When Kol Peterson added an 800-square-foot accessory dwelling unit on his Portland, Ore., property in 2010, his goal was to rent out his house, live in the ADU and cover his mortgage. He did, and within four years, the $36,000 yearly rental income had covered the ADU’s $140,000 construction cost.
Oregon became the second state in 2017 to liberalize exclusive single-family zoning laws by requiring ADUs to be allowed. California came first in 2016. Before then, accessory dwelling units were unregulated and often in coach houses, over garages or in a main home’s basement or attic.
Peterson, who worked for the U.S. Environmental Protection Agency and Forest Service, became so enamored of the concept that he founded Accessory Dwelling Strategies, a company that helps others learn through classes, his website and a book. Developer and general contractor Eli Spevak followed a similar path and built ADUs through his Orange Splot LLC company. Spevak co-founded a nonprofit website, Accessory Dwellings; helped change policies to legalize ADUs in Portland and statewide; and co-wrote the guide “The ABCs of ADUs” with AARP.
These days ADUs are popping up nationwide as detached, attached, or in-house dwellings with a kitchen, bathroom and living and sleeping quarters. A total number of units may be hard to peg, in part due to the many names used to refer to them, such as backyard bungalow, guest house, in-law suite, basement apartment, carriage house and bonus unit, says Rodney Harrell, Ph.D., vice president of AARP’s family, home and community group. One study from Freddie Mac put the number at 1.4 million ADUs in 2020.
The Need Is Real
Reasons for interest vary but the most prevalent may be that ADUs are making a dent in the country’s housing supply shortage. “They’re not the only solution but one tool in the toolkit,” says developer Denise Pinkston, a partner of San Francisco–based TMG Partners and president of Casita Coalition, a Los Angeles–based group whose goal is to increase the number of small homes throughout California. “We’re in favor of finding ways to help people gain a home since the down payment needed has eclipsed the ability of most working families,” she says. Spevak agrees: “They’re a way to build less-expensive housing without public subsidies since they’re often less costly to rent or buy than other neighborhood options.”
For older adults on fixed incomes, ADUs allow aging in place, which otherwise may be difficult, says Harrell. “Our neighborhoods are 80% single-family housing,” he says. ADUs also serve as guest houses, home offices, quarters for grown children and dwellings for natural disaster victims. (ADUs differ from tiny houses, which are under generally less than 400 square feet, often atop wheels, and not permitted on residential properties for the long term.)
Additionally, ADUs can be a way to earn rental income or make a property more flexible as family needs change, says Portland, Ore., broker Aryne Blumklotz of Aryne + Dulcinea with Living Room Realty. Her business partner, broker Dulcinea Myers-Newcomb, added a 458-square-foot prefab ADU on her property to house her father in 2018. It may become a rental to help pay for her children’s college tuition.
Where ADUs Are Taking Off
Since 2000, when AARP issued the first edition of a model state act and local ordinance, more states have adopted legislation that effectively allows ADUs and preempts local prohibitions. AARP’s Livability Index tracks statewide ADU legislation. The index credits California, Florida, Hawaii, Maine, Montana, New Hampshire, Oregon, Rhode Island, Vermont, Washington and the District of Columbia for having legislation that encourages or supports ADU development.
California started by allowing conversions of existing structures with a building permit, regardless of local zoning laws. Over time, it removed such barriers as owner-occupancy requirements, homeowners association prohibitions and limited parking requirements. It reduced fees and finally permitted state-allowed freestanding ADUs in a yard of a single- or multifamily site, regardless of local standards, says Pinkston. It also allowed ADUs in unused areas of multifamily buildings like attics or bike rooms.
“In just a few years and through a pandemic that slowed other housing types, the California results have been impressive,” Pinkston says. “More than 65,000 ADUs have been added across its cities, suburbs and rural areas, all starved for workable housing options.”
Despite progress, many locations still wrestle with challenges and look to areas that have found solutions. Among the top challenges: streamlining the permit and approval processes, NIMBY resistance and officials worried whether their areas have sufficient sewer, water, power lines and parking if density increases.
