Homeowner throughout California are turning to Accessory Dwelling Units (ADUs) to increase their property value.
Are you asking yourself...
"Does adding an ADU increase my property value?"
Or
"How much does an ADU add to my property value?"
I get asked a variation of these questions almost daily, and the answer can be a complicated one. It really depends on the type and size of ADU you are building.
As you are probably aware there are three main types of ADUs. Detached, Attached, and Garage Conversion ADUs. Not all ADU types are created equal in terms of how much value the new construction will add to your property.
With that in mind we will discuss each ADU type below and rank them in order of property value created.
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Detached ADU
A detached ADU or Granny Flat, which is separate from the existing home, will typically be the most valuable when complete. The reasons for this are quite simple. With a detached ADU you are adding additional livable square footage to the property which appraisers can use to determine how much your property is worth. For example, a new 1,000 sqft granny flat adds 1,000 sqft of new livable space to your property. With an average cost per sqft of approximately $614 in the City of Los Angeles, your new 1,000 sqft detached ADU could increase your property value by an average of $614,000.
For an investment of around $300,000, homeowners in Los Angeles can add an average of $614,000 to the value of their property. In this example the average Los Angeles homeowner would make a 200% return on investment (ROI) for simply making the decision to build a beautiful new guest home or granny flat on their single family zoned property.
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Attached ADU
An attached ADU or Granny Flat is added as an addition to your existing home and is the second most valuable type when complete. Since it is attached to your existing home there is a little less privacy than with a detached unit, but appraisers will still use a cost per square foot analysis when determining the value of the new construction, and the $614 sqft average for the City of Los Angeles would still be applicable.
The real reason why an attached unit is usually less valuable than a detached unit has to do with the ADU Ordinance affecting the amount of square footage you're allowed to build when the dwelling unit is attached to your existing home. You see, with an attached unit you are only allowed to increase the current size of your home by 50%. So if your current home is 1,200 sqft, then the maximum size of an attached ADU would be 600 sqft. And an additional 600 sqft would increase your property value by $368,400, which is still a huge increase, but below the amount a new detached ADU would increase the property.
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Garage Conversion ADU
A Garage Conversion ADU is when you convert your existing garage into an ADU or Granny Flat, and although this type of ADU will usually increase your property value substantially, the increase will be less than both detached and attached units.
Garage Conversions are great because they are typically the least expensive to build, but unfortunately in the process of converting your garage you lose the use of your garage for its intended purpose, which can decrease your property value slightly. This slight decrease in property value is outweighed by the increase in property value that the new Garage Conversion will provide, but the loss of the garage is what makes this ADU type the least valuable in terms of resale and property value.
That being said, the number one reason we suggest converting your garage into a guest home is for rental income. In Los Angeles a garage conversion Granny Flat can command $1,500 - $3,000 per month in gross rental income. Compared to the relatively modest investment a garage conversion requires, the payback of your original investment in the form of monthly rental income can be phenomenal.
Determining which type of Accessory Dwelling Unit is best for your lifestyle and budget can be difficult. That is where we can come in and advise you on what your options are and what makes the most sense for you and your property.
Whichever type of accessory unit you chose to build, rest assured that you are adding substantial value to your property. All three ADU types are great options depending on your specific situation, and we are happy to help you determine which type is best for you.
An Accessory Dwelling Unit, or ADU, is an additional living space on your property, most commonly in your backyard. ADUs are popular home additions because they can be optimized to fit your specific needs and their often-detached nature means you can expand your living space without the hassle of home construction or remodeling. Whether you call it a granny flat, cottage, casita, or in-law suite, an ADU comes in many sizes and styles. Deciding to Invest in an ADU can be intimidating at first, so we're here to break down just how much value an ADU can actually provide you and share some inspiration for how you can use your newly constructed dwelling!
How to Capitalize on ADU ROI
You may have noticed ADUs featured in the media lately, discussed by local governments regarding new rules and regulations, and even mentioned in conversation with your friends and co-workers. These detached dwellings have been all the rave lately, and not just in the real-estate industry. ADUs are becoming a fashionable addition to homes and are increasingly desirable when it comes to listing your home on the market. People are also starting to realize that there are real financial gains to be made by building an ADU on your property.
ADU’s are a great solution to generate rental income from your primary residence – think Airbnb but in your backyard! Whether long or short term, renters benefit too by having access to new housing options in desirable areas. ADU’s are an excellent option to increase housing density with lower neighborhood impact when compared to multi-family infill development. Deciding to purchase an ADU is no small feat, but there are many new financing options available for this type of project. Notably, monthly rental income can also exceed the costs of financing, providing you with substantial return on investment (ROI) immediately.
As you can see the homeowner benefits, potential renters benefit, and the country benefits all stemming from the construction of an ADU! But these aren't the only financial perks of investing in an ADU. Having a detached dwelling on your property raises your home value significantly. ADUs generally contribute about 25% to 34% of your property's assessed value, according to a study published in The Appraisal Journal. In the study, Understanding and Appraising Properties with Accessory Dwelling Units, researchers surveyed 14 properties with ADUs in Portland, Oregon testing two separate appraisal methods since ADUs are relatively new and there's no exact formula for estimating their value yet. The study concluded that adding an ADU to a single-unit property could reasonably boost your home’s resale value by 51%!
Flexibility at Every Phase of Life
With so much time spent at home these days, it's no wonder that people are looking for extra space wherever they can. In addition to the financial benefits discussed above, there are also countless lifestyle advantages that ADUs provide. Here are a few ways people at all stages of life are taking advantage of ADUs:
Parents with Young Children:
An ADU is the perfect place for homeschooling or online school activities – call it a learning pod! They can also be used as a game room or flex space where kids can blow off steam during the day without disrupting the rest of the household. Additionally, ADUs can serve as detached apartments for live-in nannies or babysitters!
Parents with Adult Children:
Now more than ever, young adults are moving back home to live with their parents. The pandemic has caused a sudden explosion of 'boomerang kids' who have willingly or unwillingly moved back home due to furloughed or lost jobs, college campus closures and the transition to online classes. Whatever the reason, many are turning to ADUs to create a separate space for their adult children while they figure out their next move. This provides an additional level of privacy for both the parents and their adult kids.
Those with Aging Parents:
ADUs have become an increasingly popular alternative to nursing homes, especially since the onset of the pandemic – people are wary of placing their relatives in group homes. Luckily ADUs provide a sensible solution. These appropriately named 'Granny Flats' are the perfect option for those who want to care for their older family members in the comfort of their own homes, without invasive remodels or pricey home editions.
Working Professionals:
We all know that home isn't always the most optimal place to get work done. With distractions in every corner and plenty of chores/projects to take your attention away from your job, having a detached home office allows you to feel like you're at work despite being steps away from your house. Home offices aren't just for corporate employees – we've seen people turn their ADUs into art studios, music recording studios, and even meditation and yoga retreats! In the long run, owning a ADU is much more affordable than renting out professional space.
The Flex Space:
Some people decide to build an ADU without having a specific purpose in mind. Instead, they're used as a flex space providing differently uses depending on the day. For example, ADUs can be used as in-law suites over the holidays or to host guests throughout the year. While they're not being occupied by friends or family, homeowners can use the space as a man-cave, she-shed, or just a place to get away and unwind. The possibilities are truly endless.
Want an ADU but don’t know where to start?
There's more than meets the eyes when it comes to ADUs. Between the financial advantages, more desirable real estate, and lifestyle benefits – an ADU can virtually pay for itself. So what are you waiting for?