What Is an Accessory Dwelling Unit? House Hack with an ADU

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Downsides of ADUs

For all those advantages of ADUs, they aren’t a free lunch. In fact, there’s nothing free about them. 

Consider the following cons before building an accessory dwelling unit.

Construction Costs: At the risk of stating the obvious, it costs money to build an ADU. Often tens of thousands of dollars, sometimes hundreds of thousands. More on the cost of building and ADU momentarily. 

Permits & Red Tape: Depending on where you live, you might face an uphill battle to get the permits or zoning approvals to add an ADU to your property. 

Maintenance Costs: All buildings require repairs and maintenance. By adding to your home’s livable space, you add to your ongoing maintenance costs. 

Loss of Space: If you build a new structure on your property, you lose the use of that ground. Likewise, if you convert your basement to an ADU, you lose the use of the basement for storing Christmas decorations or dead bodies or whatever else you were using it for. 

How Much Does an ADU Cost?

$43,286. Just kidding. You should know better than to expect a one-size-fits-all answer to that question.

You can order prefab standalone ADUs in the range of $60,000 to $120,000. Size matters of course, as do the finishes and materials.

Along similar lines, you can also look into tiny homes on wheels. With an electric and plumbing hookup, you could be good to go. And you can take it with you when you move and keep house hacking at your next home.

If you convert your basement or garage into an ADU, the cost depends on how much modification you need. You might update an already finished basement with an existing separate entrance for just a few thousand dollars, to include a full bathroom and kitchenette. Or you could spend $50,000 converting a drab, unfinished garage or basement into a cozy living space.

Bear in mind that if you have to pull permits for the work — which you likely do — the county might bump up your property tax assessment. The better to tax you with, my dear.

 

what is accessory dwelling unitCan I Finance an ADU?

You have a few options to finance adding an ADU to your home.

To begin with, you tap your home equity. That could mean drawing on a HELOC, or taking out a home equity loan, or refinancing your mortgage. Try Credible for competitive interest rates.

You can even take out HELOCs on rental properties if you have equity in one.

But you don’t need equity in your home to borrow against. As a real estate investor, you can open unsecured business lines of credit and credit cards. Check out business credit concierge Fund&Grow, who helps you open between $100-250K in business credit lines as a real estate investor. You don’t even need a legal entity — watch this explanation video of how Fund&Grow works.

If you want to add an ADU to an investment property, whether a flip or a rental, you may be able to roll the costs into your renovation loan. We particularly like Kiavi and LendingOne for purchase-rehab loans, but you can compare investment property loan terms here.

Or you could just buy a property with an existing ADU, or which lends itself to adding one inexpensively. You may even be able to get a 0% down payment mortgage through a VA loan, USDA loan, or NACA program. If you don’t qualify for any of those, borrowers with strong credit can use Fannie Mae’s 3% down payment program, and those with weaker credit can use the classic 3.5% down FHA loan. 

 

What’s the Return on ADUs?

You tell me — you’re the one who knows the details of your project. Like asking “How much do ADUs cost?”, it depends on your project.

Accessory dwelling units can deliver two types of returns: adding property value to your home and cash flow. Assuming you rent it out rather than using it as a granny flat or she shed, that is.

 

ADU Cash Flow

Run the numbers through a rental income calculator like any other property. Get clear on the costs to build or renovate the unit, and the market rent for it. Count on the market vacancy rate and the same repair and maintenance costs as any other unit (10-15% of the total rent).

If it would cost you $12,000 to convert your basement to a basement ADU, and you could rent it for $1,000, then yes, the gross rent would pay for the project in one year. But adding in all your other ongoing expenses, the 50% Rule suggests that half the rent will go to non-mortgage expenses such as property taxes, insurance, property management fees, repairs, maintenance, vacancy rate, marketing costs, and so forth. That would extend your breakeven horizon to two years.

That said, accessory dwelling units come with some efficiencies, given that they’re part of your home. Your property taxes and homeowners insurance may not go up at all. And if you convert part of an existing structure, such as a garage conversion ADU, you still only have one roof, foundation, and set of walls to maintain.

In other words, ADUs sometimes come with fewer expenses than separate rental properties.

 

Does an ADU Add Value to Your Home?

Beyond the rental cash flow you earn from an ADU, it could bump up your home’s value. 

Buyers typically pay more for homes with ADUs that provide ongoing rental income, of course. Or at the very least somewhere to stash a henpecking mother-in-law.

The higher the rental income, the more value your ADU adds to the property. You typically can’t include the square footage of outbuildings as part of the livable square footage in an MLS listing, but you can still list the ADU’s square footage in the property description. Who wouldn’t want more living space and potential income streams? 

Even so, building an accessory dwelling unit could cost more than it adds in value to your home. Do some market research in your neighborhood, and when in doubt, talk to a real estate agent about it.



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