What Is an Accessory Dwelling Unit Granny Flat ADU Costs amp Benefits
What Is an Accessory Dwelling Unit (Granny Flat) - ADU Costs & Benefits Skip to content
Motley Fool Stock Advisor recommendations have an average return of 397%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now No matter how its proponents choose to pay, the ADU movement is gaining momentum. Every year, thousands of homeowners across the United States calculate that the long-term benefits of accessory units, including substantial rental income potential and the flexibility to cheaply house aging parents or adult children, outweigh their steep upfront costs and ongoing maintenance requirements. Read on to learn more about accessory dwelling units: their types, common uses, costs, procedures to build, financing options, general benefits, and potential drawbacks.
The quintessential accessory unit is a detached structure located in the main home’s back or side yard. Detached ADUs are often miniature carriage houses or tiny houses that serve no purpose other than providing additional habitable space. They can also have dual purposes, such as a second-floor apartment above a garage or unfinished storage area. They must rest on foundations – a requirement that excludes mobile dwellings such as RVs and wheeled tiny houses. The main advantage of a detached ADU is independence. Because the entrance is separate and physically removed from the main house, occupants can come and go as they please with minimal disruption. This is useful for unrelated ADU tenants who want privacy from their landlords, for main house occupants who don’t want to be woken up when their tenants arrive home late at night, and for older ADU tenants who want to remain active for longer. The main drawback of a detached ADU is building and maintenance costs. Since the unit is entirely detached, it needs its own utility hookups and mechanical appliances (furnace, water heater), and likely requires more raw material to construct. Minnesota architect Christopher Strom, who helped the city of Minneapolis draft its ADU ordinance in 2014, says it comes down to who’s going to live in the ADU (if anyone) and what they value most. “[Homeowners] need to consider the level of independence needed for the occupant of the ADU,” he says. “The cost of a detached ADU is higher, but it also offers much more independence.” 2. Attached External Apartments
Attached external apartments share at least one wall with the main house. However, they have separate entrances and share no internal connections with the main unit. They generally have separate utility hookups, though the cost to connect them to city services is manageable due to the small distances involved. They may or may not share mechanical appliances with the main unit, depending on the existing appliances’ capacity. 3. Attached Internal Apartments
Attached internal apartments are fully integrated into the existing structure of the main house. To outside observers, it’s not immediately obvious that the property contains two separate housing units. They’re most often located in a finished basement or attic. They may or may not have separate external entrances, though they invariably have separate, secured doors accessible from an internal foyer or hallway. In most cases, they share utility service and mechanical appliances with the main unit. Since they require little in the way of raw construction materials and fewer big-ticket appliance purchases, they’re the cheapest of the three ADU options.
According to Brown and Palmieri’s report, the median cost to build an attached ADU in Portland is just over $75 per square foot. That’s $37,500 for a 500-square-foot space and $75,000 for a 1,000-square-foot unit. Costs for detached ADUs are roughly double: just under $150 per square foot, or approximately $150,000 for a 1,000-square-foot unit. Portland is a relatively expensive housing market, so it’s certainly possible that costs are marginally lower elsewhere, but the fact remains that building a habitable, up-to-code structure is a costly proposition anywhere. Geography aside, ADU construction costs may vary over time due to macroeconomic forces that affect input costs, chiefly raw materials and labor. When Should You Build Your ADU
The precise timing of your ADU’s construction will depend on your financial situation and family dynamics. For instance, if money is tight and you don’t want to serve as a landlord or Airbnb host to people you don’t know, you might wait to build your ADU until your kids are old enough to live in it. Alternatively, if you’re buying a house instead of renting, with the goal of turning it into a passive income stream, you’ll want to get started as soon as possible. Assuming you’re building your ADU from scratch, you can either build it simultaneously with or after your main house. For financing purposes, this is an important distinction. How to Finance Your ADU
