Understanding ADUs and Navigating the Challenges of Building ADU Housing in 2023

ADUs are rising in popularity which may leave you wondering what does ADU stand for?

ADU stands for “Accessory Dwelling Unit,” which is a secondary residence or structure on your property. Meaning this structure must function on its own as a dwelling, but it wouldn’t have a separate address. Accessory Dwelling Units (ADUs) open a lot of doors for homeowners.

With an ADU unit, Grandma can have her own independent space, your college graduate that moved back in can get some alone time, or you can use it as a space for Airbnb or rentals. That being said, many homeowners struggle with proposing ADUs that meet their local planning department’s requirements, obtaining the necessary permits, and finding an honest and reliable construction team. However, those who have constructed ADUs note the benefits that these units provide; for example, creating a source of supplemental rental income or providing multigenerational housing.

Before you begin planning your ADU build, you’ll need to know some of the biggest challenges that homeowners face when constructing ADUs and how you can solve them with ease and get on your way to your brand new ADU.

Keep reading to learn everything you need to know about ADUs.

What is an ADU?

So, what is an ADU exactly? Let’s break down the ADU meaning.

ADU stands for “Accessory Dwelling Unit,” which is a self-contained living space that is either attached to or located on the same property as a primary residence. ADUs are often referred to as granny flats, in-law suites, backyard cottages, or secondary suites. ADU units are designed to provide additional housing options and can serve various purposes, such as accommodating family members, generating rental income, or providing extra living space for the homeowner.

ADUs typically have their own separate entrance, kitchen, bathroom, and living area, making them independent units despite being located on the same property as the main dwelling. ADUs have gained popularity as a means to address housing affordability, promote multi-generational living, and make efficient use of existing urban spaces.

Financing the construction of an ADU, while a significant barrier, is not the only hurdle faced by homeowners seeking to add an ADU unit to their property.

ADU Types

• Detached ADUs: These are standalone ADU units that are separate from the primary dwelling. They can be freestanding structures like cottages, tiny houses, or converted garages or outbuildings. Detached ADUs offer a higher level of privacy and can be designed to blend with the main property or have a distinct architectural style.
• Attached ADUs: Also known as “junior ADUs” or “in-law suites,” attached ADUs are integrated into the primary dwelling. They often have a separate entrance but share certain utilities or spaces with the main house. Attached ADUs are typically smaller in size and can be created by converting an existing portion of the primary dwelling.
• Converted ADUs: These ADUs involve converting existing spaces within the primary dwelling, such as a basement, attic, or garage, into a separate living unit. Garage conversions and basement apartments are popular forms of converted ADUs. They can be an affordable option for homeowners as they repurpose existing space.

ADU Regulations and Zoning Requirements

ADU regulations and zoning requirements vary significantly between different jurisdictions, so it is important to research and comply with local guidelines. Some common regulations include:

• Minimum and maximum size requirements for ADUs.
• Limitations on the number of bedrooms or occupants.
• Parking requirements, such as providing off-street parking spaces.
• Design and setback requirements, ensuring ADUs maintain a harmonious relationship with the existing property and neighborhood.
• Approval processes, which may involve obtaining permits, inspections, or complying with additional building codes.

It’s crucial to consult local planning departments or zoning authorities to understand the specific regulations and requirements for ADUs in your area. They can provide valuable insights on zoning restrictions, permitting procedures, and any specific design guidelines to follow.

2023 ADU Costs and Design Trends

The cost of building an Accessory Dwelling Unit (ADU) can vary significantly depending on factors such as location, size, design complexity, materials used, and local construction costs. On average, ADU construction costs in the United States range anywhere from $100,000 to $300,000, and most people aren’t able to save that kind of money or borrow it from a family member - hence why people turn to RenoFi ADU financing.

Converting existing structures, such as garages or basements, tends to be more budget-friendly than constructing a new standalone unit. Additionally, factors like utility connections, permits, and design modifications can influence the overall cost. Despite the initial investment, ADUs can provide a valuable return on investment through rental income or increased property value, making them a financially beneficial choice for many homeowners.

