It’s safe to say that the current housing market is pretty confusing. Convoluted with rising high-density housing options and increasing mortgage rates, many people aren’t as eager to move as they are to find creative ways to maximize the available living space on their property.

And if you have the land, why not use it? Building an ADU in your backyard may be a great option if you have the space. For starters, it can significantly increase your property value. But depending on your needs, it could provide an additional passive income source. Win, win.

If all of this is starting to sound pretty good, continue reading this guide to learn more about renovating your backyard space — and how RenoFi can help you finance it.

What is a backyard cottage?

First things first, let’s define what a backyard ADU is. ADU stands for an “accessory dwelling unit,” and a backyard ADU is — you guessed it — in your backyard. It is also commonly referred to as a backyard cottage or granny flat.

These units provide an affordable housing option that maintains the same look and feel as the primary house on the same property. In many cases, people convert an unused detached garage into a backyard ADU to take advantage of the existing structure.

How is a backyard cottage different from a tiny home?

You may have also heard of the new trend: tiny homes. But they’re a little different. These homes are most commonly on wheels and are meant to be moved from location to location — great for the nomad lifestyle. But even if the wheels are removed, a tiny home is still different in that it’s designed with the recent trend of downsizing, or “living small,” in mind.

Conversely, a backyard cottage is a permanent structure and must consist of complete amenities, including a kitchen, living area, bedroom, and bathroom. While it shares the same lot as a house, it is a residential structure that’s completely self-contained and physically separate from the primary residence.

Construction limitations

Given the size and shape of your backyard, you may be limited in terms of design when it comes to designing and building your backyard ADU. But even if you’re not working with a lot of space, many backyard cottages have been built on 5,000 square feet or less, so there is proof it can be done!

In fact, due to regulations, the backyard cottage itself cannot be larger than 800 sq. ft. in size. You have to ensure the new building complies with your local zoning, ordinances, and building codes, and permits and inspections will be required. It also has to “look” the part too. In other words, it should keep with the style of the neighborhood/area. If you have any questions, be sure to check with local officials because every city and state will have their own unique laws and regulations when it comes to backyard ADUs.

In many places like Northern California, for example, a backyard cottage cannot be sold if there isn’t a primary home present before it. That’s because in order to legally be considered an ADU, the unit needs to be on the same lot as a primary home.

That being said, you have to keep in mind that the new construction and additional square footage will likely increase both your property value and real estate taxes too. Even further, if you’re renting your backyard ADU out to a tenant, additional insurance premiums and property taxes may apply.

Benefits of building a backyard ADU

There are a lot of great benefits to building a backyard ADU — especially in today’s unique housing market. Instead of investing in new property, an ADU allows you to do a number of things, depending on how you plan to use it.

First and foremost, it provides a self-sufficient space to reduce your carbon footprint. If you’re planning on renting out your backyard ADU, it can help reduce your current property’s expenses and maintenance costs, while enjoying an additional revenue stream. If not, it can create a space to accommodate aging parents or independent adult children. In many cases, this is a great way to save money when supporting these elderly relatives since nursing homes and other living facilities will likely have higher monthly costs. Plus, your loved ones will be right there in the backyard should they need anything.

When it comes to the construction of the unit itself, the process is a lot more straightforward. This is because the unit is separate from the main house, so it won’t depend on the quality or conditions of the primary dwelling or garage when designing or building it out.

Backyard ADUs and neighbor privacy

When considering your backyard ADU from a renter’s perspective, the draw of backyard cottages is the location. Essentially, you’re offering a tenant all the same amenities and features that someone living in a single-family neighborhood would enjoy — including more privacy, low-traffic streets, and quiet surroundings. Of course, it goes without saying that that also involves being conscious and respectful of the landlords in the primary home and other neighbors.

To help make that easier on everyone, consider adding hedges, shrubs, trees, or a trellis in your backyard to help provide natural and aesthetically pleasing barriers between the ADU and the primary dwelling.

There are several other privacy factors you should consider as well, such as:

  • The views your ADU has into other homes (i.e., window placements and the orientation of the unit)
  • Noise levels and sound insulation because of the proximity of the other homes
  • Location of entry routes and parking spaces for both the ADU and the main house
  • Private vs. shared outdoor spaces like a backyard patio, porch, or parking lot
  • The distance of the ADU from your neighbors’ property lines
  • How your backyard cottage might impact or obstruct your neighbors’ views or privacy

With all this considered, a backyard ADU is still its own separate dwelling, and detached ADUs are the most valuable and desirable unit for tenants seeking privacy in their new home.

ADU financing options

You have a lot of options when it comes to financing the construction of your ADU, many of which include a HELOC or home equity loan, a construction loan, or cash out refinance. BUT there is a better option out there: a RenoFi loan. Why? Well, it factors in what your entire property will be worth after your ADU construction is complete, meaning you can borrow all the money you need at a lower rate.

To explore and compare all your options in more detail and to learn how RenoFi can help you, check out our ADU financing guide or contact one of our renovation advisors today!

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