Most middle-class homeowners aren’t in the position shell out tens or hundreds of thousands of dollars on a whim. Fortunately, those who can’t afford to cover construction costs with cash on hand have a slew of legitimate financing options at their disposal. Some are appropriate for ADUs built simultaneously with the main house; others work for ADUs added after the fact. Fannie Mae HomeStyle Rehabilitation Mortgage: Designed to finance major home improvement work, this popular mortgage product lets you put as little as 5% down, though you’ll need to pay private mortgage insurance (PMI) until you reach 80% LTV. However, unlike FHA mortgage loans, there’s no upfront mortgage insurance requirement – a potentially massive money-saver. Underwriting requirements can be strict – lenders like to see FICO scores north of 650.FHA 203(k) Renovation Loan: FHA 203(k) renovation loans are specifically designed for homebuyers looking to roll the cost of major home improvement projects into their purchase loans. With lax underwriting criteria, they’re ideal for first-time homebuyers with less than perfect credit. The major drawback is a big upfront mortgage insurance hit: 1.75% of the loan value.Construction-to-Permanent Loan (All-in-One Loan): This is a turnkey loan that finances every step of the home construction process, from land acquisition to the finishing touches, and then converts into a long-term (or “permanent”) mortgage with a term of up to 30 years. Just one closing is required.Short-Term Construction Loan: Short-term construction loans are meant to finance costs associated with new home construction – including, if necessary, ADU construction. They usually have one-year terms and variable interest rates that tend to be higher than longer-term mortgage loans. Once construction is completed, you’ll need to convert to a permanent mortgage, which requires a second closing.Cash-Out Refinancing Loan: If you’re adding an ADU to an existing property in which you’ve built significant equity, you can use a cash-out refinancing loan to extract cash and finance construction. If rates have fallen since you took out your original mortgage, your new loan may have a lower interest rate as well.Home Equity Line of Credit: This is a revolving credit line secured by your home equity – often up to 90%. Since HELOCs are relatively low-risk for lenders, they typically have very low interest rates.Unsecured Personal Loan: If you lack sufficient equity in your home and prize flexibility, an unsecured personal loan may be your best bet. Unsecured personal loans generally have shorter terms than refinancing, renovation, and rehabilitation loans, so they’re ideal for homeowners who expect to sell their homes soon after completing their ADUs. For reference, the Oregon Department of Environmental Quality has a comprehensive guide with a representative lineup of Oregon-specific financing options. The loan types described in this guide are available nationwide, but the lenders mentioned in it may or may not operate outside Oregon. For more information about options that make the most sense for your situation, consult your local housing authority.
What do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menuWhat do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menu Advertiser Disclosure Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others. Home ImprovementWhat Is an Accessory Dwelling Unit (Granny Flat) – ADU Costs & Benefits
By Brian Martucci Date December 13, 2021FEATURED PROMOTION
How’s your appetite for a major home improvement project? What if that project could build equity, significantly boost your property’s value, and generate income? Most home improvement initiatives can’t do that. In fact, the list of home improvement projects that decrease resale value and drain homeowners’ personal savings is far too long. Accessory dwelling unit (ADU) additions are different. Whether you’re looking to renovate an older house or build equity in a new construction home, an accessory dwelling unit is highly likely to add value, versatility, and verve to your little patch of ground. Adding an ADU is a major investment. According to the Oregon Department of Environmental Quality, the median cost to build a detached ADU in Portland, Oregon, is approximately $90,000. The median cost to build an attached ADU is cheaper-between $40,000 and $50,000. Still, that’s surely more than almost any other common home improvement project, save high-end kitchen or bathroom remodels. ADUs may be easier for rank-and-file homeowners to finance than some other big-ticket purchases, too. If you have sufficient equity in your home, a cash-out refinance is a low-cost, reliable option. If not, consider a home renovation loan or unsecured personal loan.Motley Fool Stock Advisor recommendations have an average return of 397%. For $79 (or just $1.52 per week), join more than 1 million members and don't miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now No matter how its proponents choose to pay, the ADU movement is gaining momentum. Every year, thousands of homeowners across the United States calculate that the long-term benefits of accessory units, including substantial rental income potential and the flexibility to cheaply house aging parents or adult children, outweigh their steep upfront costs and ongoing maintenance requirements. Read on to learn more about accessory dwelling units: their types, common uses, costs, procedures to build, financing options, general benefits, and potential drawbacks.
