If you’ve looked into building a rentable addition inside your house or in your backyard, you may, understandably, be shocked at the cost. Those basement apartments, garage units and other accessory dwelling units cost more per square foot to build than most traditional homes.
If you’d like to learn the basics of accessory dwelling units (ADUs), read Part 1 and Part 2 in this series. Here, we’ll explain why building one might be a very good financial decision regardless of the cost. With examples of three types of ADU projects, we show how financing and rental income interact to create considerable profits for many homeowners, despite the upfront costs. These are immediate monthly gains beyond the increase in resale prices, which we don’t attempt to calculate here.
While we’ve chosen a few common projects to highlight, note that there are many ways to create an ADU. Basement conversions are often the cheapest, especially those starting with a partially finished family room. (The space needs a kitchen, bath and outside door to become a rentable ADU.)
Ground floor garage conversions also are relatively modest ADU projects, but adding one on top of an existing garage adds about $50 a square foot to construction costs, according to ADU consultants at the informational site Maxable. Detached units with traditional construction can be as expensive as you want to go.
For simplicity, the examples below assume a 30-year, 6% home equity loan that covers 90% of the cost of the project. (Closing costs not included.) However, many homeowners find it cheaper or more feasible to use other types of financing, such as a home equity line of credit or cash-out refinancing.
And finally, the disclaimer: You’re not going to see these figures on your real-life project. Your space is different, your contractors are different and your distance for deliveries is different from these examples. Your permitting fees may be tens of thousands of dollars more or less than those included here, depending on your design and the rules of your local planning department. Your rent will largely be determined by your neighborhood. And you’ll have some ongoing costs we don’t calculate here, such as increased property taxes and maintenance.
Further warning: All three of our examples are from California, where rental incomes are generally higher than other areas across the U.S., and some construction costs may be higher, too.
We’ve researched generalized local costs and rents to give you reasonable estimates of returns on each sample project. Use the information to mull the possibilities. Then scrupulously do the math for your own project.
_One-bedroom, one-bath detached, prefab in San Jose, 495 square feet
Buying a manufactured ADU is a relatively fast, easy and cheap way to get income from a new detached unit. For a single price, companies like Abodu in San Jose will handle the project from permitting until you’re ready to take the keys, which removes the hassle of hiring contractors. Oftentimes there are extra costs for specific property issues, such as the need for an upgrade on the property’s main electrical panel.
This example covers an Abodu unit that is pre-approved by planning departments in several San Francisco Bay area cities. Base cost and rent details come from company co-founders John Geary and Eric McInerney. They say typical turnaround is about three to four months.
Costs, including permits and construction: $199,000
Monthly loan payment: $1,073
Monthly rent income: $2,500
Net monthly income: $1,427
_Three-bedroom, three-bath detached in Encinitas (north San Diego County)
The city of Encinitas offers permit-ready ADU (PRADU) designs ranging from a 224-square-foot studio to the 1,199-square-foot three-bedroom, three-bath described below. Builders estimate Encinitas PRADUs (a good search term to find pre-approved designs anywhere) and fee waivers save homeowners three to six months in design and approval time, and $10,000 to $18,000 in fees.
Larger than most ADUs, this unit is compatible for three independent renters or as the residence of the property owner’s family. This example shows potential returns for a homeowner who wants to move in and put higher paying tenants into the main home, which by local law must be at least twice the size of the ADU. We’re using a conservative (at the high end) $340 per square foot estimate on costs based on average local rates published at Maxable.
Costs, including permits and construction: $419,650
Monthly loan payment: $2,264
Monthly rent on main house: $5,000
Net monthly gain: $2,711
_Garage conversion in San Francisco, about 750 square feet
In some places, including San Francisco, garage apartments are far more common than detached ADUs. Here’s an example of a conversion that turns part of an unfinished garage into an apartment, leaving one garage parking space. (A common ADU project in the city.)
Cost estimates are supplied by the San Francisco Planning Department’s ADU Handbook. Note that construction costs in San Francisco are about 51% higher than the national average, according to Maxable.
Permitting fees: $19,450
Architects, engineers and other professionals: $25,940
Construction costs: $259,400
Total costs: $304,790
Monthly loan payment: $1,644
Monthly rent: $3,400
Net monthly income: $1,756
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