5 Ways an ADU/JADU Investment Can Produce ROI

An Accessory Dwelling Unit (ADU) is an accessory dwelling unit with complete, independent living facilities for one or more persons. There are three main types, those attached to the primary structure, detached ADUs in which the unit is separated from the primary structure, and converted, in which a space (e.g., master bedroom, attached garage, a storage area, or a accessory structure) on the lot of the primary residence is converted into an independent living unit. A JADU is a dwelling unit attached to the main house, not exceeding 500 square feet, and which may share bathroom and/or kitchen facilitation with the main dwelling. Both ADUs and JADUs can be moneymakers for homeowners looking for short-term cash flow and a long-term investment.

In California, prior to 2016, legally converting or building an ADU was met with a host of local regulations to the point that an ADU didn’t make financial sense. Today, due to much relaxed ordinance changes in California statewide legislation, homeowners in single-family neighborhoods are now able to legally build, convert or permit ADU/JADUs on their property. A single property is allowed to have one of each type, an ADU plus a JADU, thus potentially admitting of three dwelling units (including the main dwelling) on the same lot. These units have rapidly become a popular way to offset a mortgage with rental income and increase home values.

The math is relatively easy to figure out. Just compare the cost of permitting an existing structure or building a new ADU/JADU with the amount of anticipated rental income over the years. The costs to build can vary depending upon the square footage, whether its attached or detached, a conversion, and the design specifics of proposed ADU/JADU. Garages and other previously built structures can be converted to ADUs, which is a way to save money. JADU’s, since they generally can avoid most of the costs associated with new construction, tend to be the most affordable option. Take note, permitting takes time and it’s best to hire an architect to walk you through the process. Bottom line, an ADU/JADU is an investment upfront, but it will pay off in the long term. Here are five strategies for your return on investment.

#1: Rent the ADU/JADU to a Tenant
The first place to look for income is to rent out the unit. This will mean guaranteed, monthly income as long as the unit is rented. Screening applicants carefully for a reputable tenant is important because they will be residing on the main house property and potentially sharing common space. In order research the amount of this prospective income, it’s a good idea to do some research to find comps in your area. One resource to check might be an online comparison tool such as Rentometer. Consider the amenities your prospective ADU/JADU offers when setting researching the prospective rental rate,

#2: Build a Space for a Home Office or Studio
An ADU/JADU is a perfect solution for those in need of a home office or a studio in which to work. There are many folks throughout California who work from home, but don’t want to pay for a separate office. One effect of the recent COVID-19 pandemic is a shift to working from home. Some employers have even offered incentives to employees to create home offices, including reimbursement. And, if you’re self-employed or own your own business, you can get tax breaks from your home office as well. The square footage that is dedicated solely for work may be an income tax deduction come tax time. Be sure to consult with your tax advisor for details on how and when this deduction can be taken.

#3: Build it as a Coworking Space
Coworking spaces are starting to catch on across the country and they’re not a bad way to make some money for yourself. Bear in mind although it may seem tempting to eliminate the bathroom and/or kitchen facilities when exercising this option in order to shave first costs,the ADU regulations absolutely require that these facilities be built into the unit. Also be sure to check with your local regulatory authority to be sure about the rules which may (or may not) apply to renting ADUs in this manner when exercising this option.

#4: Create a Roommate Dwelling
This is a perfect situation for baby boomers who want to create additional space, either for their grown children, or for aging parents/grandparents. As senior housing, ADUs allow extended families to be near one another while maintaining privacy. ADUs give homeowners the flexibility to share independent living areas with family members, allowing seniors to age in place as they require more care.

Nowadays it has become extremely difficult for boomerang kids to find their own apartments or houses due to the unaffordable housing market. While they are holding down jobs and starting careers, millennials are also struggling to pay back student loan debt. Accessory dwelling keep the family together on one property. Instead of just texting and calling your boomerang kid, you can connect with them face-to-face in a multigenerational household. With almost 22 percent of adults between 23 and 37 years old moving back in with their parents, ADU’s are a fantastic alternative for families to spend time with their loved ones while supporting them the best way they can. By letting your loved one live in your investment property, you are also supporting them to build a stronger financial foundation for their lives.

#5: Increase your Property Value
The big payoff will be when it comes time to appraise the home and there is both a habitable dwelling on the property with permitted square footage and a rental property to consider.

How much more value can an ADU/JADU add to the value of the home? A property appraisal can help with that question. A market appraisal is one which compares similar properties in the neighborhood. When placing a value on a property that has an ADU/JADU, the appraiser needs to find other homes in the area that also have an occupied ADU/JADU. Depending upon the neighborhood, there can be several homes as comps and the appraiser can then arrive at a fair market value of the entire property, including the ADU. In areas where there are few homes available as comps, the appraiser can take the income approach and compile a comparative market analysis taking the net rental income from the prospective accessory unit(s). This additional revenue adds value to the property and is listed as such on the final appraisal report. The addition of a ADU/JADU will ultimately make the property listing more attractive to buyers and add additional value when it’s time to sell the home.

If you’re thinking of ways to improve the value of your home while generating monthly, passive income, building an ADU, JADU, or both might very well be the right solution.

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