What Is an Accessory Dwelling Unit
An accessory dwelling unit is a secondary housing unit that occupies the same structure or lot as a primary residential structure – usually a single-family home or duplex. Unlike condominiums and mobile homes, accessory dwelling units generally cannot be purchased separately from the main home. Moreover, the construction of an accessory dwelling unit does not require or result in the subdivision of the main home’s lot. ADUs’ fortunes are therefore closely linked with those of their “parent” homes. In fact, many municipalities enforce restrictive covenants that require properties with ADUs to remain owner-occupied in perpetuity. Where such covenants are enforced, you can’t move off the property and rent out both the main house and ADU, nor can you sell the property to an absentee landlord who intends to do the same. You must remain on the property, living in either the ADU or main house, until you sell to another individual or family with the same plans.Accessory Dwelling Unit Synonyms
Despite their novelty, accessory dwelling units are known by many names. Terms depend largely on geography and personal preference. Common synonyms include: Accessory apartmentGranny flatSecond suiteLive-in garageMother-in-law suite/apartmentIn-law suite/apartmentSecondary unitFamily unitGuest unit/apartmentCarriage houseBasement unitAttic unitTypes of Accessory Dwelling Units
Accessory dwelling units come in three basic configurations: detached structures (habitable outbuildings), attached external apartments with entrances separate from the main dwelling, and attached internal apartments with shared or separate entrances. Let’s take a closer look at each. 1. Detached StructuresThe quintessential accessory unit is a detached structure located in the main home’s back or side yard. Detached ADUs are often miniature carriage houses or tiny houses that serve no purpose other than providing additional habitable space. They can also have dual purposes, such as a second-floor apartment above a garage or unfinished storage area. They must rest on foundations – a requirement that excludes mobile dwellings such as RVs and wheeled tiny houses. The main advantage of a detached ADU is independence. Because the entrance is separate and physically removed from the main house, occupants can come and go as they please with minimal disruption. This is useful for unrelated ADU tenants who want privacy from their landlords, for main house occupants who don’t want to be woken up when their tenants arrive home late at night, and for older ADU tenants who want to remain active for longer. The main drawback of a detached ADU is building and maintenance costs. Since the unit is entirely detached, it needs its own utility hookups and mechanical appliances (furnace, water heater), and likely requires more raw material to construct. Minnesota architect Christopher Strom, who helped the city of Minneapolis draft its ADU ordinance in 2014, says it comes down to who’s going to live in the ADU (if anyone) and what they value most. “[Homeowners] need to consider the level of independence needed for the occupant of the ADU,” he says. “The cost of a detached ADU is higher, but it also offers much more independence.” 2. Attached External Apartments
Attached external apartments share at least one wall with the main house. However, they have separate entrances and share no internal connections with the main unit. They generally have separate utility hookups, though the cost to connect them to city services is manageable due to the small distances involved. They may or may not share mechanical appliances with the main unit, depending on the existing appliances’ capacity. 3. Attached Internal Apartments
Attached internal apartments are fully integrated into the existing structure of the main house. To outside observers, it’s not immediately obvious that the property contains two separate housing units. They’re most often located in a finished basement or attic. They may or may not have separate external entrances, though they invariably have separate, secured doors accessible from an internal foyer or hallway. In most cases, they share utility service and mechanical appliances with the main unit. Since they require little in the way of raw construction materials and fewer big-ticket appliance purchases, they’re the cheapest of the three ADU options.
