What Is An ADU In Real Estate?

Key Takeaways

The concept of an accessory dwelling unit (ADU) has grown in popularity as the price of homes and cost of living continues to increase. More and more people are choosing to share living spaces in an attempt to account for the latest surge in home values, and accessory dwelling units have helped homeowners accommodate the transition for years. It is worth noting, however, that improvements in the economy have seen the use of these alternative living spaces come into question. What is an ADU in real estate investing terms? How much does it cost to build an ADU? Is building an ADU a worthwhile investment for today’s real estate entrepreneurs? The answers to these questions, and many more, can be found in the following ADU guide.

What Is An ADU?

An accessory dwelling unit (ADU), otherwise known as a “mother-in-law” or “granny flat,” is an additional living quarters located on the same lot as an existing single-family home. While accessory dwelling units may be attached or detached, their purpose is to provide its tenants with complete and independent living facilities. In order to be classified as an accessory dwelling unit, the living space must include permanent solutions for living, sleeping, eating, cooking, and sanitation. In other words, an ADU is essentially a self-sufficient home that happens to be located on the same plot as the single-family home. Zoning laws will vary between each municipality and the criteria that make up an ADU house may differ, so be sure to check with the proper authorities in your area to gain a better idea of what an ADU is.

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Benefits Of An ADU

In the past, building an ADU was closely associated with housing close family members or friends. Increasing the occupancy rate of a subject property helped countless families afford their mortgages when the economy was less than forgiving. However, as the economy improved, so too did the usage of ADU real estate. In addition to making homes more affordable for generational families, the benefits of an ADU have expanded to include the following:

  • An ADU home is perfectly capable of serving as an income producing real estate asset.

  • The addition of an ADU house may increase the occupancy rate of a subject plot of land, allowing more residents to enjoy the same area.

  • Higher occupancy rates associated with ADU real estate translate into more affordable living situations for families with multiple incomes.

  • The parents of younger families may move into an ADU house in order to be closer to caregivers and loved ones.

  • Homeowners who aren’t in need of the vast confines of their original home may be able to move into an ADU house and rent out the primary unit.

  • They offer a way for homeowners to optimize the traditional American home.

  • As the concept of the ADU home continues to grow in popularity, so too do the forms of financing that facilitate their development and construction.

Drawbacks Of An ADU

ADU real estate has grown in popularity, and for good reason: the opportunity to generate passive income from an existing piece of property is too good for many homeowners to pass on. That said, accessory dwelling units are not without their own caveats. While they may have become synonymous with several encouraging benefits, there are some drawbacks homeowners need to at least take into consideration:

  • ADU real estate isn’t a more basic living arrangement; it requires just as much attention to detail, permitting and care as a traditional single-family home.

  • Zoning laws will vary from city to city, which can be confusing for those who have never owned or built an ADU home. For example, in some jurisdictions, ADU-endowed properties must be owner-occupied.

  • Building an ADU can be expensive; sometimes as much as buying a brand-new home in some parts of the country..

  • When an accessory dwelling unit is built on a property, it inherently increases property taxes.

  • Accessory dwelling units coincide with a lot of ”red tape,” which can be confusing and dense to those who are unfamiliar with the concept as a whole.

  • Building an ADU will detract from the square footage of usable outdoor living space.

How Much Does An ADU Cost To Build?

The cost of building an ADU is contingent on several factors, the most important of which is whether or not the unit is attached or detached. Detached accessory dwelling units, for example, cost quite a bit more than their attached counterparts. According to AccessoryDwellings.org, detached ADU real estate can cost homeowners upwards of twice as much as attached units. Whereas an analysis of data provided by Portland ADU Owners suggests detached ADUs can cost anywhere from $9,000 to $300,0000 to build, the same data set also tells us that attached ADUs can cost anywhere from $3,500 to $200,000 to build.

Outside of their proximity to the existing property, any number of factors go into determining the true cost of building an ADU. The location in which the home is located, the size of the addition, the amenities built into the new unit, the work put into designing the ADU, and the permits required to build the ADU, are a few examples of additional costs.

The upfront costs of building an ADU can be high, but financing options are becoming more and more available. More importantly, many of the financing options made available make it possible for owners to capitalize on today’s hot rental market.

What Are The Different Types Of ADUs?

There are three primary types of ADUs: detached structures which are completely independent from the primary residence, attached external apartments with their own entrances, and attached internal units with communal and/or separate entrances.

Detached structures, as their names suggest, are ADUs built somewhere else on the same plot of land as the existing home. Detached ADUs do not share any walls with the primary residence, and must have their own utilities in most municipalities. That means detached ADUs will need their own utility hookups and mechanical appliances. As a result, detached units are typically more costly to build, but they may also award their inhabitants with more privacy, which bodes well for landlords intent on renting the space out.

Attached external units, unlike their detached counterparts, share at least one wall with the primary residence. It is worth noting, however, that the wall may be the only thing they share. Most attached external units have their own entrances and utility connections, as to function as thrown independent unit. Thats said, attached units typically cost a lot less to build, which may allow more homeowners to attempt to construct their own.

The last type of ADU is the attached internal unit. As their names suggest, these units are fully integrated into the existing structure. From the outside, it may not be obvious the home contains an ADU. However, the extra units may take the form of basement or attic units. Either way, the walls of the ADU are all shared with the primary house. More often than not, they share utility service and mechanical appliances with the main unit. Due, in large part, to the fully integrated nature, these units are the most common ADU homes.

Is An ADU A Good Investment?

Determining whether or not an ADU is a good investment is entirely dependent on current market conditions and the amount required to get the unit “up and running.” Again, building an ADU may require some homeowners to part ways with an exorbitant amount of money. Therefore, ADUs may be worth the investment if the owner is able to recoup the initial investment in a reasonable amount of time. Likewise, this particular investment strategy is more geared towards long-term commitments. It is worth noting, however, that building an ADU may take time, so profits may not come in immediately. Investors considering building an ADU should account for the time it takes to build the unit and get renters into it.


The idea of adding an accessory dwelling unit (ADU) to an existing property gained notoriety as the latest depression took hold of the country. The ability to increase property occupancy rates awarded savvy homeowners with a lower cost of living. However, today’s economic conditions have paved the way for ADU homeowners to benefit in more ways than one. More and more homeowners are finding that ADU real estate strategies compliment their long-term rental portfolios well.

What is an ADU? What is an ADU in real estate investing terms? Better yet, how can investors use these alternative forms of living to enhance their current portfolios? Let us know what you think about ADUs in the comments below:

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