As house prices continue to rise and inflation sends the cost of daily living into the stratosphere, more and more people are looking for simple ways to make paying bills easier.
Many buyers hope that secondary suites, or ADUs, will do just that. Basically, an ADU is a separate living space on the same property as the primary residence. The ADU belongs to the principal owner and as such must generally be sold together with the principal residence as a single lot.
ADUs have grown in popularity in recent years. The number of first registrations with an ADU has increased over the past decade, increasing by an average of 8.6% per year, according to a recent Freddie Mac study. The study found that almost 70,000 properties with ADUs were sold in 2019, compared to just 8,000 properties in 2000. And the ADU trend seems to be hitting the hardest in the south and west, with double-digit growth in Portland, OR; Dallas; Seattle; Los Angeles; and Miami.
But is the ADU a savvy solution to the housing and money crisis? The short answer: It depends.
Below, we break down the most important details to consider before buying a home with a secondary suite that you plan to rent.
Advantages of buying a house with an ADU
The most obvious benefit of buying a home with an ADU is the passive income it generates. The amount of income will vary depending on where it is located and the city’s rental market. Keep in mind that some of that revenue will need to go towards necessary repairs and cleaning costs if you rent it out for short-term use on sites like Airbnb.
An ADU can also add value to your home. According to Porch, houses with an ADU are priced 35% higher than houses without an ADU. Even if not used as a rental unit, an ADU can be used for guests or family members.
Disadvantages of buying a house with an ADU
There are a number of costs and responsibilities involved in owning a short-term rental unit, which eat away at the passive income generated by the ADU.
“Maintenance, repairs and renovations are just the beginning,” says Ben Wagner, real estate investor and house turner at Leave the Key in Amityville, NY. “Landlords also need to consider miscellaneous expenses such as insurance coverage and cleaning costs.”
(Insurance for additional structures can be covered by most homeowners insurance policies and, at most, would cost a few hundred.)
Additional charges and cleaning fees vary. If you’re renting the ADU for short stays and need to pay to clean it and stock it with basic supplies like paper goods and hygiene products, you’ll want to budget for $2,500 per year.
Apart from costs, operating an ADU can also affect the lifestyle of the owner. Your tenant will need access to certain parts of your property, so you want to make sure you feel safe with tenants coming and going as they please.
“An ADU has the potential to completely disrupt your privacy,” says George Beatty, founder of Problem Property Pals in Philadelphia. “It’s not everyone’s cup of tea.”
ADU rules to keep in mind
So you’ve calculated the numbers and decided that the extra income will be a net gain. But before you pull the trigger to operate an ADU, you should know that state and local rules regarding ADUs and vacation rentals vary widely, and new rules are being issued every day by municipalities. To avoid costly surprises and keep your operation above all else, be aware of zoning requirements, housing laws, and taxes in your area.
“You need to make sure the property has been properly zoned for an ADU,” says Rinal Patel, a licensed realtor and co-founder of We Buy Philly Homes in Philadelphia. “And making sure the property has the necessary permits is critical.”
It’s also important for homebuyers to be aware that regulations can change.
“In DC, for example, new rules came into effect this year restricting and regulating short-term rentals,” says Amber Harrisrealtor at Keller Williams Capital Properties in Washington, DC.
You also don’t want the money generated from your ADU to be your primary income.
“I always advise buyers to make sure they would be able to continue if something took that rental income away from them,” Harris says. “The [COVID-19] The pandemic has shown how things beyond our control can change market dynamics, and local regulations can change quickly.
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