• Basement apartments: Basements can be converted into independent living spaces by adding bedrooms, bathrooms, a kitchen, and a separate entrance. Adequate natural light, proper ventilation, and compliance with building codes are important considerations for basement ADU design. Basement renovations cost anywhere from $18,000 - $45,000+ and an additional $15,000+ when converting to an ADU style.
• Garage conversions: Converting a garage into an ADU unit involves transforming the space into a living area, complete with necessary amenities. This can be a cost-effective solution, especially when the garage is not fully utilized. Local regulations may dictate requirements for parking alternatives if the garage is converted. Garage renovations cost anywhere from $10,000 - $20,000+ and an additional $75,000+ when incorporating ADU designs.
• Standalone structures: Detached ADUs can be designed as separate buildings, such as cottages or tiny houses. These structures provide a higher degree of privacy and can be designed to complement the main dwelling or create a unique architectural statement. According to Angie’s list stand-alone ADU units cost ranges from $150 to $300 per square foot. However, it’s essential to note that certain ADUs can exceed $600 per square foot, depending on design complexity and materials used. Typically, ADUs fall within the 600 to 1,200 square feet range, but the final size can be tailored to individual preferences and specific needs.

How to Pay For ADU Renovations: Smart Financing Options

Financing for ADU options has evolved in recent years, and it’s important to explore the options available in 2023. Here are some financing avenues to consider:

Personal Loans

Personal loans or unsecured loans, can be used for ADU renovations. These loans do not require collateral and can be obtained based on your creditworthiness. However, personal loans aren’t the smartest option as they may come with higher interest rates compared to home equity loans.

RenoFi Home Improvement Loans

A RenoFi loan allows you to borrow up to 90% of the after-renovation value of your home without the need to refinance your first mortgage. RenoFi offers competitive rates, lower fees, and a streamlined process and works with credit unions for savings, flexibility, and personalized support throughout your home renovation journey. RenoFi loans are considered one of the best options for ADU financing due to their favorable terms and structure.

Home Equity Loans or Home Equity Lines of Credit

Homeowners can utilize a home equity loan or line of credit to finance ADU renovations by borrowing against their property’s value via a home renovation loan. 

In particular, home equity loans often offer lower interest rates compared to other loan types, making them an appealing option for ADU projects. Since ADUs are viewed as home improvements, lenders see them as an investment that enhances property value, reducing their risk. Lower interest rates when using a home equity loan for an ADU - lies in the fact that ADUs are often considered as an extension of the primary residence. Unlike other types of loans, where the purpose of borrowing may vary (e.g., personal loans, credit cards, etc.), using a home equity loan for an ADU is perceived as a home improvement project.

This perception of home improvement carries certain advantages when securing a home equity loan. Lenders tend to view ADUs as an enhancement to the property’s value, which reduces their risk. Therefore, they are more inclined to offer homeowners more favorable interest rates compared to unsecured loans like personal loans or credit card debt. Still, when using a home equity loan or HELOC, keep in mind that you are putting your home at risk as collateral.

ADU Expert Tip: Also, it’s important to recognize that individual lenders’ policies and market conditions may still influence the final interest rate, so homeowners should shop lenders to compare offers to secure the best possible terms (which you can quickly do below).

Government Programs and Grants

Various government programs and grants are available at the local, state, and federal levels to promote affordable housing and ADU development. These programs may provide financial assistance, low-interest loans, or grants specifically targeted toward ADU construction or renovation. It’s advisable to research and inquire about such programs with local housing authorities, community development organizations, or your municipality’s planning department.

Some of these programs include: 

• Fannie Mae Homestyle Loan 
• FHA 203K Loan

Construction Loans

If you plan to build a new ADU from scratch, a construction loan can provide the necessary funds to cover the construction costs. Construction loans are typically short-term loans that provide funds in stages as the project progresses. After the construction is completed, you may need to refinance the loan into a long-term mortgage or another financing option.

