How to Make Money Off ADUs: Essential Tips for New Landlords
Accessory dwelling units, or “ADUs” are becoming an increasingly popular way for homeowners to make money from their property. Relatively affordable to build, these small, simple spaces can, in the right situation, bring in thousands of dollars a month.
But they can be difficult to create. And once you have one, being a landlord is never easy. Fortunately, there are simple ways to reduce expenses and increase the potential profits from an accessory dwelling unit.
How Much Money Can You Make Off ADUs?
Of course, all of this is irrelevant if you can’t make a large profit from your ADU. While information specific to ADUs is difficult to find, when you look at the typical rent for the U.S., California, and cities like San Diego, you’ll see that the potential is certainly high.
Across the U.S., home and property prices have been increasing, especially in suburban areas, although rises are certainly not limited to the suburbs. According to iPropertyManagement, the average rent in the United States is $1,164, a significant increase over the past decade.
In our state of California, a state known for low availability and high prices, the average can be even higher. World Population Review says that the average rent in California is $1,503, making it second only to Hawaii, which has an average rent over $1,600.
Certain cities can have even higher rent. In our beloved San Diego, for example, RentCafe says that the average rent is $2,433. In Los Angeles, the average is $2,518, while San Francisco renters pay an average of $3,102.
These are statistic for all rental properties, and likely include large houses, extravagant luxury apartments, and other high-cost homes. Much will depend on the location, the quality of the ADU, and the overall market demand for rental property in your area.
But one thing is for certain: you could earn a large income with your ADU. And with these tips, the profits could be even higher.
7 Tips to Help Make Money Off ADUs
Know the State and Local Regulations
If homeowners are going to make money off ADUs, the most essential steps is having a legal unit that can actually be used to earn a monthly rent check. And this starts with understanding the local and state laws that govern ADUs.
States have a lot of say over the rental market, as do local governments like city counsels and mayors’ offices. ADUs are becoming more popular as an option to reduce housing prices, increase availability, and ease shortages, but some cities are more friendly to ADU owners than others.
Talk to town officials, visit city websites, and learn about important factors for your potential ADU. You’ll want to find specific information on density regulations, structural codes, parking requirements, and access requirements for your area.
Build a Separate Unit Within the Walls of Your Home
Once you know the basics, you can start to think about an ADU for your space. Generally speaking, it’s likely more affordable to build a separate unit within the walls of your existing home than to build an entirely new wing or separate structure.
For example, converting a basement or second story into an ADU is likely more affordable than constructing a separate building on the far corner of the property. You won’t have to move wiring and plumbing to the new unit, although you may need to make changes to create proper kitchen and bathroom facilities.
Keep the New Unit Simple, Not Extravagant
To make money off ADUs, you need to keep your overhead low. If you are using a loan to finance the construction, the additional monthly cost should be well below the cost of your monthly rent check. Even if you are paying out of pocket, you don’t want to overextend your budget.
When building the new unit, keep it simple and affordable. Most renters aren’t looking for lavish countertops and decorative high-end fixtures. They’re simply looking for a comfortable, clean space. Keep the construction cost as low as possible (without neglecting quality or skipping regulations) to make money off your ADU.
Screen Tenants Carefully
A good tenant is a dream for a landlord. Make sure you are cautious and patient when choosing tenants, as this person won’t just be a renter on the other side of town, but someone you see practically every day. If they trash the ADU, they are essentially trashing your home, so take your time, get references, and select a tenant carefully.
Market the Unit Like a Pro
To get the most money from an ADU, you need to market it as a top-quality living space. Think about how you are advertising the property. What does a potential renter see? Much of this starts with great photos, images that show the unit in the “best light,” both literally and figuratively.
Take Advantage of Tax Benefits
Experienced landlords may not be tax experts, but they understand the basics of tax law and use every possible (and legal) write off to their advantage. This applies to owners of ADUs and well as multi-property investors.
There are many potential write offs, including general maintenance, interest (if you are using a loan), legal fees, marketing expenses, and more. Basically, if you spend money that is directly related to your ADU, there’s a chance it could be a write off. Keep detailed records so you don’t miss out on potential tax savings.
Use Equity to Secure a Better ADU Loan
Many people will need financing for their ADU. There are numerous options, including construction, business, and investment loans. However, you may be able to take advantage of your current equity to secure a better loan. By attaching the loan to your property through options like a cash-out refinance, home equity loan, or HELOC, you may be able to enjoy a lower interest and better terms on your ADU loan.
Get the Loan You Need to Make the Most Money Off an ADU
If you want more information on potential ADU loans, contact our team today. We’ll help you choose the right financing so you can create an excellent space that attracts high-paying tenants.