Provide Housing and Generate Extra Monthly Income with an Accessory Dwelling Unit

Would you believe it if you were told that you could undertake a home improvement project that not only increased the value of your home, but would pay for itself over time? Adding what is known as an “accessory dwelling unit” to your existing property can provide you with income while also increasing your home’s worth. Building one is nothing more than a great investment in your future.

So, what are accessory dwelling units? Accessory dwelling units, or ADUs, otherwise known as guest units, in-law suites, or accessory apartments, are housing units that are separate and secondary to a primary residence, usually a single-family home, that is housed on the same lot. They differ from mobile homes and condominiums because they are unable to be purchased separately from the main home. As a matter of fact, in some jurisdictions, you cannot rent an ADU out unless you still live on the property.

Accessory Dwelling Unit Types

There are three major configurations of ADUs. There are detached units, attached external units, and attached internal units. Let’s take a look at each:

1. Detached Units

The first type of ADU that comes to most people’s minds immediately is a detached structure that is located in the backyard of the main house, such as a carriage house, or a pool house. Sometimes, the term can even apply to a multi-purpose detached unit, such as a garage with residential space on its second floor. RVs would not count because these units must have a foundation of some kind.

Unfortunately, owning this type of structure can become burdensome. Another building means additional maintenance costs and separate utility hookups, as well as providing it with its own water heater and furnace.

2. Attached External Units

This is an apartment that has at least one wall in common with the main home on the property. That said, it will have a separate entrance from the main entrance and will share no internal connections or utility hookups with the primary unit.

3. Attached Internal Units

These types of ADUs are entrenched in the home’s existing structure and will not usually have their own entrances. Finished basements and attics fit this description, if they are being used as secondary units. Such apartments may not even appear visible to onlookers from the outside, since the spaces used are usually what most homeowners would use for storage.

Accessory Dwelling Unit Uses

There are many uses for your home’s ADU, and while not all are profitable, they may help you to save money in different ways. Here are some of the most common:

1. Long Term Rental

You can rent your ADU to low and middle-income tenants that would jump at the chance to live in a better neighborhood than they could otherwise afford. Many families wish they could send their children to better schools, and moving in will be a great opportunity for them.

Whether you prefer annual or month-to-month leases, the contract will provide you with a steady stream of passive income for as long as you need it. While the rent will vary depending on the ADU location, size, and amenities, you will still make a nice profit without any extra effort.

2. Short Term Rental

As long as it is permitted in your state and municipality, you can make some short term cash by leasing your ADU on vacation rental sites. This is especially true if you live in, or are adjacent to, a larger city or a popular holiday destination.

3. Housing Elderly Parents

You can save money on assisted living facilities and nursing homes by housing your aging parents on your property. Not only is this a humane alternative, but it assures your relatives that they can remain independent while not living completely alone.

4. Safety Nets for Adult Children

If your young adult child desires his or her freedom, but is not yet financially-prepared to live alone, moving into your ADU is a great option. You can charge adult children a lower rent than usual to help them get on their feet.

5. Trading Spaces

Perhaps you are empty nesters that don’t really need all the space that your main dwelling provides, but you sure could use additional income, such as rent, in your retirement. What is the solution? Instead of renting out your ADU, you can move minimalize your possessions and move into it, freeing the main home for rental to a larger family.

Things to Take into Consideration

When your home is appraised, it may actually lose value if you have an ADU. That is because it is required to meet all Freddie Mac and Fannie Mae guidelines. If it doesn’t, the cost of updating the space must be deducted from the value of the home, so be careful.

Also, sometimes, certain municipalities require multiple permits and strict adherence to local rules and regulations in order to build or rent an ADU. It can be difficult to meet all the requirements in particular situations, if not impossible. Just remember, any income received from an “illegal” dwelling is also considered illegal.

In conclusion, building an ADU is a great way to increase your home’s value, build equity, make passive income, and provide for your family. Just be sure that you have knowledge of all applicable building codes and federal guidelines before you start building.

Mindful Money is Here to Help You!

With the rental market becoming more competitive, your borrowers can create an opportunity to provide housing and generate extra monthly income with an ADU. If you want to leverage current ADU rental income to qualify, or if you want to add an ADU, Mindful Money LLC can help!

As a seasoned mortgage broker with 19 years of experience, you can take a deep, cleansing yoga breath; that’s what I’m here for!

If you have any questions about ADUs, please don't hesitate to call me or email me at sam@mindfulmoneyusa.com!

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.