Is Building an Accessory Dwelling Unit (ADU) a Good Investment?

Accessory dwelling units (ADU’s) are becoming more and more popular throughout North America. Essentially, an ADU is a fully functioning living space with a kitchen, bedroom, and bathroom facilities. It is also worthwhile mentioning that it’s built on a lot that already has an existing house.

With that out of the way, is building an accessory dwelling unit a good investment?

As Drew Doheny Property Management in Pooler explains, even with the rising popularity of ADU’s, the value the unit is going to add to your property is rather complicated to calculate. There are just far too many things that need to be taken into consideration.

Furthermore, you may not know the value it has added to your property until you finally sell it. Let’s take a look at some of the most important questions you may need to ask yourself before building an ADU.

Question #1: Will it be lawful on my property?

It goes without saying that it is an important question that you should ask yourself first before going any further. If an ADU isn’t lawful, then it’s unlikely it will get appraised. This can prove problematic if you wish to seek a bank loan or when you wish to sell your property somewhere down the line.

In addition, by constructing an illegal ADU, you risk paying fines due to flouting code regulations. Needless to say, in such a scenario, building one would be money down the drain.

To check whether building one is lawful in your location, please check your local zoning ordinance. Alternatively, hire an experienced lawyer for help.

Question #2: Do I meet the requirements set by the zoning ordinance?

As you review what the law says about building one in your locality, also look at the requirements for building one.

Will you, for instance, be required to provide additional parking space? Are there any requirements in regard to the location? Are there any requirements with regard to the ADU being attached or detached?

If the zoning ordinances have restrictions that make building an ADU illegal, you might consider seeking a “variance”. That said, a variance will only serve to add to the complexity and overall costs, and offers no guarantee that your request will be granted.

So, before starting to incur any costs related to an ADU, get to know its feasibility first.

Question #3: How much will it cost me to build one?

Building ADU’s is often a costly affair. With a detached ADU, expect to pay similar costs to what you may pay for constructing a small house. And while an attached ADU will most likely cost less, it’ll still be expensive.

Once you have understood the cost, get bids from a couple of experienced general contractors. This should give you a better picture of what the overall costs of constructing the ADU will be.

Generally speaking, though, expect a detached ADU to cost you upwards of $100,000 for building and outfitting. Whereas, for an attached accessory dwelling unit, expect costs north of $40,000. This is at least according to MoneyCrashers.Com.

Question #4: How will I finance the construction costs?

This can be a tricky proposition. With cash on hand, you will definitely be one step ahead.

Now, there are a handful of financing options available to homeowners thinking of constructing ADUs. Some of these options include equity refinance and renovation loans. Just as you would with any property, do your diligence and find out the best option available to you.

Of course, by seeking financing from a lending institution, expect the construction of the ADU to cost more as a result of loan interests and lending fees.

Question #5: What will be my tax obligations?

The accessory dwelling unit may have an impact on your property tax bill. And, this may mean paying tax on any rental income you will receive from your investment. As tax matters can be complicated, consider speaking to a tax professional.

Question #6: What rent can I expect to charge from my ADU investment?

Of course, being an investment, understanding the monthly cash flow is key. After all, it’s in your best interest to know whether or not the ADU will cover any financing that you took to construct it.

Figuring out what to realistically expect from your investment can be challenging. There are just too many things that go into computing the right amount of rent to charge. So, if you lack experience in rental investments, please consider hiring professional services.

A professional real estate agent will be familiar with local residential rental rates and will help you set the best rate.

So, back to the original question – is building an accessory dwelling unit a good investment? Well, there is no straightforward answer, and you have to factor in a smorgasbord of factors.