Potential Uses for Accessory Dwelling Units
Architect Christopher Strom says that most homeowners who build ADUs do so to accommodate elderly family members at a reasonable cost or earn extra income from short-term rentals. “For the most part, [ADU owners] have elderly family members that want to live independently but nearby,” he says. “The next [most common use is earning] extra money through Airbnb.” However, there are plenty of other uses for detached or attached accessory units. Here’s a look at some common options, none of which are mutually exclusive: Housing Grandparents and Older Parents Independently, but Nearby. For many families, ADUs are affordable, humane alternatives to nursing homes and assisted-living facilities. According to the U.S. Department of Health and Human Services, the cost of a semiprivate nursing home room approaches $7,000 per month. An entirely private nursing home room costs nearly $8,000 per month. Even assisted-living facilities, with their more hands-off approach to care, cost more than $3,500 per unit, per month. By contrast, median rents for attached and detached ADUs in Portland, Oregon, range from roughly $750 to $1,000 per month, per the Oregon Department of Environmental Quality – and that assumes you’d charge your elderly parent or grandparent market-rate rent to live on your property.Long-Term Rental Income. Another common use for ADUs is long-term rental income from tenants on monthly or yearly leases. Income potential obviously varies greatly by ADU size, amenities, location, and other factors, but this is a legitimate passive income opportunity for any homeowner who builds or buys into an accessory dwelling unit.Short-Term Rental Income. If you don’t want to give your accessory unit over to a single renter or couple for months or years at a time, turn it into a short-term rental instead. Whether you live in a big city or popular vacation town, you can market your ADU to travelers on Airbnb, Vrbo, HomeAway, and other vacation rental sites. Keep in mind that short-term rental laws vary by jurisdiction, so make sure you’re allowed to go this route before creating a listing – and pay all applicable lodging taxes once you’re up and running.Bonus Space for Older Kids. As a parent, you’re probably leery about letting your adolescent or teen hang out with his or her friends (and potential love interests) in a separate apartment. That’s totally understandable. But, with proper ground rules and supervision, an ADU can be a great place for older kids to create some distance from their parents without venturing into completely unstructured environments.Low-Cost Housing for Adult Children. In high-cost areas, ADUs can serve as safety nets for low- and middle-income young people who can’t afford decent housing near work or school. They’re also useful for adult children who are capable of productive work, but have chronic health or developmental issues that prevent them from living independently.Space for a Home Office or Studio. If you’re an artist, craftsperson, or individual professional, adding an ADU is a great way to carve out space for your passion (or profit) without cluttering your main house or driving the rest of your family crazy. With a kitchen, bathroom, bed, and other housing necessities, you can toil indefinitely as you strive to meet deadlines or put the finishing touches on your next masterpiece.Separate, Specialized Space. Your property is unique. Depending on its amenities and configuration, your ADU could accentuate an existing function or create an entirely new one. For instance, if you have a backyard pool, your ADU can serve as a pool house, complete with equipment storage, private changing areas, and a shower. If you’re a frequent host, it could house party overflow or divert traffic from the main building. Or it could serve as the proverbial man (or woman) cave. The sky’s the limit.Private Accommodations for Guests. If you regularly host friends and family overnight, your ADU can serve as a super-private spare bedroom. That’s a win-win for you and your guests, especially in older, smaller houses where every sticky door and creaky floorboard sounds like a cannon.Efficient Quarters for Single and Empty Nester Homeowners. If you’re a younger, single individual with the means to purchase a house, consider buying one with an existing ADU or adding an ADU yourself. By living in your ADU and renting the main house to a larger family or group of roommates, you can maximize your investment’s income potential without taking up more space than you need. The same principle applies for empty nesters: Once the kids are off on their own, why not move out of the main house and rent it to a group that can take full advantage of the space?Life Cycle of an Accessory Dwelling Unit
Like any permanent housing unit, ADUs are designed to last for many decades. Given their longevity, they’re likely to fill multiple roles during their lifespans, as the needs of their original and future owners change. What you do with your accessory dwelling unit is ultimately up to you. You can use it as a home office, give it over entirely to short-term rentals via Airbnb or Vrbo, or simply maintain it as a bonus space that you can escape to when the main house gets claustrophobic. However, many ADUs’ life cycles follow a pattern that echoes their owners’ changing needs over time. This is a summary of one possible life cycle, courtesy of Second Suite: Year 0: Homeowners purchase a home with an existing ADU or build one themselves. The homeowners then start a family.Year 1 – 18: The ADU serves as extra living space for the growing family – a home office, pool house, play room, spare bedroom, or all of the above.Year 18 – 25: When their oldest child graduates from high school, the homeowners convert the ADU into a rental space. If the child attends college or works close to the family home, the homeowners rent the ADU to him or her. Otherwise, they rent it to unrelated tenants to earn income (and subsidize their kids’ education).Year 25 – 30: Once the homeowners’ kids have all left the house, they rent the ADU to their parents. This avoids the potentially exorbitant cost of assisted living or nursing home care while maintaining proximity and family connections.Year 30 – 35: The homeowners downsize and move into the ADU. They rent the main house to their grown kids or an unrelated family.Year 35 and Beyond: The original homeowners sell the property to one of their grown kids, who by this time has started a family. The original homeowners then remain in the ADU, paying rent to their kid. This sequence makes a lot of assumptions – for instance, that one of the original homeowners’ kids will want to raise his or her own family in his or her childhood home. Still, it’s a useful illustration of ADUs’ versatility over time.How to Add an Accessory Dwelling Unit to Your Property
