Generating Income with a Backyard Home
Passive income is one that does not require active actions to receive it. Simply put, any type of income that comes with a certain frequency and does not need to be “earned” is called passive. Building an additional living space or ADU is the best passive income today.
The phrase “passive income” has become incredibly common in recent years, as homeowners seek to optimize their space and cash flows. While there are many ways to do this, one of the most popular among property owners is constructing an accessory dwelling unit, or ADU. These units offer rental income, should the homeowner choose to do so, as well as increased property valuation on their home overall.
However, ADUs are also a convenient way to offer extra housing to family members, should you decline the option to rent. The versatile spaces are now easier to build than ever and are gaining popularity quickly.
What is an ADU?
ADUs go by many names - granny flat, in-law suite, casita - but the intention is all the same: to give homeowners an additional, available, flexible space on their own property. For those unfamiliar with any of these terms, an ADU is essentially a small second home on a property. They usually remain under 1,200 sqft because of local regulation and typically have one to three bedrooms. They can be stick-built or prefab, which means you can either build them from scratch on your property or have a pre-constructed ADU brought to you.
Why are ADUs a hot topic across the country?
In recent years, many states (namely California), have passed legislation to better allow homeowners to invest in these ADU builds. The push for ADUs is part of an effort to address the housing crisis major cities are facing. Other metro areas actively encouraging the construction of ADUs include Denver, Washington DC, Tucson, Nashville, Richmond, Gainesville and many cities in the tri-state area.
Because ADUs are built on a homeowners’ private property, they are a great way to add housing to a growing city with space constraints. ADUs are also significantly more sustainable and energy-efficient than a regular house due to their small size.
Some states like California have taken measures to increase the sustainability of ADU properties, as they now require all energy consumption to be net-zero, necessitating the installation of solar panels on all newly constructed ADUs.
What do homeowners use an ADU for?
As mentioned before, ADUs have a number of uses. For those with the available space, it is definitely a worthwhile investment to rent out an ADU. In San Diego, you have the opportunity to make upwards of $2,500 a month from your rental property. A financed ADU can also reap upwards of a 15-20% return. Overseeing your tenants is made easier with an ADU, as they are quite literally in your backyard. You have the option of how much space you would like to put between your tenant and yourself, as long as you comply with the required setbacks in your area. However, your vision need not stop at renting. ADUs are a great way to bring family closer, as they allow relatives independence while staying in close proximity. Finally, your ADU can save you money by downsizing your space; renting out your larger primary dwelling in exchange for a move into a new ADU will help you save on property upkeep and energy expenditures thanks to the ADU’s small size.
What is the build process for an ADU?
The build process is not too challenging or unusual when beginning ADU construction, though it’s important to know what is involved in the process. There are two options when picking out a contractor when building your ADU: a design-build firm, which will handle all aspects of the build, or an architectural firm plus a separate general contractor. As mentioned before, you also have the option of bringing in a prefab, but the limited design choices with pre-fab deter many homeowners. With a design-build contractor, one company and one point of contact will take care of you throughout construction. They generally handle everything from plans and permitting to build out of the accessory dwelling unit.
On the other hand, contracting with a general contractor only takes care of the construction and build aspect; you will need to hire a different individual or company (or do it yourself) for the additional steps, like plans and engineering, permitting, and finishing the interior of the house. There is no right answer when choosing what type of contractor for your ADU, as it all depends on your timeline, budget, and vision for your project.
How do you start to add an ADU to your property?
Now that you are more familiar with what an ADU is, what they can be used for, and how they are constructed, your next question may be what you need to do to start the process? The first step is selecting a contractor. Usually, a quick internet search will point you in the right direction of a contractor with strong reviews in your area. If the first one you land on happens to be the wrong fit, they should be able to refer you to someone with a better chance of helping you out. Be sure to consider their past projects and talk feasibility with their team. Picking the right contractor will make all the difference during your build. Choosing a reliable, transparent contractor will ensure you do not fall victim to any surprise costs that hike up the cost of your build. It’s important to look for a full picture of the costs that go into building an ADU, which include plans, permitting costs to the city, sitework, vertical construction (including all finish materials) and solar if it is required in your jurisdiction. You will also want to understand additional work your site requires if it is a challenging property with a steep slope, difficult access, or older utility connections.
How long does it take to build an ADU?
Once you select your architect or contractor, they will be able to walk you through the rest of the process. This typically includes signing the initial proposal to kick off the project, plus selecting and modifying your floorplan of choice. Soon after that, you will begin the full design process for your construction documents, move into permitting, and eventually begin construction. All in all, the ADU process will take around 8-12 months for design, permit, and build-out. The right contractor will be sure to keep you up-to- speed throughout all of it and will alert you as soon as possible to any changes to the original budget.
How does an ADU affect resale value of your property?
Whether you choose to rent, downsize, or bring the in-laws closer, an ADU is an interesting option for many families. The flexibility allows you to utilize the space for various uses depending on your needs, so you need not worry about wasting the space.
With the right team in place, construction is absolutely worth it no matter if you go in the direction of prefab or stick built. Many ADUs end up paying for themselves through the additional income, increase in property value, or both. Finally, the demand for ADUs is on the rise as more families are choosing intergenerational living. The National Association of Realtors has stated that since the pandemic, homes purchased for multigenerational households is up to 15%, the highest percentage since the NAR began tracking this trend back in 2012.
