The term “accessory dwelling unit” describes a secondary dwelling unit on the same lot as a primary single-family home. It is sometimes called an in-law suite, granny flat, or, more romantically, carriage house. Barndominium is a relatively new term for this kind of dwelling.
As zoning laws across the country have changed to allow ADUs, the trend has boomed, especially along with population growth in the South and the West. Read on to learn more about why ADUs are popular and are what it takes to build one.
Key Points
• An accessory dwelling unit (ADU) is a secondary home on the same lot as the primary residence.
• ADUs can be attached, detached, or interior conversions.
• Benefits include rental income, multi-generational living, and enhanced property value.
• Drawbacks are high costs, potential higher taxes, and possibly reduced yard space.
• Financing options include home improvement loans, home equity loans, and cash-out refinancing.
ADU Meaning Explained
An ADU goes by many names, but its features make it unique among types of dwellings.
• ADUs are smaller than the primary residence they accompany. In California, which passed statewide laws making many city restrictions on ADUs obsolete and streamlining the approval process, the size generally ranges from 500 to 1,000 square feet.
• ADUs are self-contained. They usually include a bathroom, kitchenette, living area, and separate entrance.
• ADUs require a special permit, which varies by location, according to the American Planning Association. Building codes may limit the size of the ADU and the number of occupants. Some cities, however, are offering an ADU amnesty program to help legalize under-the-radar units.
• Unlike a duplex, ADUs usually share utility connections with the primary residence.
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What Are the Different Types of ADUs?
All ADUs have to follow ordinances and laws, but they don’t all look the same. Depending on homeowner preference, it might look like one of the following:
• Detached This is likely new construction, formal or informal.
• Converted garage This might mean retrofitting the garage or adding a second floor to create an ADU.
• Attached Typically this is an addition to the existing residence.
• Interior conversion An existing portion of the house, perhaps the basement, is transformed into an ADU. Fans of Full/Fuller House might recall the Tanners’ attic conversion and the basement/garage living space.
Benefits of an ADU
For the right homeowner, an ADU has upsides.
• Rental income Choosing to rent out the space could bring in income, whether with a long-term rental or short-term Airbnb.
• A true mother-in-law suite or adult-child dwelling For multi-generational families, adding an ADU could be a good way to create privacy and be close … but not too close. An ADU can also house an adult child who returns to the nest.
• A space to age in place Conversely, aging homeowners or empty-nesters might choose to build an ADU for themselves. The homeowners could move into the smaller, more manageable space and rent out the larger property for passive income.
• Flexibility An ADU could become a home office or art studio. For some homeowners, it might just be a good place to host guests.
• Enhanced property value Compare the cost of buying a second small home or condo in your area with the cost of adding an ADU. How much value will a permitted habitable accessory dwelling add? A property appraisal will answer that question.
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Drawbacks of an ADU
ADUs may also come with their fair share of potential downsides.
• Can be expensive A detached ADU may cost as much as a small house to build (though the homeowner already owns the land). The home improvement site Angi says that currently, it costs an average of $180,000 to add an ADU. An attached ADU or conversion of an existing structure will probably cost less, but still may cause sticker shock. Size, features, and the cost of professional services, permits, and any financing come into play.
• Occupancy requirements Some local ordinances require that a home that has an ADU be owner-occupied in some capacity. That means a property with an ADU may not be the right fit for someone who wants to rent out the entire property.
• Higher taxes On one hand, adding value to your property is a good thing. On the other hand, an ADU can make a property tax bill spike.
• A smaller yard Unless a homeowner is retrofitting an ADU into their existing dwelling, building an ADU will cut down on outdoor space.
• Financing Can be tricky. Learn more below.
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Ways to Pay for an ADU
While ADUs have different shapes and designs, they have a commonality: a price tag. If homeowners don’t have cash on hand to finance the build, they’ve got a few options to move forward.
A home improvement loan is a personal loan used to pay for a home renovation or update. When a homeowner takes out a home improvement loan, it’s not secured by the property — meaning the home isn’t collateral in the transaction.
A home equity loan or home equity line of credit (HELOC) leverages homeowners’ equity in a property and allows them to borrow money against the value of the home. Unlike a home improvement loan, a home equity loan or credit line is tied to the house, meaning the property is used as collateral. A home equity loan provides you with a lump sum of funds at one time and typically has a fixed interest rate. With a HELOC, homeowners can draw different amounts at different times, typically with a variable interest rate.
With sufficient equity in your home, homeowners could also consider a cash-out refinance. This replaces your current mortgage with a larger one, paying off the original loan and giving you additional cash, drawn against your equity.
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The Takeaway
Determining if an accessory dwelling unit is the right move for a homeowner comes down to needs, preferences, and finances. ADUs have pros and cons, but many areas have eased the way for this cottage industry. The average cost of $180,000 for a newly installed ADU can require financing. Homeowners who don’t have much equity in their property or don’t want to use their home as collateral may want to consider a personal loan to cover ADU costs.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What does ADU mean?
ADU stands for accessory dwelling unit, and it can refer to an additional dwelling on a lot that already has a single-family property on it.
How much do ADUs cost?
The cost of an ADU can vary tremendously depending on the size, location, style, and other factors (attached or freestanding) of the dwelling. Angi reports a current average price of $180,000.
How can an ADU be used?
Depending on your needs and local zoning, you could have a parent or adult child live in an ADU, you could rent it out, you could have guests stay there, or you could use it for a studio or home office, among other purposes.
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