How ADUs Can Help
Creating an accessory dwelling unit — an ADU or a Junior ADU — can have big advantages for both property owners and real estate investors. This trend of adding additional living units to single-family lots beyond primary dwellings is growing increasingly popular and may just benefit you. Let’s look at a few ways.
But first, what’s the difference between an ADU and a JADU?
As its name suggests, a Junior ADU (up to 500 square feet in size) is a smaller version of an ADU, which often goes up to 1,200 square feet. While state codes differ, California’s state building code requires that JADUs have sinks, cooking facilities, and separate entrances, but not private bathrooms. JADUs are often bedrooms in single-family homes, as they must be in owner-occupied residences, whereas the owner doesn’t necessarily have to live there with an ADU. And ADUs, which need to have private bathrooms, are often detached from primary dwellings.
The benefits of ADUs and JADUs include:
- Homeowners can make money. Of course, that’s almost always the idea behind ADUs. How much money? That depends. If the homeowner rents the unit to a long-term tenant, the monthly cash flow could easily equal the average rent of a one-bedroom apartment in the area. In Los Angeles, for example, the median price of a one-bedroom apartment was estimated at $2,190 in the first quarter of 2022. And rents can be much higher than the median price in more-exclusive neighborhoods.
- Homeowners don’t have to invest in separate utilities. Connecting new electric meters, new water connections, and new sewer services — as one needs to do when building a single-family home — can be costly. But they’re not needed in California, where state law forbids utility companies from requiring new separate services for an ADU. Shared utilities mean big savings!
- Homeowners can keep things in the family. One might think of an ADU as an owner/tenant situation. And many are. But it’s also quite common for members of an extended family to live in ADUs. With an aging family member, for example, an ADU allows an elderly relative to age in place in their own space while still staying close to the rest of the family.
- Homeowners can leave the ADU to someone else. A recent change in California state law allows non-owners to get permits for building ADUs. That means a homeowner can rent an as-is structure like a garage, or land such as a backyard, to an investor who builds the ADU with their money. Very few other passive income streams for homeowners are so simple!
- Homeowners increase the values of their properties. Having a money-making enterprise on the grounds almost certainly means a higher listing price when it’s time to sell the home. How much higher? One ADU study found that an ADU adds 35% to the resale values of homes in major metropolitan areas.
- Investors can build ADUs for affordable costs. Construction costs for ADUs are usually significantly lower than those for building a single-family home. Why? Construction for these buildings don’t include paying for land, major advanced infrastructure, structured parking, etc. ADU’s and JADU’s are built using cost-effective wood frames that are significantly lower in construction prices compared to other residential or even multi-family structures.
- Investors can get shorter construction times. Really short. As a lot of ADUs aren’t built on site from the ground up, or even existing structures that get refurbished, but rather purchased prefabricated units. That cuts the ADU’s start-up time from months down to a few weeks to prep the site and a few days for the unit’s installation.
- Investors can get twice the selling power. While California law previously prohibited the separate sales of ADUs and primary residences, that changed last year with Assembly Bill (AB) 345. Now, local governments can allow separate sales in certain circumstances. This gives increased flexibility to anyone who is thinking about investing in a property with an ADU.
- Investors have increased financing options for ADUs. Now that Fannie Mae and Freddie Mac are firmly in the ADU financing game, the two mortgage titans have said they’ll increase investments in mortgages for those who intend to build ADUs, or buy properties that have existing ADUs.
- Investors are part of a rising tide. Based on the remarkable popularity of ADUs, they seem here to stay. In California, permitting for ADUs jumped a staggering 1,421% from 2016 to 2021; the former year was when new laws allowed the practice to go mainstream. And all signs show that the rising ADU trend isn’t apt to decline anytime soon with the vast number of advantages for homeowners and real estate investors.
Want to know more about ADUs and other real estate matters?
You can always turn to AllView Real Estate Management for expert real estate investment consulting and professional property management. Connect with us online or give us a call today at (949) 400-4275.