Accessory Dwelling Unit (ADU)

What Is an Accessory Dwelling Unit (ADU)?

An accessory dwelling unit (ADU) is a legal and regulatory term for a secondary house or apartment that shares the building lot of a larger, primary home. The unit cannot be bought or sold separately, but they are often used to provide additional income through rent or to house a family member. For example, an elderly parent could live in a small unit and avoid having to move to an assisted living facility.

Understanding Accessory Dwelling Units (ADUs)

The accessory dwelling unit, or ADU, is also known as an in-law or mother-in-law unit, secondary dwelling unit, granny flat, or carriage house. An ADU has its own kitchen, living area, and separate entrance. An ADU may be attached to a house or garage, or it can also be built as a stand-alone unit, but it generally will make use of the water and energy connections of the primary house.

After the housing boom that followed World War II, most U.S. residential areas were zoned to set limits on population density as well as the size and separation of single-family dwellings. More recently, zoning changes in a growing number of areas around the country allow for the addition of ADUs. These zoning laws generally limit the size and style of any new unit and require that the owner lives on the property. 

Constructing an ADU could include various costs, including a hefty tax bill, which could limit overall profit.

Accessory Dwelling Units (ADUs) Pros and Cons

While many people build ADUs to house family members, many others do so for rental income. Whether this is a wise investment varies from one landlord to another and depends on a number of factors, including local zoning ordinances, upfront costs, maintenance costs, possible tax consequences, and activity in the rental and housing market more generally.

Investors should first investigate whether building an ADU on their property is lawful. Building an unlawful ADU can create problems if an owner has to refinance the property. Building an unauthorized ADU can also lead to possible code enforcement actions that result in fines. Owners should look to their zoning ordinances and possibly consult with a lawyer specializing in this area.

Then, there is the matter of cost. Will the ADU be attached to the owner’s home, or will it be detached, such as in the case of a carriage house? What renovations will be required, and will the owner need to solicit professional services from construction contractors, engineers, or surveyors?

Financing ADU Construction

The most efficient way to finance an ADU varies depending on the owner’s individual situation. Options include taking out a renovation loan, refinancing if the homeowner has equity in their home, or pulling from available cash on hand.

Constructing an ADU could increase a homeowner's tax bill, possibly eliminating a significant amount of the profit. The housing and rental market varies significantly state by state and city by city.

Potential landlords should consult real estate agents or do their own research by looking at rental listings and assessing rental rates in their local area. Once they determine the likely overall annual income from their ADU, they can consult with a tax professional to gauge whether their financial situation makes an ADU a beneficial investment.

Pros of ADUs

Cons of ADUs

Accessory Dwelling Unit (ADU) FAQs

What Is an ADU?

An accessory dwelling unit is a small dwelling right on the same grounds, or attached to, a single-family house. For example, it could be an apartment over the garage, a basement apartment, or a stand-alone house in the backyard. An ADU can be used to house a family member or for additional income through rent.

How Much Does An ADU Cost?

The cost of building an ADU depends on the design, for example, whether it will be detached or attached to the main house and what materials and contractors will be required. Another cost implication is that adding an ADU to a property is likely to increase the homeowner's tax bill, possibly eliminating a significant amount of any rental income.

Does an ADU Add Value to Your Home?

ADUs are popular because, in many cases, they add value to a property. However, how much value they add depends on the market, and the amount is difficult to calculate. A property owner may not know whether an ADU is a good investment until they sell the property.

However, an ADU adds value in other ways that should be considered. An elderly family member who lives in an ADU may place great value in the ability to live in their own home rather than an assisted living facility. Alternatively, a younger family member may appreciate living at home until they are more financially independent.

Does an ADU Require a Kitchen?

The rules for ADUs and what type of kitchen they require will depend on where you live. Consult your local housing and community development administration. It is also a good idea to use a contractor who knows the local zoning rules and requirements for ADUs.