You’ve probably picked up on the Accessory Dwelling Unit (ADU) investment craze. Everyone is saying it is the best way to invest in real estate and get high returns. Is it just another craze that doesn’t hold any truth? Or could ADU investment be the financial breakthrough you’ve been hoping for?
Is an ADU a Good Investment?
Yes, it is. ADUs make excellent investments because you don’t have to purchase any additional property since the ADU is constructed on your existing piece of land. However, your return on investment will depend on several factors, including rental rates in your area, permit fees, and building costs, among other things.
Before you hop on the bandwagon and invest in an ADU, it’s crucial to understand what this investment is, what you need to get started, and the rates in your area. This way, you can make an informed decision about whether it’s the best investment for you. In this article, we’re going to discuss ADUs as investments.
Is ADU an Good Investment? Everything You Need to Know
It’s crucial to understand what this investment is and what it entails to know if an ADU investment is worth it for you.
What is ADU?
Fortune Builders define an ADU as an additional living quarter that’s located on the same lot as an existing single-family home. These units can be attached or detached to the main house. The primary idea is to provide tenants with living facilities that can be described as complete and independent.
For the living quarters to be considered accessory dwelling units, they need to provide permanent solutions for eating, sleeping, cooking, sleeping, and general sanitation. Therefore, it suffices to say that an ADU is a self-sufficient home that happens to be located in the same area as a single-family house.
However, the zoning laws and criteria for categorizing accessory dwelling units vary from one state to the other. For this reason, it’s crucial to understand the state laws concerning ADUs in your area before embarking on this type of investment.
Once you’ve constructed an ADU on your property, the primary way to earn income from the ADU is to rent it out. The amount of rent you charge should be in line with the rental rates in your area, depending on the amenities included in the property. However, it’s always a good idea to work with an experienced and licensed realtor when coming up with rental figures so that you don’t under or oversell.
What are the Benefits of ADU Investments?
So why should you consider an ADU instead of investing in a different property and building a house there? Well, one of the primary benefits of ADUs compared to other real estate projects is the fact that you don’t have to invest in more property. You get to take advantage of what you already own and make money from that.
Other benefits of ADU investments include:
Reduced costs
Building a new home on a separate piece of land will require you to dig deeper into your pockets to afford land, the prices of building the new house, getting permits, and other costs that may be involved to complete the project.
You get to cut back on these costs with ADU units. Since you’re building on land you already have, you’ll only have to deal with a few expenses, such as construction, supplies, and labor. These reduced costs make ADUs excellent investments for people who want to invest without spending too much.
Minimal Hassle
According to QuantmRE, ADUs are also an excellent type of investment because they don’t include much hassle. When you choose to invest in an ADU, one of the troubles you don’t have to deal with is finding the perfect land and making it suitable for living in.
Think about it. If you intend to purchase land, you will need to go on several site visits before you find an area that would be perfect for the property you want to build. Not to mention, you have to wait for document transfers and other legal processes to be completed before you can begin construction on the land.
You’ll also have to construct septic tanks and ensure there is a water system and other essential features that any tenant will needs. With an ADU, you can avoid all this hassle because your land already has all these things. Therefore, you can begin construction without delays and with minimal issues.
Income Generation
The best thing about ADUs is the fact that you get to earn income from the housing unit. If you don’t plan to use it as a home for a senior or sick relative, you can easily rent it out as you would an apartment to make extra money.
Limitations of ADUs
Unfortunately, ADUs don’t come without disadvantages. According to Emily Chou-Lee in the article “Pros & Cons to Building an ADU,” some of the problems with building ADUs include:
Costs of Construction Can Be High
Although ADUs are generally cheaper compared to building on a different piece of land, the prices of construction can be quite high depending on the size of the home you plan to build and what features you’re going to include.
For instance, if you plan to add separate parking, an office, unique lighting fixtures, and other features, you’ll spend more compared to someone who plans to build a basic house with only essential elements.
It Can Disrupt Your Daily Schedule
As a landlord, you’re responsible for taking care of the ADU and making sure your tenants are comfortable. This will require you to be present when they need you or work out a plan on how their problems will be addressed. If you have a fulltime job, this can take away from your time, and it can be challenging to juggle your responsibilities.
Reduced Space
Adding a new house to your property will also take away from the space you’re accustomed to. It may reduce play space for the kids, your parking area, and areas you can access because the tenants need to have their privacy and enjoy their space as well.
So is an ADU a Good Investment?
As you can see, the pros of ADUs outweigh the cons. Once you have a suitable financing method to get the unit up and everything ready, the only thing you’ll have to get used to is keeping the ADU in perfect condition for the tenants and sharing your space with other people.
However, generally, it is a good investment because you don’t have to invest in a new property. Nonetheless, as we mentioned, your return on investment will depend on several factors, including rental rates in your area, permit fees, and building costs, among other things.
Therefore, make sure you research and work with a real estate agent to get an idea of how much you can earn from the ADU unit before you begin. It’s also a good idea to find out what other people in your area are doing. What sizes are their ADUs? What features do they include? Who rents these housing units?
The answers to these questions will give you an idea of your target market and what kind of ADU you need to construct.
Now Go
ADUs, like any other investments, are affected by several factors. However, to get a good return on investment, you need to understand what is in demand, how attractive the investment is in your area, and comply with all the real estate laws to avoid any trouble with the law in the future. So do your due diligence before embarking on this investment.