Does it feel like your house is always draining your wallet? Perhaps it's time to make it earn income instead of burn it with an accessory dwelling unit.
Homeowners across the country are building ADUs. And aging homeowners are making ADUs part of their retirement income planning. They may even move out of the main house and into their ADU to gain more income and age in place.
What's more, cities with housing shortages are encouraging ADU construction. In California, the state legislature has authorized ADU construction. ADUs in tony cities help boost affordable housing.
Most Trusted Financial Companies — Take A Survey And Win A $50 Amazon Gift Card
"Our city is permitting ADUs at a pretty rapid pace," said Rosie Dyste. She's a project planner in the community development department of the City of Santa Barbara, Calif. Setbacks rules — how far a structure must be from lot lines — have been reduced for new ADUs and waved for ADU conversions (like garages), says Dyste.
"For the most part if you can fit it, you can built it," she said.
Retirement Planning: Build An Accessory Dwelling Unit
Since 2017, Santa Barbara homeowners have built (or are currently constructing) 215 ADUs. That's according the city's ADU site map. But that's just the start. The site says 371 ADU plans have been approved, and 288 plans are pending approval as of July 1, 2022.
"ADUs are being accepted by municipalities across the country," said Sheri Koones, an author of nine books on small houses and sustainable building. "This is a growing trend."
Koones says ADUs were first adopted in Vancouver, Canada. But as city living has become more expensive, ADUs have become popular in the U.S. as a way to help ease "the tremendous shortage of housing," she said.
ADU permits issued across California rose from almost 9,000 in 2018 to 12,392 in 2020, according to data collected by the California Department of Housing and Community Development.
California cities actively encouraging ADUs include San Francisco, Santa Cruz, Del Mar and many others. Del Mar even has sample ADU plans on its website.
ADUs are not tiny houses, explains Koones. They may be small structures, but ADUs aren't on wheels. And unlike tiny houses, they're fully code compliant.
Dyste says in Santa Barbara many homeowners are building 500- to 600-square foot units. Structure costs typically run $150,000 to $200,000 for permits, site preparation and construction. However, California allows for ADUs of up to 1,200 square feet. And conversions can be of any size (think barn or other out-building).
Or, a homeowner may opt to build a junior ADU or JADU. They're created within the structure of an existing single-family home. These Golden State ADUs are restricted to less than 500 square feet.
Cities in other states have their own rules. Research the rules in your area, possible funding sources (a home-equity loan or line of credit) and possible ADU grants for some projects.
Be sure to ask your municipality about owner occupancy and short-term rental (STRs) rules. Many communities restrict short-term rentals of ADUs and other properties. And some municipalities require a property owner to live in either the main house or the ADU.
DIY An ADU?
David Marchetti, a real estate agent with Sotheby's International Realty in Santa Barbara, knocked down a carport to build his recently finished 500-square-foot ADU. He says he had help with the design, foundation and other "heavy lifting." However, he did "most of the finish work myself."
His plan for the unit in the near term is to rent it to a professional — teacher, firefighter or traveling nurse — who needs affordable housing. He and his wife are looking toward retirement and thus built the unit to "create passive income."
When they retire, the ADU will give them flexibility. "It gives us the opportunity to put our stuff into the ADU and use that as our home base if we want to travel," said Marchetti. "We can go out and see part of the world."
"The rent for my main house, which is very near the beach, would pay for the rent for any place in the world," he said.
Does An ADU Increase Home Value? The Tax Man Cometh
ADUs will increase a property's value. How much? That depends on the property's features and location. In Santa Barbara, a small ADU "would likely increase the value of the property much more than the cost to build it," said Bob Walsmith Jr., a Realtor and the 2022 president of the Santa Barbara Association of Realtors.
Walsmith says a small unit, say 600 square feet, can bring in $2,000 a month or more in rent today. "We're at about 99% occupancy for apartments in this area," said Walsmith.
However, Uncle Sam always gets his cut. Building an ADU will increase a property's assessed value and thus property tax bill.
Also, you'll need to declare all rental income on your tax returns. And since you're putting a rental unit on your property, you'll want to research possible tax ramifications for when you sell.
