What They Are and How They Work – Forbes Advisor

Accessory dwelling units (ADUs) can be an affordable and effective housing option for renting a room or creating extra space. You can convert your basement or garage into an ADU, or you can utilize land from your backyard and build one from scratch. Before you consider such a project, make sure you understand how ADUs work as well as your financing options.

What Is an Accessory Dwelling Unit?

Accessory dwelling units, or ADUs, are smaller housing units that share the lot of a larger, primary home. These can be tiny homes, garage conversions or other independent living spaces separate from the main property.

ADUs feature a separate kitchen or kitchenette, bathroom and sleeping area from the primary house. They are also referred to as:

• Basement apartments
• Garage apartments
• Guest houses or cottages
• Mother-in-law or in-law suites
• Multigenerational houses
• Secondary dwelling units

ADUs are generally smaller than single-family homes and tend to be more affordable. This is ideal for multigenerational families looking to build close and affordable housing for relatives. It’s also a great way to rent your property on sites like Airbnb without having strangers inside your primary residence.

How Much Does an Accessory Dwelling Unit Cost?

ADU prices vary based on a few different factors, including:

• Location
• Size
• Amenities
• Construction materials
• Proximity to the primary residence
• Age of the unit

These factors make it difficult to estimate the cost of an ADU. In most cases, an ADU costs a fraction of the price of a new, single-family home. Internal ADUs—like a basement or attic conversion—can be built for as low $50,000. However, detached ADUs are usually more expensive, costing upwards of $150,000, according to AARP.

Related: How To Calculate Price Per Square Foot

Pros and Cons of Accessory Dwelling Units

Despite the benefits, ADUs aren’t for everyone. Before breaking ground on your addition, consider these pros and cons.

Pros

• Renting can help recoup costs quickly. If you have the space, time and resources available, you can rent your ADU and quickly recoup some building costs. This means an additional revenue stream alongside your main job. It can also serve as retirement income if you’ve stopped working full time.
• Offers an affordable housing option. For families looking to add space for relatives, an ADU allows both parties to maintain independence while keeping them close by. This can be a less-expensive option for multigenerational families instead of buying a bigger home together or separating families into different smaller homes.
• Increases home’s value. Homes with ADUs in large cities and areas with a high cost of living are often priced higher than those without ADUs. Generally, you can expect an ADU to increase your home’s value anywhere between 10% and 35%.

Cons

• Costs go beyond construction. The more space you have, the more money you’ll need to set aside for maintenance and insurance.
• Less privacy. Even though ADUs are separate from the primary living space, you’re still inviting others onto your property. This means less privacy, which may be inconvenient at times.
• Not available to build in every area. ADUs are still a relatively new concept. Not all local zoning laws account for them. Check your municipality’s rules to ensure you can pull the necessary construction permits.

Ways To Finance an Accessory Dwelling Unit

There are a few different ways to pay for an accessory dwelling unit, such as:

• Refinancing. You can use a cash-out refinance to access your home’s equity and fund the ADU construction. You’ll take out a new, larger mortgage and pay off your existing mortgage, receiving the difference in cash. You can use the extra cash to pay for anything, including your ADU project’s expenses.
• Home equity loans. You can borrow against your home equity with a home equity loan or home equity line of credit (HELOC). A home equity loan provides a lump-sum, whereas a HELOC grants access to a line of credit that you can borrow from as needed. Both tend to offer lower interest rates than unsecured personal loans.
• Construction loans. These are short-term loans from the builder or contractor of your ADU. Construction loans usually have higher interest rates than traditional, longer-term mortgages.
• Local grants or loans. Some local nonprofits and government agencies offer interest-free loans or grants to help fund home construction projects. See if there are deals available in your area before getting a loan to fund your project.
• Cash and savings. The best way to avoid high interest costs is to pay for the project out of pocket. If you can, save up for an ADU to lessen the burden of borrowing.