What Is an ADU in Real Estate? Definition and Benefits

An accessory dwelling unit (ADU) is a smaller secondary living space that shares the same land as the primary residence. With a few exceptions, they cannot be bought or sold separately from the larger property that they are a part of. However, they are often used to generate additional income streams through long-term and short-term rentals. 

ADUs can also serve a more personal purpose. They can provide permanent housing for a family member, or when your family and friends visit. An ADU can be the ideal guest house that provides privacy for your guests.

• An accessory dwelling unit (ADU) is a small secondary living space that shares its property with a primary home.
• ADUs often generate rental income for their owners.
• To be classified as an ADU, the living space must be a permanent part of the property.
• Depending on where you live, special city and county zoning regulations must be met. 

The term “accessory dwelling unit” is a legal term to describe a secondary property located on the same grounds (or near) the main residence, often in the backyard. ADUs have separate entrances from the primary residence and are fully equipped with living, kitchen and sleeping areas. In addition to occupying the same plot of land, ADUs share utility connections with the main house.

These types of ADUs share at least one wall of the main property. It can be an addition to your single-family home that pops outs on the side or back of the house. An attached ADU will still function separately from the main house, with a private entrance and separate amenities. An attached garage conversion would also fall into this category. 

Attached ADUs usually already have utility, sanitation and electrical access, making renovations or upgrades less daunting and more cost-effective.

Unlike the attached ADUs, detached properties do not share walls with the existing home. Examples of these types of ADUs include garages located away from the main house, sheds and former carriage houses. Detached ADUs typically require more extensive renovations. The cost of building can include running power, plumbing and sanitation lines from the main house. These spaces may have more structural needs, such as roofing concerns.

ADUs within the main property are also a common type of smaller secondary housing. These types of dwellings are within the home's existing space. Basements and attic conversions are common examples of interior ADUs. Some basements, including walkouts, have private entrances. Attic ADUs, too, may have stairs leading up to the property, allowing for a private entrance. 

These ADUs have doors leading directly into the main house, and the property owners have immediate access to these dwellings. Like attached ADUs, they may be less costly since they are inside the main home.

In addition to the excitement around ADUs, there’s a resurgence in enthusiasm for the tiny home movement. The terms are sometimes used interchangeably, but a tiny home and an ADU are not always the same. 

If the square footage of an ADU is typically that of a tiny home, it can be classified as such. For example, if a converted shed’s interior space is up to 400 square feet, then it is, by definition, a tiny home.  

Building codes and zoning ordinances are the two biggest legal hurdles to tackle when considering becoming the owner of an ADU. Zoning and ADU permits vary depending on where you live. Building codes are rules that set the minimum requirements and standards for the safe construction of the ADU, while zoning codes are laws that regulate land use. 

• Building codes address structural standards, such as the placement of smoke alarms, HVAC systems, emergency exits, the required number of windows in the property, etc.
• Zoning laws determine how a property can be used within a city or county. They can limit what you are allowed to build, as well as the size and shape of buildings on your property. 

In some instances, ADUs must be a specific distance from the main house and property line, and there may be a limit on interior space. For example, in Richmond, Virginia, the zoning requirements state, “The ADU cannot exceed one-third of the floor area of the main single-family dwelling or 500 square feet, whichever is greater.” 

A few cities have supported ADUs for decades, while others have recently waived special permits due to housing shortages and a lack of affordable housing. 

California passed the first ADU laws in 1982, making it one of the most ADU-friendly states. Washington and Oregon also have progressive ADU laws. Richmond, Virginia, eased its ADU regulations, allowing homeowners to have accessory dwelling units on their property without a special permit in all residential areas. San Jose, California, is the first major city that allows property owners to sell their ADUs as condos.

One of the biggest benefits of ADUs is the opportunity for increased property value. A real estate agent can help you price your home accordingly if you ever decide to sell.  

• An ADU can generate monthly rental income. Many homeowners use the profit to pay off debts, increase their savings, pay for vacations, college tuition and more.
• Due to the lack of housing and the increased cost of living, your property could be an affordable housing option for someone.
• ADUs are easily accessible since they are steps away from the main property. You do not have to go far to clean, maintain or check on your space.
• Some homeowners who travel a lot may consider moving into their ADU and renting out their main house.
• For those with aging parents, ADUs are ideal for multi-generational living spaces, sometimes known affectionately as a “granny flat” or in-law suite.   

• Just as the main property needs regular maintenance and upkeep, so does your ADU. Cost will include utilities, landscaping, cleaning, replacing broken items/appliances and small home repairs.
• While it is exciting to see your property value increase, your property taxes do, too. If you still have a mortgage and your taxes are included in your payments, you will see your monthly out-of-pocket costs increase.
• If you offer outdoor areas in your listings, you must share yard space with your tenants. You must figure out how to schedule gatherings without disturbing your renters.

If you’re thinking about adding an ADU or renovating an existing structure, you’ll need to consider your local laws, construction type and budget. 

This involves zoning laws, building codes and permits. Once you find out if you can build an adu or renovate an existing structure, you can move on to think about the construction process and financing.

Research credible contractors, plumbers, electricians, and architects. Or decide if you will put your DIY skills to use. Once you make this decision, you can obtain estimates and quotes, which will give you a good idea of how to approach your budget.  

Most ADUs offer between 600 and 1,200 square feet of living space, according to Angi.com, and the cost to build is typically $150 to $300 per square foot. 

Your budget will include money for construction labor, materials and permit fees. Consider purchasing salvaged materials, which are eco-friendly and cut costs. Be sure to include a contingency plan for unforeseen expenses that will surely arise. 

A standard recommendation for an emergency fund is 10% of your projected total costs.

There are multiple ways to approach funding. Homeowners typically opt for a home equity line of credit (HELOC), a home equity loan or pull their funds from a savings or investment account.

Talk with your contractors to gauge how long each aspect of the project will take. Just as you planned for a financial emergency, build leeway into your schedule for plumbing, structural and electrical issues. Give the project some grace if things take a bit longer than you anticipated. 

You may also consider waiting to start your project after vacations, scheduled health-related needs or other obligations. This will ensure that you are available if anything needs your attention.

This will depend greatly on how your space is used. If it is for aging relatives, you’ll need to keep in mind ADA guidelines and accessibility features, including larger doorways, additional railings and walk-in showers, for example. If your ADU will be a rental, build it so that the space will be attractive and marketable to tenants.  

You’ve worked hard to complete it, so now it’s time to relax and enjoy the benefits. Test out your new ADU by spending the first night there. Take notes on any oversights regarding amenities your future guests will need or appreciate. When the property is vacant, some homeowners use their ADU for a staycation, allowing them to have an adventure in their own backyard.

ADUs are on the rise and continue to contribute to the housing needs among the urban sprawl. They also serve as sustainable housing options. Because of their smaller sizes, ADUs require fewer materials and cause minimal disruption to the surrounding natural habitats. They tend to be smart investments for homeowners. An ADU can also serve as an additional living space for family and guests.