A guide to ADUs in real estate

It’s no secret to anybody that housing prices have been soaring over the past decade. As of 2019, a single-family home costs an average of 4.6 times an area’s median income, and housing prices increased 1.4% year over year between 2022 and 2023.

Of course, housing prices have increased more rapidly in some areas than others, and different cities have come up with different solutions to the problem. Many cities and property owners are leaning on accessory dwelling units (ADUs) to help mitigate housing costs.

ADUs have become particularly popular in cities like Portland, Oregon, Los Angeles, and San Francisco — places where space is limited and people want to set down roots. And in a recent survey of Orchard home improvement experts, close to 75% of respondents agreed that adding an ADU can increase your home value.

Still, there’s a lot to understand before embarking on this home renovation project. ADUs can be a costly upfront investment, but the different types of ADUs offer an array of options for many budgets.

What is an ADU?

An accessory dwelling unit, or ADU, is a secondary housing unit on a single-family residential lot. Basically, it’s a second private living space on the same single-family lot. 

ADUs come in many forms, from a second structure on the same lot, a private wing of a house, a converted private basement, and more. Regardless of where an ADU is or how it’s structured, it has the potential to increase housing affordability by infusing more supply into the market and making better use of existing space.

What’s the difference between an ADU and a guesthouse?

The term ADU and guesthouse are often used interchangeably, but this is an error. They are not the same.

For starters, ADUs have their own kitchens and bathrooms, allowing them to be fully self-sufficient and independent of the primary home on site. Guesthouses do not have kitchens, although they may have a bathroom. Guesthouses are intended to be temporary residences for guests of the primary residence. An ADU is somewhere a person could live permanently.

Types of ADU

There are three primary types of ADUs, although there are many variations within each one.

Detached ADUs

Detached ADUs are what some people might think of as guesthouses. They are backyard cottages detached from any other structures on a property. They’re great for giving a renter more privacy or allowing a family member to have some more independence.

Since they’re built as standalone buildings away from the main house, new construction is usually fairly straightforward and less invasive than a major renovation or addition to your existing home that could serve as an attached ADU.

Attached ADUs

In-law suites or rental units attached to the main house or another structure are attached ADUs. Some properties have an ADU like this already built into the house. Others may just need to make a few modifications.

Attached ADUs may require fire-rated separations between the ADU and the main home depending on location, which can add to the cost. But generally, adding an attached ADU is much less expensive than building a new one.

Conversion ADU or JADU

Conversion ADUs are built into the existing house structure, most commonly as a garage conversion. However, other options include converting a basement, attic, or even spare bedroom into a rental unit.

The most cost-effective way to add an ADU to your home, conversion ADUs allow you to simply finish an existing space with a kitchen and plumbing to start drawing rental income.

JADUs are smaller ADUs with fewer regulations and ordinances, typically at a maximum of 500 square feet. JADUs, however, must utilize existing space within the home’s main structure, so only attached garage structures count.

The primary difference between a JADU and other ADUs is that JADUs permit efficient kitchens with just a hotplate or microwave rather than a cooktop or range, and they can share bathrooms with the main house.

Who would add an ADU?

ADUs have become a trendy way to add functional living space, both for private and public entities. The city of Los Angeles has leveraged the affordability of ADUs to increase the housing supply. More than 20% of new houses in LA are ADUs. ADUs are efficient and relatively cheap to build, making them useful levers to pull in combating housing prices, although most cities have yet to develop strong ADU programs.

In the private sector, any homeowner with some extra space could benefit from building an ADU.

Pros and cons of building an ADU

There are a number of reasons to build an ADU on your property, but it’s not all sunshine and roses.

Pros

• Rental income: An ADU adds a separate living space on your property that you own. That means you can rent it out and earn some extra income.

• Increased home value: The prospect of being able to cut into their mortgage costs immediately with rental income is an enticing one for many buyers. One study shows that ADUs offer a 5-10% return on investment in home value increase.

• Increased living space: You don’t have to rent out an ADU. You could just treat it like an in-law suite to house family or friends for extended stays. It’s also just nice to have extra private space to use how you’d like.

Cons

• Cost: While ADUs are significantly less expensive than building a whole new house, it’s still a whole new structure and, therefore, will likely be one of the most expensive projects you undertake as a homeowner.

• Responsibility: Overseeing the construction of an ADU is taxing in itself. Handling the maintenance and acting as a landlord are additional responsibilities that not everyone has the time or patience for.

How much does it cost to build an ADU?

The cost of building an ADU depends on several factors. The size and type of ADU are the two biggest determining factors, but you’ll also have to consider local permit and labor costs and the materials you’re using.

The national average price to build an ADU to between $60,000 and $360,000. It tends to break down as somewhere between $150 to $300 per square foot, and the average ADU is between 600 and 1,200 square feet. Again, the biggest factors are if you’re building a detached ADU or just finishing a space inside your home, the amount of work needed, and how big of an ADU you’re looking to build.

ADUs are becoming a more popular way to help mitigate rising housing costs and allow homeowners to earn a little extra rental income. It’s an expensive project for a private homeowner to take on, but if you do it right, it may just be worth it for you.

Accessory Dwelling Unit (ADU) FAQs

The most commonly asked questions about ADUs, answered.

Does having and ADU increase property value?

Yes, having an Accessory Dwelling Unit (ADU) can indeed increase property value. ADUs are sought-after additions due to their potential for generating rental income and providing flexible living arrangements. The added square footage can attract a wider range of buyers or tenants, thus enhancing the property's overall appeal. Additionally, the income potential from renting out the ADU can contribute positively to the property's value by offering a steady stream of revenue. However, it's important to note that the extent of the value increase can vary depending on factors such as the ADU's size, quality of construction, location, and local real estate market conditions.

How close can I build an ADU to my home?

The allowable distance to build an Accessory Dwelling Unit (ADU) in relation to your home largely depends on local zoning regulations and building codes. These regulations typically stipulate setbacks, which are minimum distances required between structures and property lines. It's crucial to consult your local planning department or a professional to understand the specific setback requirements for ADUs in your area, as they can vary widely.

Am I allowed to build an ADU?

Whether you're allowed to build an Accessory Dwelling Unit (ADU) depends on the regulations and zoning ordinances set by your local jurisdiction. Many areas now permit ADUs to address housing needs and urban development. To determine your eligibility, it's advisable to consult your local planning department or relevant authorities who can provide information about ADU regulations, including size limits, setbacks, and other requirements applicable to your property.

Do ADUs increase utility costs?

The impact of an Accessory Dwelling Unit (ADU) on utility costs can vary depending on several factors. Generally, an efficiently designed and well-insulated ADU may have a moderate impact on utility costs. Plus, a lot of these costs can be offset by tax breaks for energy-efficient home improvements. However, it's important to consider energy-efficient features and appliances during construction to minimize any potential increase in utility expenses.

Selected sources

1. Guardian. (2023) “How finding a home in America became so absurdly expensive”
2. Core Logic. (2023) “US Home Price Insights July 2023”
3. Crosstown. (2022) “New housing in Los Angeles leans heavily on ADUs”
4. Cottage. (2023) “Does an ADU Add Value to Your Home?”
5. Angi. (2023) “How much does an ADU cost?”