2023’s Most Important ADU Considerations

The landscape of ADUs in 2023 continues to evolve, with new considerations emerging for homeowners interested in building or renovating ADUs. Let’s explore some key factors to consider in relation to ADUs this year:

Updated Regulations and Policies

Regulations and policies surrounding ADUs are continually being revised to accommodate the increasing demand for these housing options. Homeowners should stay informed about any new or updated regulations in their specific jurisdiction, including changes in size limitations, parking requirements, permitting processes, and design guidelines. It’s important to consult with local authorities or planning departments to ensure compliance with the latest regulations.

Financial Incentives and Tax Benefits

Governments and local municipalities are recognizing the value of ADUs in addressing housing shortages and are introducing financial incentives and tax benefits to encourage their construction or renovation. Homeowners should explore potential grants, low-interest loans, or tax credits available in their area to offset costs associated with ADU projects. These incentives may vary by location, so it’s recommended to research local programs and consult with financial advisors.

For example, making sustainable changes to your home may even qualify you for certain tax credits like the Residential Clean Energy Credit. The Residential Clean Energy Credit allows individuals to receive a tax credit equal to 30% of the costs of new, qualified clean energy property for their homes installed between 2022 and 2033. The credit is nonrefundable and cannot exceed the amount of tax owed. Excess unused credit can be carried forward to future years. There are no annual or lifetime dollar limits, except for fuel cell property, and the credit can be claimed annually until it begins to phase out in 2033.

Sustainability and Smart Home Integrations

The focus on sustainable building practices and energy efficiency has gained prominence in the ADU industry. Homeowners are increasingly considering eco-friendly materials, energy-saving technologies, and solar power options to reduce their environmental footprint and lower utility costs. Incorporating features like energy-efficient appliances, proper insulation, LED lighting, and smart thermostats can enhance the sustainability and efficiency of ADUs.

The integration of smart home technology into ADUs has also become a popular trend. Homeowners are incorporating smart thermostats, automated lighting systems, security cameras, and remote access controls to enhance convenience, comfort, and security. Smart home technology allows for remote monitoring and control of various systems within the ADU, providing homeowners with greater flexibility and peace of mind. Don’t forget to check if any of these upgrades can help you qualify for the Residential Clean Energy Credit. 

Accessory Structures and Outdoor Living Spaces

In addition to the ADU itself, homeowners are paying more attention to creating functional and attractive outdoor living spaces and incorporating accessory structures. Backyard cottages, standalone studios, or additional storage units are being designed to complement the ADU units and meet various lifestyle needs. Outdoor amenities like patios, decks, gardens, and outdoor kitchens are being incorporated to enhance the overall livability and appeal of ADU projects.

The Benefits Of An ADU (Pros) 

Accessory Dwelling Units (ADUs) offer numerous benefits to homeowners, communities, and the housing market. Some of the key advantages of ADUs include:

1. Increased Housing Options

ADUs provide additional housing options within established neighborhoods, allowing homeowners to accommodate family members, aging parents, or renters without the need for extensive new developments.

2. Sustainable Living

ADUs promote sustainable living by utilizing existing infrastructure and reducing the need for new developments, which can help conserve resources and reduce carbon footprints.

3. Flexibility and Adaptability 

ADUs can serve multiple purposes over time. They can be used as guest houses, home offices, studios, or rental units, providing flexibility to homeowners as their needs change.

The Challenges Of An ADU (Cons) 

Building ADU housing can be beneficial to homeowners, but there are a handful of challenges they need to prepare to face if they want to make this type of addition to their home. 

1. Approval Process & Permitting Fees

One of the biggest challenges that homeowners face with building ADUs is government approval and permitting.

What states allow ADU? Most states allow the addition of ADUs to a home in one form or another, but it’s important to focus on local requirements as cities and counties can have unique requirements for building ADUs. 

