So you’ve heard the buzz about Accessory Dwelling Units (ADUs) and have been doing a little research. You’ve found some info on the cost of an ADU and are now wondering if that price is worth it. Will adding an ADU to my home actually increase my property value?
While the actual value of an ADU depends on several factors — such as its size, quality, and local housing market — the answer is still certain: yes, it will.
Also known as granny flats or in-law suites, ADUs are a great investment. They’ve been increasing in popularity since 2020, making homes that have them highly sought after — regardless of the price tag. According to Porch.com, ADUs are growing at a rate of 100,000 per year, and on average, homes that have them are priced 35% more than homes without. As the housing market continues to appreciate, converting your existing space into additional living space adds value. With an ADU, homeowners can not only achieve a higher resale value but also enjoy the additional housing option for themselves, their families, or renters — which offers another source of income!
How Much Value Does an ADU Add?
So how do you know how much of an increase in value you can expect when adding an ADU? For starters, this is normally based on how much additional square footage the ADU will be adding to the home.
For example, if homes in your area are selling for $500 per square foot, then your 1,500 square foot home will likely be appraised at $750,000. That means that adding a 500 square foot ADU could tack on another $250,000 to your home’s value.
But you should note most ADUs will not achieve the full value of the current home per square foot. In reality, it’s close to a 30% increase in the home’s value. So if you are looking for a rough estimate of your increase, you can multiply your property’s current value by .30.
Another thing to keep in mind is that appraisals can vary based on how the ADU is categorized, i.e., if the ADU is considered additional living space for the homeowner, a rental property, etc.
Increasing Value for You and Your Family
A great way to make the most of your ADU is to enjoy it for yourself! And there are a number of practical ways that you and your family can use your new ADU. Here are just a few:
- Extra storage space to help declutter your garage, basement, etc.
- Play space for your children
- In-law suites to provide privacy when your family comes to stay
- Separate home office you can even invite clients to
- Private guest space
Another great perk is that this space can help you and your family save on hotels during the holidays or when guests visit. Before you make any decisions, we recommend checking with a local real estate agent to determine what kind of ADU would be in the highest demand in your area. This is important because if the new unit seems strange or out of place, it may lower your home’s value.
Passive Income from Renters
If you’re considering other uses for your ADU, many homeowners take advantage of renting out the space for additional income. In some areas, ADUs are so highly sought after that the rent earned can cover your mortgage costs, allowing you to live for free as you pay it off.
Take a look at the specific regulations of your local municipality to determine whether you want to do short-term or long-term rentals. Some cities may only permit rentals for 30+ days. In this case, you would want tenants to sign a lease agreement or consider renting out your unit as a vacation rental.
ADUs are a great way to expand your short-term rental portfolio without investing in additional property. Utilizing Airbnb or VRBO, you can find potential renters and set agreements through their platforms, simplifying the landlord process. If you live in a popular area or near a tourist destination, this is definitely a lucrative option.
Which Type of ADU is the Most Valuable?
As previously mentioned, the value of your ADU depends on several factors. So yes, some types of ADU are more valuable than others.
The most valuable type of ADU is a detached ADU or granny flat that is separate from the primary residence. An attached ADU is the next highest in value, and an interior conversion — such as a garage or basement — is the third highest in value.
Detached vs. Attached ADU Value
With a separate or detached ADU, you can increase the amount of inhabitable square footage on your property, which appraisers will use to calculate your home’s increased value.
For example, if your area’s average cost per square foot is $500, then a new 1,000-square-foot detached ADU could increase your property value by $500,000.
The same rules of appraisals in determining your home’s worth would apply for an attached ADU, but since it is attached to your primary residence, it offers less privacy when used by guests or renters. Another important thing to note is the ADU ordinance limits the amount of square footage you can add when the unit is attached to the primary house. This addition can only extend your home by 50% of its current size.
For example, if your home is 1,200 square feet, this would mean your ADU can only be 600 square feet.
Do Prefab ADUs Lose Value?
Prefabricated (prefab) ADUs are detached ADUs that are partly or entirely manufactured in a factory and transported to your residence. This route offers a couple of benefits to homeowners. Since they’re manufactured remotely, they cause less disruption on your property than if you were building from the ground up. They also have a shorter construction time and permitting and inspection process, given that they’re pre-built.
That said, Prefab ADUs are a quick and easy way to increase your home’s value. Like all homes, however, they can still depreciate over time, so consider your location and make sure to maintain it properly. If you do, the renters will come.
Basement or Garage ADU Value
Similar to the other ADUs, an interior ADU conversion will boost the value of your home — it just won’t be by as much as a detached or attached unit. Since the space already exists as part of your home, interior conversions offer a solid ROI since they are less expensive to construct. But you’re not technically adding any new square footage to your home — you’re just making it livable. As a result, appraisers won’t be able to account for the extra square footage of living space your ADU provides. At the same time, you’ll be losing the use of that space for its intended purpose. For example, if you’re converting your garage, that’s less secured parking for your vehicles.
But if you will be renting this space out, one major benefit of these conversions is the ability to generate $1,500 or possibly more per month in gross rental revenue.
To recap, certain types of well-maintained ADUs will be more valuable than others, depending on features and purpose. But in the end, they are all likely to increase your home’s value. If your ADU has full bathrooms, kitchens, and bathrooms, they’ll be far more valuable than those with half baths and kitchenettes.
Let’s look at Houston, Texas, for example. According to Trulia, the average price of a home in Houston is $226,900. But the average price of a home with an ADU in the same area is $582,500 — over $355,000 more.
The math just makes sense, and the numbers don’t lie — adding an ADU to your property can provide an incredible return on investment. If you are interested in adding an ADU to your primary residence, speak with RenoFi today to learn more about your financing options.