What Is an Accessory Dwelling Unit?

Some Americans are sharing their property with family members or tenants. But rather than sharing the same home, they offer an accessory dwelling unit (ADU) situated on their building lot. 

What is an accessory dwelling unit? An ADU is a separate living space that exists on your property — usually detached from your primary home. Here’s what you need to know about building and maintaining an accessory dwelling unit.

Definition of ADU

Accessory dwelling units (ADUs) go by a small variety of other names, including granny flats, secondary suites, or carriage houses.

Depending on your state, you may be subject to additional zoning requirements or other regulations, some of which may vary depending on the type or size of your ADU.

Types of ADUs

ADUs can be either attached or detached. Detached ADUs can include things like:

• Tiny houses
• Backyard cottages
• Mobile homes
• Detached garage or outbuilding

However, an attached ADU shares only a wall with the primary residence and is otherwise separate. This means that you have to physically exit one residence to enter the other, making this arrangement more formal than just an added guest room.

Features of ADUs

The features of each ADU will vary, but all ADUs must offer the following features:

• Comfortable living area
• Dedicated sleeping area
• Working kitchen
• Bathroom
• Basic utilities (water, electricity, heat, etc.)

An ADU doesn’t have to offer all the features of a single-family house, but it must be able to operate separately from the primary dwelling.

Pros and Cons of Having an Accessory Dwelling Unit

What is an accessory dwelling unit used for? Some homeowners use an ADU as a rental property, while others use the ADU for family members. A loft apartment over a detached garage would also be considered an ADU and may be used as a guest house or rental space. 

Before you start building or renovating, consider the pros and cons of an ADU.

Advantages of Having an ADU

Positively, an ADU can provide the following advantages:

• A source of rental income
• Accommodations for your family members
• Affordable housing for your community
• Added value to your property

If you have family members who are looking for housing options, an ADU might be a better arrangement than trying to live together within the same house. 

Disadvantages of Having an ADU

On the other hand, an ADU comes with some drawbacks:

• Must meet local zoning requirements
• Owners must pay utilities on the second living space
• An unauthorized ADU can jeopardize your ability to refinance
• Shared walls may create noise

This is to say nothing of any upfront costs that may go into constructing or converting an ADU. Add in any fines for zoning violations, and you may find yourself facing steep costs that can be recovered only by renting.

How to Build an Accessory Dwelling Unit

Building an ADU takes careful planning and financing. Here’s what to expect if you want to build an accessory unit on your property.

Design and Planning

Start by thinking about the reason you’re building an ADU. For instance, if you’re trying to provide housing for an aging family member, a loft apartment over the garage might present accessibility issues. And if you’re hoping to rent out the space, you and your tenants may prefer a completely detached structure for added privacy. 

Keep in mind that the nicer you make the property the easier it will be to find interested tenants.

Financing an ADU

There are several possible ways to finance an ADU, including:

• A cash-out refinance of your primary residence
• Home equity loan or home equity line of credit (HELOC)
• Home renovation loan

Some states may even offer financial assistance. California, for example, offers an ADU grant program with values as high as $40,000 to aid in ADU construction.

Building an ADU

Once you lock in your needs and your financing options, you’re ready to start building. But make sure to rely on qualified contractors who understand your needs as well as any local zoning ADU requirements and restrictions that may apply to certain residential areas. 

Your contractors will also be responsible for pulling any permits needed to complete the job, and they will assume liability for the work they perform.

How to Rent an Accessory Dwelling Unit

Once your ADU is complete, you’re ready to rent it out. The rental process will work just like any other type of property, though you’ll obviously need to specify in your advertisements the type of property you’re offering.

Finding ADU Tenants

Your ability to make money from your ADU will largely depend on your ability to keep the property filled. Advertise your rental unit in places like:

• Real estate websites (under apartments/rentals)
• Social media marketplaces
• Colleges or community centers

Don’t neglect your own personal network. Your family and friends may know of individuals looking for a place to rent.

Make sure to create a rental application to screen tenants for financial history and lifestyle choices (smoking, having pets, etc.). This will ensure that you’ll fill your unit with the most reliable renters.

Setting Rent For An Accessory Dwelling Unit

How much should you charge for rent? While some landlords adopt the 2% rule (where rent is 2% of the property value), this gets tricky with an ADU. You might look into similar dwellings in your area. For example, if your ADU is a fully-detached living space, you could charge a rent price that’s comparable to other houses in your area.

Make sure to account for any amenities or benefits you include in the rental agreement. For example, if you cover the cost of certain utilities, you may be able to charge more for the monthly rent.

Managing the Property

As a landlord, you’re ultimately responsible for all of the maintenance and repair. The advantage is that an ADU is physically on your property, so it’s easier to do things like cut the grass or repair a plumbing fixture. And if you already use a grounds keeping or maintenance service, you can simply have the same companies take care of the ADU.

Convenient Financing

An accessory dwelling unit can be a great way to provide for family members or earn passive income through rent. CrossCountry Mortgage can help you with financing. Contact our experienced team to discuss options such as home equity loans or lines of credit that can make it easier to build or renovate an ADU on your property. 

Reach out today, or complete an online application.

This article is for educational purposes only and does not constitute financial or mortgage advice. Loan programs, rates, and guidelines may change at any time. All loans are subject to credit approval and underwriting. For guidance tailored to your situation, consult a licensed mortgage professional.