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Building an ADU in your backyard: Accessory Dwelling Units from Costs to Construction

Building an ADU in your backyard: Accessory Dwelling Units from Costs to Construction

In today's expensive real estate market, some homeowners are looking to add extra space on a budget. ADUs can add a new guest house, office, or playroom to your property, but how much do they cost?

Key Takeaways

  1. ADUs cost $156,000 on average, depending on the type and construction methods.
  2. The fees and financing options vary with local regulations.
  3. "Granny flats" can be a great long-term investment with a multitude of benefits.

What is an ADU?

Accessory Dwelling Units (ADUs) are small housing structures that occupy the same property as a larger residence. These buildings can be built through renovations or independently constructed. ADUs can generate income as rental homes but are often used as convenient housing for family members. In fact, this role has earned ADUs nicknames like "granny-flat" and "in-law unit".

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What are the benefits of an ADU?

Now that we've covered the complex costs of a "granny-flat", what do homeowners get in return?

Property value almost always rises with a new ADU. One Porch Research study found that properties with ADUs are valued at 35% higher than those without units. This impressive increase comes from the new square footage, along with the additional net operating income.

Extra space is another essential virtue of an "in-law unit". Need an extra guest house or a rec-room for the kids? ADUs have you covered. Working from home? A detached office might be just what you need to keep your work and personal spaces separate.

Rental income is a common pursuit of ADU construction. The space can be listed for either short-term or long-term rentals. Units with bedrooms create a revenue stream anywhere from $1,500 to $5,000 a month, depending on the specifications and neighborhood. However, California ADUs are subject to a confusing web of rent control rules, so it is crucial to identify any price limits before listing by utilizing a rental income calculator.

In-place aging is the namesake of a "granny flat". Traditional living communities are costly and often cause older relatives to feel isolated from the family. ADUs can offer affordable downsizing for people who want to keep older relatives close while preserving dignity and independence.

How much will it cost to build an ADU?

You're probably wondering, how much do ADUs cost? Well, as with any honest estimation of construction costs, the answer is: it depends. One Berkeley study found that the average cost of these units is $156,000. However, the cost per square foot can be anywhere from $150 to $500.

ADU prices shift based on the type of structure, the desired amenities, and the various local permits. Despite the significant upfront costs, these units are long-term investments with attractive potential. "Granny-flats" can also be financed through a variety of loans and plans to best suit your needs.

What are the construction methods for ADUs?

The two most common construction styles are prefabricated and stick-built. Each option carries unique advantages, drawbacks, and prices.

Wood-frame construction is the conventional method for building small structures such as ADUs, primarily using lumber to frame the structure of the building. Built on-site with permanent foundations, these ADUs are known for durability and customization. These factors explain why wood-frame units receive higher appraisal values than prefabricated ones, offering more property value. On the other hand, unless you purchase ready-made ADU construction drawings, the detailed design process can heavily inflate overall costs and construction times.

Prefabricated or Modular ADUs are largely manufactured offsite and then are shipped to and assembled on your property. Some modular ADUs are completed and finished at the factory and are trucked and craned directly into your backyard. Depending on the fit-out they can either be competitive with conventional construction costs or can come at a premium. The benefit of a prefab or modular ADU is a much shorter construction timeline. Many cities have also pre-approved certain designs so it may spend up the permitting process. These perks come from the use of efficient machines, which largely eliminate architect costs and weather delays. However, prefabricated units have limited options for customization and typically have fixed layouts and less flexibility of design.

What are the types of ADUs?

Three main classifications of ADUs are attached, detached, and conversions.

Attached units have a shared wall with the rest of the home. With an independent entrance, these ADUs can be spacious additions to the property.

Detached "granny flats" are completely separate structures from the primary building. These ADUs offer more privacy than an attached unit, but this virtue often comes at a higher price.

Conversions are a great option for underutilized existing spaces, such as basements and garages. These projects often require less construction, with insulation and utilities comprising the primary expenses.

What are the development costs for an ADU?

The development costs for these "in-law units" can be grouped into three distinct categories.

Vertical Construction is the most obvious aspect of building ADUs. This step includes laying a foundation, assembling the frame, putting up walls, and installing the roof. Depending on the inclusions of a kitchen, bathroom, or high-quality materials, costs will vary heavily.

Site Work and Utilities also make up a substantial portion of building expenses. Clearing and excavation are two important phases of early construction. Later on, utility systems such as plumbing, electrical, and HVAC are connected.

Finishings are everything you can actually see and touch in a finished building and are a big part of the construction costs associated with building an ADU. Flooring, tiles, and fixtures are interior design elements that can vary in quality and cost. Insulation and appliances are two essential elements of any unit, as they make the space livable. Choosing affordable appliances can be a great way to control the budget.

What other fees come with ADUs?

Apart from the expenses of building the structure, ADUs undoubtedly bring various fees.

Building permits are necessary costs with building an ADU. Depending on the state and city regulations, these building permits typically range from $10 to $12. Other local costs may include school or sewer fees. Typically, these expenses will amount to at least $5,000. States such as California are encouraging the building of ADUs to address housing shortages and meet housing goals.

Miscellaneous fees like architectural design costs and environmental regulations may also come into play. When designing a stick-built ADU, architects will charge for the custom plans and alterations. Some districts in California impose impact fees for larger units, and septic restrictions intended for environmental protection.

How can you finance an ADU?

Given the high upfront expenses of building an ADU, there are several attractive options for financing the project.

Home equity financing is a great way to fund ADU construction, especially for people who own their homes. Once the unit is complete, the value of the home will likely increase, so it is logical to leverage this valuation. Traditional home equity loans provide a fixed sum of cash with a rigid schedule for payments. On the other hand, HELOC (Home Equity Line of Credit) involves borrowing against the equity of the home as a revolving line of credit. Analogous to credit card agreements, the repayment terms are generally shorter and the interest rates are usually variable. These financing options are very common choices for people who ultimately rent their ADUs because the extra income can often cover the costs over time.

Cash-out refinancing is another option for people looking to restructure their current mortgage or home loans. Switching the mortgage provider is the most distinct step of this process. Through a reappraisal, lenders will see an increase in the valuation of the home. The resulting payments will usually be lower and tax-deductible.

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