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If you’re a real estate investor looking to maximize the value of an investment property, you have several options.
One of the most profitable options may be what’s called an accessory dwelling unit, otherwise known as ADU housing.
ADU real estate gives real investors the opportunity to maximize their return on investment by building a secondary structure on a property that already has a single-family home and renting it out.
But is ADU housing right for you?
In this article, we will cover:
- what is an ADU
- the intricacies of ADU housing
- how it can be advantageous for real estate investors
What is ADU Housing?
An accessory dwelling unit is an additional dwelling unit on the same parcel of land as a single-family home.
ADU housing can take many different forms. Some will simply look to convert a room in a home into a second unit, such as an in-law suite with its own kitchen, living space, and entrance, though generally, ADU housing will be a completely separate unit.
Others will convert a detached garage or perhaps a space above the garage into a livable unit.
In addition, ADU housing units could also be entirely separate homes, townhouse, or apartments.
These second units are typically rented out to tenants by a real estate investor to generate income from a property.
Next, we’ll look at both the advantages and disadvantages of ADU housing.
Advantages of ADU Housing
Adding ADU housing to a property can be advantageous to a real estate investor for a few of the following reasons.
ADU housing can be an excellent way to generate revenue off of your property and subsidize your mortgage.
You can generate revenue off ADU housing by:
Increase Home Value
Adding ADU housing to your property can increase the overall value of your home.
According to Architects LA, adding a detached ADU housing unit to your property has the potential to increase your property value by 20%-30%.
Disadvantages of ADU Housing
While there are advantages, there are also disadvantages associated with ADU housing to factor in.
Local Ordinances Prohibiting ADU Housing
Keep in mind that local ordinances or other restrictive covenants may not allow you to add an ADU housing unit on your property.
If you’re looking to buy a property and considering an ADU unit in the future, it’s important to find out if there are any restrictions on those properties.
When adding an ADU housing unit to the property, just as any other renovation, you have to pull permits with the city and hire architects and contractors, sometimes a timely and challenging task.
Legality of ADUs
Before building ADU housing on your property, it’s important to understand the laws in your local area.
Here are some items to consider on the topic of ADU legality.
You may need a special permit to house an ADU housing unit on your property.
If the dwelling is considered a completely separate unit, it generally needs:
- a kitchen
- proper venting
- smoke and CO2 systems
- fire prevention
- separate entrance
Cannot Be Sold Separately
ADU housing built on properties cannot be sold separately from the main property unless the property is split from the original property — a process conducted legally through the city — as well as separate utility lines being set up.
The Bottom Line: ADU Housing
ADU housing can be an excellent way to generate additional revenue for an already existing property.
As a real estate investor, it can increase your profit margin — as long as the laws regarding ADU housing are followed correctly.