Is Building an ADU a Good Investment?

Did you know that there are more than 1.4 million properties in the United States that have accessory dwelling units (ADUs)? An ADU can be a great thing to have for various reasons. After all, you can use it to house guests or family members; you can use it for extra storage space, turn it into a specialized room like an office or exercise room, and so on.

But is building an ADU really a good investment? You might have heard that an ADU can improve your property price, but how true is that really? Keep reading and learn more about if you should invest in an ADU.

What You Need to Know About Building an ADU

Before you get too excited about building an ADU, you need to consider a few different factors. For example, you need to think about ADU costs, the ADU construction process, construction costs, the fixed cost of a detached ADU, the cost per square foot, and how many square feet you want the accessory dwelling unit to be. The list goes on and on because there are so many fixed costs and project cost options to consider.

And the ADU cost, of course, is the main factor you need to consider if you do decide to go through with your plan to build one. After all, if you want to make an ADU an investment, then you need to compare the ADU cost with the amount of money you plan to gain on your property from building this structure. The last thing you want is to build an ADU only to find out that you’ve lost money.

So, before you plan to build anything, just know that this can be an expensive venture. If you don’t do it right, there is a chance that you could lose money.

But if you do it right, you could gain quite a lot of equity.

First, consider the basics. Think about the cost to build in the San Francisco Bay area. Think about permit fees, design costs, the potential loan value to build the ADU plans, and so on. Also, think about higher cost options for an attached ADU vs a detached ADU.

The Details

You also can’t forget about the time it takes to come up with construction drawings, granny flat project plans, the current electrical supply system, impact fees, general contractors, interior finishes, and more. There are also various things you can do with your ADU that can help improve the price of your property.

For example, you can generate rental income from your ADU. This would offset a lot of additional costs from construction. You can also make it the primary residence of a family member or friend.

Or, you could turn it into a sort of garage apartment that you can rent out to people. Of course, this is all a lot to consider. Many homeowners struggle to decide whether they should add ADU build to their single family home. After all, besides all that was mentioned before, you have to think about the permitting process, utility upgrades, building permits, sticker shock, extra square footage, and more.

But as long as you are willing to filter through all of these details, you will be on the right track and, indeed, an ADU may be a great idea as an investment. But what else should you consider before you jump into the process?

Consider the Type of ADU You Want

Besides the obvious accessory dwelling unit costs, the ADU permit cost, and the ADU construction costs, you should think about what type of ADU you want. Many people don’t realize there are different types. For example, you can decide to add an ADU to an existing structure.

This would make the square foot issue easy since you wouldn’t need to add that much more square foot space. For an ADU project like this, property owners tend to have a much easier time. You might not even need a construction loan if you don’t need to build much additional space.

Instead, you can consider a garage conversion for your ADU design. This construction timeline would be relatively brief since the structure already exists. The cost to build would be virtually non-existent.

The main costs will come from the design costs. Instead of worrying about site conditions and financing options, you can worry about what color the walls will be, what kind of counters you want, what floors you should buy, and so on. This is the easiest way to add an ADU to your property and it is also the cheapest.

It is a perfect investment since you won’t need to spend too much money to begin with and you can reap the benefits later on if you ever decide to sell your house. But what about Detached ADUs? Some property owners might not like the idea of an ADU attached to the same structure as the house.

What You Need to Know

A better idea is to opt for an ADU that is a separate living space from the house. Of course, this will be more time-consuming and more expensive. A concrete slab is necessary to be the foundation. However, the benefit of a detached ADU is that you can choose the exact ADU size. You can also determine many factors that attached ADU owners wouldn’t be able to experiment with such as the structure and design.

At the same time, you need to remember the final cost, the resale value, potential fixed price options, property taxes, and so on. The price can vary greatly depending on how you decide to build your ADU. Again, when you build an ADU in San Diego, you can either decide to get an attached or detached ADU.

One option may be better than the other for certain people. It all depends on the ADUs cost, your home equity line, how much an ADU increases your property value, and so on. The goal, of course, is to make a return on the construction of an accessory dwelling unit.

This obviously won’t happen if the total cost of the accessory dwelling unit is way higher than what you expected. For that reason, you need to stay within your budget. You also need to consider additional costs like increased electrical demands, what kind of people will stay in the ADU (such as your adult children or renters), and more.

Making an Investment from Your ADU

If you do everything correctly, you can make quite a lot of money with your ADU. This is because an ADU is a perfect vessel for cash flow. You just have to figure out how to get that ADU cash flow going.

In general, building an ADU will add value to your property. This is because an ADU build will count as additional floor space (at least in the case of a detached ADU). Even with attached ADUs, it will count as an additional bedroom at the very least.

This can help offset the cost to build an ADU. The best way to offset the ADU cost is to rent out the accessory dwelling unit. You can either generate rental income from strangers, adult children, or whoever else might stay there.

What to Know

To offset the ADU cost, you need to make sure that the rental income is adequate every month. As long as you do that, your accessory dwelling unit should be a great investment. It is also a very good long-term investment even if you don’t want to rent it out.

As mentioned before, ADUs tend to add value to properties due to the fact that they count as extra square foot space. Keep in mind that the average ADU in California is between $300,000 and $400,000. Adding one to your property should increase the property’s value by quite a lot, especially over the years.

As long as you make up for the total cost of the ADU and then build more wealth from it over time, your investment will be a big success, so keep that in mind if you are still on the fence about building an ADU.

All About Building an ADU

Building an ADU can be a big step. After all, the total cost of one can be quite expensive in California. However, there are ways in which you can make the cost a good investment.

For one, you can rent out the extra space to generate extra income. You should also keep in mind that an ADU will increase the total cost of your property. If you would like to build an ADU, get started with us here.

Follow us on social

Subscribe to receive updates & new posts

"*" indicates required fields

This field is for validation purposes and should be left unchanged.

More from the Blog