Building a habitable structure, attachment, or internal unit is a complicated, potentially costly proposition that can’t be done overnight. “Building an ADU requires creativity in design, technical, and building code compliance,” says architect Christopher Strom. That means careful planning, disciplined budgeting, and professional help. Let’s take a closer look at what it takes to add an ADU to your property without breaking your budget or running afoul of local regulations.Construction Timeline and Financing Options
Before you can break ground, you need to figure out: How much your ADU is going to costWhen to build itHow to pay for it How Much Do ADUs Cost to Build?According to Brown and Palmieri’s report, the median cost to build an attached ADU in Portland is just over $75 per square foot. That’s $37,500 for a 500-square-foot space and $75,000 for a 1,000-square-foot unit. Costs for detached ADUs are roughly double: just under $150 per square foot, or approximately $150,000 for a 1,000-square-foot unit. Portland is a relatively expensive housing market, so it’s certainly possible that costs are marginally lower elsewhere, but the fact remains that building a habitable, up-to-code structure is a costly proposition anywhere. Geography aside, ADU construction costs may vary over time due to macroeconomic forces that affect input costs, chiefly raw materials and labor. When Should You Build Your ADU
The precise timing of your ADU’s construction will depend on your financial situation and family dynamics. For instance, if money is tight and you don’t want to serve as a landlord or Airbnb host to people you don’t know, you might wait to build your ADU until your kids are old enough to live in it. Alternatively, if you’re buying a house instead of renting, with the goal of turning it into a passive income stream, you’ll want to get started as soon as possible. Assuming you’re building your ADU from scratch, you can either build it simultaneously with or after your main house. For financing purposes, this is an important distinction. How to Finance Your ADU
Most middle-class homeowners aren’t in the position shell out tens or hundreds of thousands of dollars on a whim. Fortunately, those who can’t afford to cover construction costs with cash on hand have a slew of legitimate financing options at their disposal. Some are appropriate for ADUs built simultaneously with the main house; others work for ADUs added after the fact. Fannie Mae HomeStyle Rehabilitation Mortgage: Designed to finance major home improvement work, this popular mortgage product lets you put as little as 5% down, though you’ll need to pay private mortgage insurance (PMI) until you reach 80% LTV. However, unlike FHA mortgage loans, there’s no upfront mortgage insurance requirement – a potentially massive money-saver. Underwriting requirements can be strict – lenders like to see FICO scores north of 650.FHA 203(k) Renovation Loan: FHA 203(k) renovation loans are specifically designed for homebuyers looking to roll the cost of major home improvement projects into their purchase loans. With lax underwriting criteria, they’re ideal for first-time homebuyers with less than perfect credit. The major drawback is a big upfront mortgage insurance hit: 1.75% of the loan value.Construction-to-Permanent Loan (All-in-One Loan): This is a turnkey loan that finances every step of the home construction process, from land acquisition to the finishing touches, and then converts into a long-term (or “permanent”) mortgage with a term of up to 30 years. Just one closing is required.Short-Term Construction Loan: Short-term construction loans are meant to finance costs associated with new home construction – including, if necessary, ADU construction. They usually have one-year terms and variable interest rates that tend to be higher than longer-term mortgage loans. Once construction is completed, you’ll need to convert to a permanent mortgage, which requires a second closing.Cash-Out Refinancing Loan: If you’re adding an ADU to an existing property in which you’ve built significant equity, you can use a cash-out refinancing loan to extract cash and finance construction. If rates have fallen since you took out your original mortgage, your new loan may have a lower interest rate as well.Home Equity Line of Credit: This is a revolving credit line secured by your home equity – often up to 90%. Since HELOCs are relatively low-risk for lenders, they typically have very low interest rates.Unsecured Personal Loan: If you lack sufficient equity in your home and prize flexibility, an unsecured personal loan may be your best bet. Unsecured personal loans generally have shorter terms than refinancing, renovation, and rehabilitation loans, so they’re ideal for homeowners who expect to sell their homes soon after completing their ADUs. For reference, the Oregon Department of Environmental Quality has a comprehensive guide with a representative lineup of Oregon-specific financing options. The loan types described in this guide are available nationwide, but the lenders mentioned in it may or may not operate outside Oregon. For more information about options that make the most sense for your situation, consult your local housing authority.