California streamlined the process by requiring permit approval within 60 days. Los Angeles went further: The city offers preapproved plans so permits can be OK’d the same day, says Jennifer Svec Williams, legislative advocate manager at the California Association of REALTORS®. And more changes keep coming. This past January, California approved two-story ADUs in some cases and greater flexibility regarding where ADUs can be sited.
And even while some municipalities wait to see what their state does, others push forward to alter their own ordinances. Chicago’s City Council gave the green light on May 1, 2021, to a pilot program in five zones after decades of not permitting them, says Hunter Andre, broker and director of agent development at Baird & Warner’s Lincoln Park office in that city. “Chicago has become a more expensive place to live with fewer spaces to build. Existing properties can be maximized and monetized by building an ADU,” he says.
Those seeking to build ADUs also need to consider:
ADUs are less expensive than primary homes but not cheap. To date, there are few conventional financial products available to build ADUs. Homeowners who want to build on their property can talk to a lender about qualifying for a home equity line of credit, cash-out refi, or renovation-style construction loan, says Pinkston.
Most lenders won’t count future rental income as part of a homeowner’s income stream to build it and may require two years of residency for a construction loan. “It’s not easy for many if they don’t have personal savings or a home equity loan,” says Harrell.
To help, some companies such as Abodu, a California developer that partners with modular builders, work with businesses that offer low-interest loans. It also handles permit approval, financing, design and installation. Some states offer the option of converting ADUs to condominiums, which makes them eligible for conventional mortgage and insurance products, Pinkston says.
2. Size and placement.
The typical size of an ADU is between 800 and 1,200 square feet. However, California gives local governments flexibility to establish ADU square footage requirements, provided the maximum is not less than 1,000 square feet for an ADU with more than one bedroom, says Svec Williams. ADUs must be set back from lot lines, often matching setbacks that apply to the main house, says Spevak. In California, it’s four feet. Height is also restricted. In California, it’s 16 feet, unless a home is located within a half-mile of a major transit stop or high-quality transit corridor or on a multifamily, multistory parcel; then it can reach an 18-foot-high maximum, says Svec Williams. In some areas, ADUs can be two stories tall, Spevak says.
As regulations are revised, some states and areas are permitting more than one ADU on a site. California now allows two. It uses the new acronym JADU for the junior one, which must be under 500 square feet and attached to the main home. Portland, Ore., and Seattle allow two by right.
3. Stick-built or prefab?
ADUs are more commonly stick-built in California, while prefabs represent 15% to 20% of the market there, Peterson says. Myers-Newcomb’s prefab ADU took between seven and eight months to build, versus the typical two to three years for stick-built. Costs vary. The least expensive ADU Peterson is aware of is Wolf Industries’ $110,000 turnkey prefab. The average cost to erect a stick-built ADU in Portland, Peterson says, is about $250,000; in California it’s about $350,000. Abodu offers several models, starting at $228,000 for a 340-square-foot ADU and $400,000 for a two-bedroom, 610-square-foot design, including installation, says Tom Roche, head of brand. At showrooms in Redwood City, Calif., and Los Angeles, customers can tour models.
And entrepreneurs continue to enter the market. PrefabPads LLC started manufacturing the MyCabin brand modular homes at its Waukegan, Ill., factory last August; its 450-square-foot model costs $150,000, says co-founder and CEO Hemang Mehta. Boxabl’s “house in a box” that unpacks in an hour is generating buzz, especially since Elon Musk reportedly bought one. New ADUs reveal more stylistic variations. Many built from scratch mimic the main house, while many modular companies favor a Scandinavia-meets-Dwell magazine modern vibe or regional vernacular such as South- west casita or Portland Craftsman, Spevak says. Harrell cautions buyers to check that their area will approve a prefab design, since not all do.
An ADU will generally increase real estate taxes and appraisal values, though the latter is hard to calculate in advance due to insufficient comp data. Myers-Newcomb advises clients not to expect an ADU to increase a home’s value since not all buyers may want one. She also warns homeowners not to expect immediate ROI. However, in the short term, an ADU can be monetized through rental income to owners, Andre says. More good news, Harrell says, is that there’s no evidence they hurt property values. Putting one in every single-family home- owner’s yard, Roche says, would be a great way to add “gentle density.”