If you live in a neighborhood where monthly rent on a garage apartment equates to a big chunk of your mortgage payment, you might want to get in on that action. Is constructing a rentable unit at your homestead worth upfront costs?
Thousands of homeowners are saying yes, as cities and states around the country begin to welcome the additional housing. In attempts to counter crippling housing costs, lawmakers in many cities are striking down single-family zoning laws that ban rentals of granny suites, attic flats, backyard apartments and other accessory dwelling units (ADUs). The changes pave the way for homeowners to reduce their own housing costs with units that they can tap for extra income, constantly or temporarily.
Interested? Start by Googling “ADU” and your city for the relevant .gov site. There, you’ll learn the process and limitations for creating and renting an ADU, as well as fees for permits.
This article, and a follow-up detailing costs in several case studies, will help get a handle on potential costs and returns of your project. They’ll also help you avoid the sticker shock a lot of homeowners experience when they start adding up costs in these seemingly small projects.
Keep in mind that the two most expensive rooms – kitchen and bath – cover much of the space in these units, making construction costs per square foot much higher than they were on your larger home. Also, note that most homeowners finance these projects over a decade or more. For many, the best indicator of the project’s financial return is the difference between monthly debt payments and the rent the ADU draws. (Or the main house draws, if owners move into the ADU.)
Installing a manufactured ADU is usually quicker, potentially cheaper and a more predictable process and price than constructing one from the ground up. Companies like prefabADU and Cover can take care of the project, from permitting to final inspections. Some cities, including most of the big ones in California, have streamlined approvals for certain prefab designs. Abodu claims its design-approved, detached prefabs can be installed in about two weeks, for about $200,000 all told. There is a delightful variety of prefab designs now, and they’re found in neighborhoods wealthy and not.
Other homeowners save money by doing some work themselves and outsourcing as needed. AmeriSus in Philadelphia sells a $59,000 kit for a 729-square-foot one bedroom. The company says the project can be completed for under $100,000. If you have construction skills, you may be able to convert part of your existing house into a rentable unit without a kit or contractors.
All ADU additions, including prefabs and kit projects, must go through your city planning department and permitting process. Here’s an explanation of those costs, as well as other points to consider.
_Design: It’s best to show up at your city’s planning department with at least a rough design before you fork over money for the project. Those officials can point out applicable codes and permits, as well as potential issues. For example, some places limit ADU size to a percentage of square feet of the main home. Some count decks in square footage while others don’t. Some require parking. You’ll eventually need at least an architect for a detached unit, but planning officials can help you determine what outside professionals you’ll need, if any, to clear small inside jobs.
_Permitting: San Francisco and other places desperate for more housing waive certain permitting and inspection fees to encourage construction. In some places, a small interior project costs about $5,000 to permit, while a major build can go into the tens of thousands. Local fees for these projects are all over the board.
_Financing: Home equity loans can fund ADU projects with a lump sum paid in fixed monthly installments, over as many as 30 years. Alternatively, many people with sufficient home equity finance their ADU with a 10-year home equity line of credit, with less predictable rates and payment requirements. Home improvement loans don’t require equity but typically have higher interest rates. Others will refinance their entire mortgage and wrap the ADU cost in, if possible, to get the lowest rate.
You may find better financing options through a local program. For example, the city of Boston offers interest-free loans for homeowners willing to build ADUs in certain neighborhoods.
_Taxes: Property taxes rise with an ADU addition, with limits. In California, for example, the house you bought 10 years ago for $500,000 may be worth $1 million today, but it will not be reappraised to figure your new assessment with an ADU. So, say your tax rate now is based on a $500,000 valuation (because of a cap on annual assessment increases), and the new ADU appraises for $120,000. Your new tax rate is calculated at $620,000, plus 1%. Studying comparable homes with an existing ADU in your area, on the property tax roles, is a must.