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Accessory Dwelling Units – A Quick Guide
Published Date : July 20, 2023
July 20, 2023
There are countless reasons for building an Accessory Dwelling Unit (ADU) on your existing property. Defined as a self-contained residential unit located on the same lot as an existing single-family home, these units can be ideal for many scenarios. From creating a separate space for loved ones or a live-in nanny, accommodating our new work-from-home philosophy, to supplementing income through rent, ADUs can be a real lifestyle benefit. It is also a great way to expand your living space without the inconvenience of home construction. While the possibilities seem endless, it is critical to do your research before proceeding.
Start by understanding local laws and regulations. Is your lot even eligible to expand the footprint in accordance with local zoning restrictions and building codes? This is crucial because if it is unlawful, the appraiser may not assign it any value and you will be unable to gain access to lenders. After that is determined, make a list of all other considerations. As an example, do you need to install a sprinkler to meet fire regulations? Do you need to provide off-street parking? Can you tap into existing utility connections?
All of these considerations add up financially, so do the math! As an example, will you be able to comfortably cover the potential increase in ongoing expenses such as additional mortgage and insurance payments, and property tax associated with the structure? What are the one-time costs such as permit fees and utility hookups?
Should you choose to rent out the unit, are you reliant on rental income to cover these costs? Have you researched rental rates in your area to understand your cash flow? Now that you have calculated a good estimate of your overall costs, are you able to use existing assets to finance the project or can you easily obtain financing?
One of the main benefits to building an ADU is its versatility. What may start out as a rental property or additional guest space, could eventually become an ideal home for your aging parents or that art studio or home gym you always wanted in retirement. But the main goal should be determining if the unit will add value to your balance sheet. When it is time to sell your home, having this additional structure may bring additional buyers into the pool who are looking for rental income to supplement mortgage payments.
For so many of us, our primary residence is a significant part of our overall net worth, so you want to ensure that using resources to build the ADU makes the most financial sense for your particular situation. Be sure to contact your Sand Hill Wealth Manager to guide you through the process.
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