Overall, 50% of homeowners found it difficult to build their ADUs to their city/county’s development standards. Many people struggle with the length and complexity of the permitting process and feel like their jurisdictions impose unnecessary red tape in the permitting process. 

Even architects struggle to navigate through the different departments’ requirements. 

Unlike other home renovation projects, ADUs have much more stringent legal requirements that have to be met and reviewed by your local municipality. 

Not only that, because they’ve only been allowed as of recently in California through the SB-9, some municipalities continue to be hesitant with the approval process and might drag their feet. 

So, knowing that most people find this difficult, these are the steps you must take to have a smooth approval process:

• Don’t file for permits at the last minute. While not every process takes this long, it can take more than six months to get ADU permits approved by your local authority. We don’t mean to scare you, we just want you to be realistic. If you’re all set to go to build your ADU and are hoping to submit your permit request at the last minute and get started, you may want to reset your expectations. 
• Prepare every item on your county’s ADU permit checklist. Your county website should lay out instructions for you and your builder to read before submitting a permit. Usually, they’ll have a checklist of all the documents you’ll need, as all the rules your ADU plans need to follow if you want them to be approved.  For example, this is the San Jose County ADU checklist.
• Review your building plans with your contractor to make sure they fit the requirements. Although we’d hope your contractor is deeply familiar with the ADU permit process in your county, ADUs are a new trend and have only just become possible in many areas. They may also be in the dark about some requirements. So, sit down with your contractor’s plans and your county’s requirements, and make sure the plans include everything.
• Submit your application/meet with your local jurisdiction to review the application. If you’ve done the work in advance, your application should be approved and/or this meeting should go well. If you missed some details, your application will get denied and you’ll have to start over. Unfortunately, in counties with more vague guidelines, you may not even be aware of a problem with your build until submitting your application.

2. Design Constraints

Another challenge that homeowners face with ADUs is design constraints. While there are a lot of ADU options when it comes to designs, hidden design regulations or standards can halt progress immediately. 

Unlike a kitchen renovation or addition project, ADUs are fully new builds that require a lot more architectural and engineering expertise. While a kitchen reno is fully inside of your home and within your purview, things that are outside on your property could affect other people. To make sure that your design won’t get flagged, you should consider pre-approved plans.

Under the Standard Plan Program, plans are designed by private licensed architects, and engineers to accommodate various site conditions.

Plans are then reviewed and pre-approved for compliance with the Building, Residential, and Green Codes. 

When an applicant selects an approved Standard Plan, staff will review site-specific factors for your property, including compliance with the Zoning Code and foundation requirements.

In certain counties and states, you can find a listing of several ready-to-go blueprints that have already been through the approval process (if you want to make changes to these, make sure you still consult with your architect). But even if you use a pre-approved plan, you’ll still need to watch out for these potential problems: 

• Lot, Setback, or Height Limits: If your local jurisdiction has no ordinance regulating ADUs, then you can build up to 1200 square feet, 16 feet high, with four-foot side and rear yard setbacks - and there are no requirements based on Floor-Area-Ratios (FAR), lot coverage, open space, or minimum lot size, according to the UC Berkeley Center for Community Innovation.

  If your property is in a jurisdiction with its own ADU ordinances, the regulations can limit you to 850 sq ft (or 1000 sq ft if the ADU has 2+ bedrooms) and it can impose requirements based on Floor-Area Ratios (FAR), lot coverage, open space and minimum lot size. 

  But there is a “statewide exemption ADU” where you can build an ADU housing structure up to 800 square feet, 16 feet high, and with four-foot side and rear yard setbacks, and it should be exempt from the FAR, lot coverage, open space, and minimum lot size requirements.

• Utility Connections: ADUs access sanitary sewer and water service by connecting to the main sewer and water service of the primary residence, so you’ll need to make sure that the design coordinates with your main sewer and water service so that you don’t need to move the location.

  Water and sewer connections are accessed through the basement of the primary residence. ADUs connect to existing electrical service through a new meter, allowing the unit to pay for its own electricity.

