Investing in a rental property can be a lucrative financial endeavor, but choosing the right property is the key to making a profit. There are many ways to become a rental owner, including using an ADU.

What is An ADU?

An accessory dwelling unit (ADU) is a guest house that lives on the same property as your or someone else home. As the name suggests, it’s an accessory to the main home on the property that works for both short and long-term stays. 

Many people purchase a property with an ADU for their guests. It is an excellent option to give family and friends more privacy during their stay or to teach teenagers or college students how to be more independent before they completely leave the nest. 

For families with children, an ADU is a great place to hold a pool party — people can change and use the restroom without walking through the primary residence with wet feet. It can also be an excellent place for sleepovers, as many kids like getting their own “house” for the night. 

Eventually, many ADUs fall out of these uses, just sitting on properties whose owners could use them as investment opportunities. Some real estate investors will purchase their home on a property with an ADU in hopes of renting out the extra space as soon as possible. 

Whether you have an ADU already or want to invest in one, there are advantages and disadvantages to making it a rental property. 

Pros of Renting Out an ADU

There are several reasons why you should consider investing in an ADU. 

• Easy maintenance: Having a rental on your personal property makes maintenance much more manageable. You can address problems quickly because it is close by. Your home likely has the same or similar systems, making you familiar with potential problems and fixes. You can often do the landscaping for the property yourself as an add-on to your regular yard maintenance, saving you money. 

• Better monitoring: When you are just yards away, you will likely know if the people renting the property have too many people staying there or are damaging the property. 

• Increases your initial investment: If you already rent out a single or multi-family property and have the space to add one, you can increase your passive income without investing in an entirely new property. 

• Adds property value: If you place a well-maintained ADU on a property, it will raise its value. With the opportunity for rental income, homes with accessory units sell for up to 35% more than they would without one.

With these advantages, it is easy to hop on board the investment train, but there are some things you need to consider to know if an ADU is the right choice for you. 

Cons of Renting Out an ADU

While an ADU is a great rental option for many property owners, there are some potential disadvantages. 

• Privacy: While having a close rental ADU can give you peace of mind about your tenants, it can make you feel like you have less privacy. Sharing a property means your tenants might see you enjoying personal time–making it feel like your home is less private. 

• Initial costs: Adding an ADU can get pricey. You might pay around $250 per square foot to build. If you have one on your property that you haven’t touched, it will likely need repairs and renovations, costing hundreds or thousands of dollars. To gain income from the property, you must ensure that you make more through rent than in the maintenance and upgrades you perform. 

• Insurance: As with adding any rental, your property insurance will certainly increase when you have an ADU. 

With these potential downsides, you might have a better idea if an ADU is your best investment. 

Securing Permits for an ADU

You will need to check with your local government to determine which permits and licenses you will need.

Address Assignment Request 

This document allows you to give your ADU a separate address from your one. Some localities may require a separate address for each home on your property. 

Building Permit

This permit gives you permission to build or add to an already-established accessory unit. 

Electrical Permit

You must acquire a specific permit in most locations before installing or updating an electrical system. 

Location Permit 

If you live near the coast or in other areas that put your property at high risk, you will likely need to acquire a location permit. 

Other Site Permits

Some localities require permits based on the specific circumstances surrounding them. For example, you may need an easement permit to construct within one. 

Choosing the Right ADU for You 

The permits you need depend on whether you are building or purchasing your accessory unit. There are good reasons to do either. 

Building 

Building an ADU gives you complete control over how it functions, providing you the ability to maximize your chances of finding tenants or guests for a vacation property rental. 

When you build, you can take advantage of smart design and efficiency to lower your cost and carbon footprint. Build the property as large or as small as you want it. You can even make the modifications you would enjoy if you chose to discontinue renting it in the future. 

Buying 

One of the easiest options for purchasing an ADU is to get a prefabricated option from one of the many companies selling them. You can choose a small, modular home or a more creative option like a dome to impress your short-term guests. 

You can also purchase an ADU with an additional home or property that has one. You can live in the primary home or rent it out as well. If the property is large enough, you may be able to add additional ADUs in the future. 

Taking Advantage of the Market with Your ADU

When renting an ADU, it is important to consider its location to determine the most profitable type. 

Using your ADU as a vacation rental could be more lucrative if you have a beachfront property or are close to a major attraction, such as a theme park or popular city. You could see a very high turnover and can adjust your prices according to peak tourist seasons. Recent research found that short-term rentals earn nearly 40% more than they did before 2020. 

If you are inland and away from any major tourist attractions, consider renting your ADU long-term. While you will spend a long time around the same tenant, getting into a rhythm with a long-term renter is often easier. As a landlord, you can build a reputation that leads to others becoming interested in your property for long-term passive income. 

Investing in an ADU

An accessory dwelling unit can be an excellent investment opportunity to earn passive income without leaving your property. When you carefully consider what renting out an ADU would mean, you can confidently decide whether it is right for you.