence.
A big obstacle for us was that we were not allowed to add 220 volts of power. This is the power the oven uses. They feel that adding an oven would turn the property into a multi-family residential area, which our zoning does not allow.
We also had to watch out for legal setbacks. We live in a traditional suburban neighborhood, so our land isn’t too big.
Are ADU Real Estate Investments Worth It?
Many feel that ADU is the solution to the housing crisis and the perfect option for environments looking to build more housing. By building an ADU, you can help with the housing crisis and create your own passive income stream while minimizing your environmental impact.
You’ll have to sit back and work out the numbers, but if your city allows it, ADU’s real estate investment is clearly a unique way to become a real estate investor without buying a new property.
Many experts tout investing in ADUs because of the flexibility they have without having to buy new land. If you already own property and are considering investing in real estate, you should seriously consider ADU.