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Accessory Dwelling Units: Tips for Building One!

Before building an accessory dwelling unit, there are some legal, design, and financial implications to consider. Accessory dwelling units or ADUs — those separate living units tucked inside a single family home or sharing land with one — are increasing in popularity. Dozens of cities and counties, and at least nine states have changed or adopted laws that make it easier and more attractive for homeowners to build ADUs. For homeowners, ADUs can be a source of rental income or serve as living quarters for adult children or extended family, a work-at-home space, a place to escape to, or run a home-based business.

Still, there are still enough challenges involved in building one that they’re usually undertaken only by homeowners with the motivation, money, knowledge, and confidence to see the project through. The rewards can be substantial for those willing and able to build one.

What is an ADU?

An ADU can be:

  • a newly constructed stand-alone structure
  • a home addition that creates a separate living quarter
  • conversion of an existing space such as garage or basement into a separate dwelling
  • ADUs are commonly known by other names, including in-law apartment, granny flat, casitas, she-shed, or backyard cottage. Once common prior to World War II, they are considered a more affordable source of housing because they can be built without having to purchase land — usually the biggest component of housing prices, especially in expensive coastal cities.

Changes in state and local laws could speed up the construction of ADUs and streamline the process for building them.  If you’re thinking about building an ADU, or buying a home with the intention of building an ADU for rental income or multi-generational living, here are some things to consider:

1. Can I build an ADU on my property? 

Before you start sketching layouts and picking paint colors for an ADU, check with your city or county department that oversees planning, construction, or zoning to make sure you’re allowed to build, what you’re allowed to build, and where. Rules around ADUs vary widely across the country, and can vary among cities in the same state. If your home falls under the governance of a homeowners association (HOA), be sure to check the rules there as well.

2. Who can I hire to build an ADU?

If you’re thinking of building an ADU as a DIY project, do a realistic assessment of your skills and how much you’re prepared to take on. While it’s certainly possible to be your own contractor, it requires knowledge, time, and coordination.  If you’re the kind of person who thrills to the challenge and satisfaction of building something from scratch and you’re eager to learn what it takes, you’ve hit the lottery. 

Developing land — and this is basically what you’re doing when you construct a new building — requires attention to things you might not anticipate, including construction permits, utility connections and scheduling work at the right cadence.  More likely, you can expect to hire professionals to do some or all of the work, including the following: 

  • Design: An architect and/or engineer to draw up plans. If you’re considering a pre-fabricated or manufactured home or a kit for DIY assembly, check with your local building department to make sure the home you’re considering meets local building codes.
  • Construction: A general contractor who can act as conductor for the entire project, or individual contractors who for electrical or plumbing work. 
  • Site work: Water, power, sewage and grading, if needed. 
  • If you’re hiring professionals, get recommendations from people who can vouch for their work. The Federal Trade Commissions has some good tips on what to look for before hiring a contractor. 

Interest and growth in ADU development has given rise to companies who bill themselves as one-stop shops for ADUs. Some offer their own models to choose from, which could make it less expensive than building a custom ADU.  If you opt for a pre-fabricated or manufactured home that can be delivered to your property, check with your city or county building department to make sure it meets local building codes.

3. How much does it cost to build an ADU?

As a general rule, ADUs aren’t cheap. Even without the land costs, the cost of construction — and viable ways of paying for it — are limited. The cost will depend on the size and type of ADU, and the local wages. 

You can save money on the design if you live in a city that offers “pre-approved” building plans that homeowners can use to build their ADU either for free or for a licensing fee. The plans, which can be customized to a degree, speed up the review process because they already meet the city’s building code and design guidelines.

Fixed costs in new construction, such as excavation and laying a foundation, make even small ADUs expensive. Given the fixed costs, some homeowners choose to build to the maximum size allowed in their jurisdiction since adding additional square footage is relatively inexpensive. Some cities or counties charge “impact fees” for larger buildings, so check with your local building department when considering the size of your build.

4. Can I finance an ADU?

Financing can be the hardest part of the process. That’s because the majority of traditional lenders don’t offer loans to construct ADUs, and the few that do generally write loans only for work done by professional contractors. Those loans tend to carry higher interest rates and require mortgage insurance. Due to those factors, most people put together a patchwork of sources to pay for their ADU.

5. How might I save on the construction cost of an ADU?

Converting an existing space into a separate living unit is likely to cost less than new construction, although things can get pricey if you choose high-end finishes. Another way to cut costs is to build a dwelling from plans that have been “pre-approved” by your county or city building department. Buying a pre-built model or kit home also may offer a way to cut costs, but be sure to factor in all applicable costs, including utility hookups. Some pre-built models only include the structure itself, so be sure to factor in the cost of finishing the inside and installing electric and plumbing. You also might save money by purchasing used materials such as doors, cabinets, flooring and  windows that have been salvaged from other construction or demolition projects. Check your local business listings to see if there are salvage businesses nearby. Whatever you decide, you’ll want to make sure the space is inviting. 

6. Calculate the Return on Investment (ROI) in your real estate market

In cities with high housing costs, rental income can pay for the costs of development in a matter of years, while providing a homeowner with future options for downsized living without having to move from their home. Legally permitted ADUs also tend to add value to a property. Some localities have created ADU calculators to help people determine whether area rents will generate enough to cover monthly expenses. Beyond that, there are considerations about what is involved in being a landlord. While ADUs don’t promise instant riches, they can be a good way to build some wealth over time.

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