• Parking Requirements: Parking requirements for ADUs cannot exceed one parking space per unit or bedroom, whichever is less. These spaces may be provided as tandem parking on a driveway. Guest parking spaces aren’t required for ADUs under any circumstances.

3. Obtaining Financing & Cost of Construction

ADU costs can add up quickly. According to a survey from the UC Berkeley Center for Community Innovation, (24%) of homeowners surveyed cited paying for the cost of construction as a top challenge associated with constructing their ADU, and (5%) struggled to obtain financing for their projects. 

This is quite astounding, considering the fact that the homeowners in this survey are more affluent than the typical Californian homeowner. Overall, 62% of homeowners depended wholly or partially on cash savings, or money from a friend or a relative, to finance their new ADU.

While in this survey the majority of homeowners paid for their ADU without a renovation loan, this isn’t realistic for the average person.  An ADU can cost anywhere from $30,000 to $400,000, and most people aren’t able to save that kind of money or borrow it from a family member. 

So how can you afford an ADU?

Sometimes homeowners struggle to use traditional loan options like HELOCs, and personal loans because it’s difficult to borrow the full amount you’ll need. But there are several different ways to finance an ADU

ADU Expert Tip: To expedite the construction of your ADU, collaborate with a knowledgeable architect or ADU specialist who is familiar with local building codes. Their expertise will help ensure compliance with regulations and accelerate the approval process for your ADU project.

Expert ADU Design Tips and Functional Concepts

ADUs offer incredible potential for homeowners to create versatile living spaces that meet their specific needs. To make the most of your ADU renovation in 2023, consider these design tips and functional ideas based on the latest trends and preferences:

• Embrace open concept designs: Open floor plans are popular in ADUs as they create a sense of spaciousness and flexibility. Design the main living area to flow seamlessly from one space to another, combining the kitchen, dining, and living areas. This open-concept design maximizes natural light, enhances functionality, and provides a welcoming atmosphere.
• Create multi-functional spaces: ADUs often have limited square footage, so it’s essential to make every inch count. Incorporate multi-functional spaces that can serve multiple purposes. For example, a guest room can double as a home office or a living area can include a built-in Murphy bed for additional sleeping space.
• Optimize storage solutions: Efficient storage is crucial in ADUs to maintain a clutter-free environment. Utilize creative storage solutions such as built-in cabinets, under-stair storage, wall-mounted shelves, or hidden storage compartments. Consider incorporating dual-purpose furniture with built-in storage, such as ottomans or coffee tables with hidden compartments.
• Prioritize natural light: Maximize natural light in your ADU by incorporating large windows, skylights, and glass doors. Natural light not only enhances the aesthetic appeal of the space but also makes it feel more spacious and inviting. Additionally, consider using light-colored paint and reflective surfaces to bounce light around the rooms.
• Choose flexible furniture and a modular design: To maximize flexibility, choose furniture that can easily be rearranged or folded away to adapt to changing needs. Modular furniture pieces allow for versatility and can be customized to fit specific spaces. For example, a sectional sofa with movable components can be adjusted to accommodate different seating arrangements.
• Integrate the outdoors: If possible, connect your ADU to outdoor living spaces. Create a seamless transition between indoor and outdoor areas by incorporating features such as sliding glass doors, a patio, or a deck. Outdoor spaces can expand the usable area of your ADU and provide a pleasant extension of living space.
• Be thoughtful with landscaping: Pay attention to the surrounding landscape to enhance the overall appeal of your ADU. Consider adding greenery, plants, and garden elements that complement the architectural style of both the ADU and the main dwelling. Thoughtful landscaping can create a serene and inviting atmosphere.
• Incorporate energy efficiency and sustainability: Incorporate energy-efficient appliances, LED lighting, and smart thermostats to reduce energy consumption. Choose eco-friendly materials and consider installing solar panels. Energy-efficient design not only benefits the environment but also reduces utility costs in the long run.

Find an advisor to help you learn about smart ADU financing options.