What Is an Accessory Dwelling Unit (Granny Flat) – ADU Costs & Benefits

What Is an Accessory Dwelling Unit (Granny Flat) – ADU Costs & Benefits

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.

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.

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.

Despite their novelty, accessory dwelling units are known by many names. Terms depend largely on geography and personal preference. Common synonyms include:

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 Structures
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.

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:

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:

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.

 shed conversion adu

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.

Before you can break ground, you need to figure out:

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.

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.

Just as every accessory dwelling unit is different, so too is every ADU construction process. That said, it’s possible to break the ordeal into a logical, step-by-step process. Here’s the sequence of events you’ll need to follow to get your ADU up and running:

granny flat living room

ADUs have many benefits. Some are self-evident; others are less obvious. These are among the most commonly cited by homeowners, city planners, and ADU advocates:

For many smart development advocates, the case for ADUs is truly open-and-shut. Alas, the granny flat movement isn’t without controversy, particularly in suburban communities where orderly development and property value preservation are overriding concerns.

Here’s a look at some common arguments against ADUs in general and pesky drawbacks for homeowners considering adding ADUs where permitted:

In this guide, we’ve examined at length the upfront costs of building an ADU. If you’re still reeling from sticker shock, but intrigued by the income potential of an attached or detached accessory unit, you might be moving away from building one yourself and toward buying a property with an existing ADU.

That could be a good thing for your sanity. Buying an existing ADU eliminates all the headaches associated with overseeing a complicated construction project – a job for which most already-busy homeowners have little appetite.

Just don’t expect it to reduce the upfront cost of your ADU. Building an accessory dwelling is a near-certain way to boost resale value, sometimes by an amount greater than the builder’s total initial investment. Whether you build or buy, you’ll pay for your ADU one way or another.

Does your property have an accessory dwelling unit on it? Are you thinking about adding one?

Updated: October 15, 2018
Categories: Family & Home, Home Improvement, Real Estate

Brian Martucci writes about frugal living, entrepreneurship, and innovative ideas. When he’s not interviewing small business owners or investigating time- and money-saving strategies for Money Crashers readers, he’s probably out exploring a new trail or sampling a novel cuisine. Find him on Twitter @Brian_Martucci.

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What Is an Accessory Dwelling Unit (Granny Flat) – ADU Costs & Benefits

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