Don’t be a fool, if you have some spare capital make an ADU (Accessory Dwelling Unit) and earn a passive income!
First Understand what an ADU is – if you already know what it is.. then you can skip to “Let’s talk about money”.
An accessory dwelling unit is an investment where you can employ funds for the purpose of achieving additional income and growth in the value of the current property. First, you need to have a clear understanding of what an ADU is and what are its common forms:
Accessory Dwelling Units (ADUs) are commonly referred to as secondary homes or granny flats. They are majorly categorized under three classes that are:
- Interior ADUs
- Attached ADUs
- Detached ADUs
1.Interior ADUs
Interior ADUs are commonly built inside the main residence usually as the conversion of attic or basement from the already existing space.
2.Attached ADUs
Attached ADUs are usually built around the primary residence as an addition to the main property.
3.Detached ADUs
Detatched ADUs are basically the stand-alone structures and like all other ADUs are owned by the owner of the main house. They do not typically exceed the area of about 1200 sq. ft. in total.
Garage conversions, basement conversions and attic conversions all fall under this category. However, the structural forms vary
Some of the distinguishing characteristics that define ADUs and separate them from conventional housing system are listed below:
Keep reading, you’re almost at the interesting part!
- They are an accessory to the main residence and thus are comparatively smaller in size to the primary house.
- They are usually adjacent to the primary housing on the same grounds.
- They must have a separate entrance and usually offer a driveway.
- They have a living area, a separate kitchen, or a kitchenette.
- They usually make use of water and electrical connections of the primary residence.
- Informal ADUs also exist in comparison to the permitted ADUs depending upon the jurisdiction.
Other ADU terms and types that are most commonly used are Converted ADUs and Junior Accessory Dwelling Units (JADUs).
Converted ADUs are the areas that are not used as livable spaces such as boiler rooms, storage areas, and garages.
Junior Accessory Dwelling Units (JADUs) are allowed to spread on an area of around 500 sq. ft. alone. They need to stand within the walls of the existing building. No additional parking is required but it must have a separate entrance just like other ADUs. Only one JADU is allowed on a single-family residence.
Let’s talk about the money…
The current housing and rental system allow you to charge as much as $1500 on monthly basis from the guests. The potential guests can be sought out easily by being available on websites such as Airbnb, Home Togo, and Tripping.com. You can build an extraordinary profile to attract the customers by uploading exuberant photographs of the units to be rented. These search engines allow you to interact with millions of trippers and getaway-seekers who are looking to rent out space on a nightly, weekly, or even monthly basis.
Building an ADU is a very profitable source of passive income. The charges can vary depending on where you live. Once an ADU has been added to your primary residence the value of your housing ultimately goes up in the market and you have the option to sell your property that will allow you to have a large sum of money on hand. Thus building an ADU is a value-adding operation and if you have the capacity to do so, then it may be something to consider.
There are a few rental options to chose from. A rental plan such as renting it out on some social websites such as Airbnb, traveler’s hub, etc. You should consider the market trends and prices because market saturation affects your rental plan. The prices can vary depending upon the legal housing laws and regulations therefore before renting out space go by the regulations of the area that you are living in.
For example, in an area such as Southern California if you build an ADU for a total sum ranging from $250,000-$300,000 and plan to sale it the market value could potentially couble to about $600,000, which is actually a great return on the initial investment
To give you a picture of how you can benefit from a property that has a newly build ADU with it, consider the following:
A host of my acquaintance has been living completely on the revenue generated through these ADUs in Santa Clara. He built his first ADU for approximately $180,000 in 2018. He rents his ADU for six months throughout the year and earns a net income of $12,800. His property is valued at the price of around $1.6 million from a subsequent price of $1.2 million. This is an increase of about 25%, or approximately $400,000 in the resale value of the home.
Similarly, another median residence with an ADU of about 500 sq. ft. was sold with an increment of 22% from the actual price of the home before the ADU was built. The price at the time was about $415,000 in San Bernardino and the resale value-added the sum of $91,300l so $506,300 in the final resale.
A family bought a house in Santa Barbara for the price of $1,450,000 and then by remodelling and constructing a detached ADU they were able to resale the property for a profit of about 34%. The sale price of the house increased to $1,556,100 meaning they had a profit of about $141,100.
Apart from that, there are other studies that show that adding an ADU to your residence can enhance the value of your property to as much as 51% which is a phenomenal deal.
Rental Money
The common rental charges in various cities for an ADU that typically spread over an area of 500-600 sq. ft. are given below:
- Sacramento attached ADUs: USD $1220/month
- Sacramento detached ADUs: USD $1400/month
- Los Angeles attached ADUs: USD $800/month
- Los Angeles detached ADUs: USD $1200/month
- San Diego attached ADUs: USD $1400/month
- San Diego detached ADUs: USD $1900/month
- Orange County attached ADUs: USD $2500/month
- Orange County detached ADUs: USD $3500/month
- San Jose attached ADUs: USD $1500/month
- San Jose detached ADUs: USD $2000/month
The rental income on a monthly basis that can be obtained with respect to the area an ADU occupies is depicted below in the line graph for easy understanding:
Figure 1 Rental Income as per area of ADUs
Moreover, you can expect the gradual increase in the rent with increase of floor space in sq. ft. this trend of rental increment is depicted below in the figure.
Figure 2 Increase in income as per area of ADU
Thus, even a small ADU of 500 sq. ft. can earn you a passive income of about $1200. The survey shows that one of the major factors that contribute to the rising trend of ADUs is the need for passive income that everyone would like to have on hand. Another contributing factor is that the housing industry giving back to ADUs is the result of the aging population who tend to invest in real estate as a safe income option in the years to come.
Bottom line is that ADUs are profitable. If you have good contractors and you live in a good area, you will always be able to rent it out and will most likely make a return on your investment quicker than you expect. The laws are easy now so take advantage of them before they change.
Good Luck!
