The term “accessory dwelling unit” might sound foreign, but chances are you’ve encountered one. Sometimes called an in-law suite, granny flat, or, more romantically, carriage house, an ADU is a secondary dwelling unit on the same lot as a primary single-family home.
Although ADUs have risen in popularity in recent years, they’ve been around for decades, according to a study by the Federal Home Loan Mortgage Corp., known as Freddie Mac.
When the suburbs boomed in the 1950s, municipalities across the country created zoning laws prohibiting higher-density residential structures, the Freddie Mac report noted, but in cities like Los Angeles, San Francisco, and others that lacked affordable housing, the practice continued in secret.
As zoning laws across the country have changed to allow ADUs, the trend has boomed in tandem with population growth in the South and the West. “Half of our total 1.4 million ADUs are located in the Sun Belt states of California, Florida, Texas, and Georgia,” Freddie Mac reported.
What’s the attraction? Some property owners add an ADU to generate rental income; others want a place to accommodate guests, and still others need living space for aging parents.
Read on to learn why ADUs are all the rage in pricey cities and what it takes to build one.
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. Fans of Happy Days might recall Fonzie living in the Cunninghams’ converted garage, which was actually 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 tell the tale.
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). 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, 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. Read on.
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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.
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.
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 SoFi unsecured personal loan to cover the cost of an ADU. SoFi’s home improvement loans range from $5K to $100K, and offer competitive, fixed rates, as well as a variety of terms. Plus, there are no fees required.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.