image courtesy of Building an ADU
As home prices continue to rise and inflation sends the cost of daily living into the stratosphere, more people are looking for simple ways to make paying the bills easier.
Many homebuyers are hoping that accessory dwelling units, or ADUs, do just that. At its most basic, an ADU is a separate living space on the same property as the primary residence. The ADU belongs to the main property owner, and as such, is generally required to be sold with the main home in one package.
ADUs have been gaining in popularity in recent years. The number of first-time listings with an ADU has increased in the past decade, growing 8.6% on average per year, according to a recent Freddie Mac study. The study found that close to 70,000 properties with an ADU were sold in 2019, compared with only 8,000 properties in 2000. And the ADU trend seems to be hitting the hardest in the South and the West, with double-digit growth in Portland, OR; Dallas; Seattle; Los Angeles; and Miami.
But is the ADU a savvy solution to the housing and money crunch? The short answer: It depends.
Below, we break down the most important details to consider before buying a home with an accessory dwelling unit that you plan on renting out.
Pros of buying a house with an ADU
The most obvious benefit of buying a home with an ADU is the passive income it generates. The amount of income will vary depending on where it is located and the rental market in the city. Keep in mind that some of that income will need to go toward any necessary repairs and cleaning fees if you’re renting it out for short-term use on sites such as Airbnb.
An ADU can also add value to your home. According to Porch, homes with an ADU are priced 35% higher than homes without one. Even if it’s not being used as a rental unit, an ADU can be used for guests or family members.
Cons of buying a house with an ADU
There are a number of costs and responsibilities involved in owning a short-term rental unit, which eat into the passive income the ADU generates.
“Maintenance, repair, and renovations are just the start,” says Ben Wagner, real estate investor and house flipper at Leave the Key in Amityville, NY. “Landlords must also take into account miscellaneous expenses like insurance coverage and cleaning fees.”
(Insurance for additional structures can be covered by most homeowners insurance policies and, at most, would cost in the low hundreds.)
Supples and cleaning costs will vary. If you are renting out the ADU for short stays and need to pay to have it cleaned and stocked with basic supplies like paper goods and hygiene products, you will want to earmark $2,500 per year.
Aside from costs, operating an ADU can also affect the homeowner’s lifestyle. Your renter will require access to certain parts of your property, so you want to make sure you feel safe with renters coming and going as they please.
“An ADU has the potential of completely disrupting your privacy,” says George Beatty, founder of Problem Property Pals in Philadelphia. “That’s not everyone’s cup of tea.”
ADU rules to keep in mind
So you’ve crunched the numbers and decided the additional income will be a net gain. But before pulling the trigger on operating an ADU, you should know that state and local rules about ADUs and vacation rentals vary considerably, and new rules are issued by municipalities every day. To avoid costly surprises and keep your operation above board, be aware of your region’s zoning requirements, dwelling laws, and taxes.
“You have to make sure the property has been appropriately zoned for an ADU,” says Rinal Patel, a licensed real estate agent and co-founder of We Buy Philly Homes in Philadelphia. “And it’s critical to ensure that the property has the necessary permits in place.”
It’s also important for homebuyers to know that regulations may change.
“In DC, for example, new rules went into effect this year restricting and regulating short-term rentals,” says Amber Harris, a real estate agent with Keller Williams Capital Properties in Washington, DC.
You also don’t want the money generated from your ADU to be your primary income.
“I always advise buyers to make sure they’d be able to carry on if something took that rental income away,” says Harris. “The [COVID-19] pandemic has shown how things outside of our control can change market dynamics, and local regulations can change quickly.”
Learn more on Realtor.com
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