Do you own an ADU? Have you thought about renting it out? Here are vital questions you need to ask yourself before making this lucrative investment.
ADU’s – accessory dwelling units – can be a significant investment but they’re also a great way to generate income. It may seem daunting to rent out your ADU, so here are some of the basics that you need to know along with a few tips to ensure that you attract the renters you want.
Why You Should Rent Out Your ADU
COVID-19 accelerated the real estate market in 2020 and 2021, but the housing shortage was well into effect before that. Many of us remember the crazy market in 2008 which resulted in a real estate crash due to toxic private mortgage lending and unregulated markets. When the housing bubble eventually popped, many homes foreclosed and builders stopped building. As our population continued to grow after this event, the rate of new homes didn’t increase at the same rate. It is estimated that 180,000 new homes are needed each year to keep up with demand but in past years building has hovered around 100,000 housing units per year. Basic Economics 101: Low Supply + High Demand = High Prices. Not enough houses on the market plus a huge demand for better work from home conditions created a real estate market that struggles to keep up.
Clearly the lack of housing also applies to rental properties. In 2009, the average rent in California was $973. In 2019, it was $1,657 according to the Department of Numbers. Check out this chart by Zumper:
So depending on your city and neighborhood, your rental income could easily exceed your monthly payment on your ADU. For example, if you purchased an ADU at $150k with 3% interest, 15 year loan, your monthly payment would be $1,036/month. (Of course, this is just an example, so please discuss your strategy with your financial advisor or lender for details specific to your unique situation.)
How Do You Start Renting Your ADU?
Before you decide to rent your ADU or backyard home, here are a few things to consider:
- Is there a separate backyard entrance and pathway that the renters can easily access to get to the ADU?
- What spaces are shared spaces? What part of the backyard or side yard can your renters use if they want to garden or relax outside? Can they use your laundry facilities if their ADU doesn’t have one or do they need to use a laundromat?
- If they have a car, where can they park? Do you have room on the street or are there any city guidelines that you need to follow?
- How will you split utilities? Will it be included in the rent?
- Do you allow pets? If so, is there a size limit, breed restrictions, and deposit required?
- Will this be a long term lease for a year or more or a month-to-month lease?
- Do you live near a popular attraction like an amusement park or beach? Would renting it out on Airbnb or Vrbo be a better option for your needs?
- How much should you charge? Apartments.com and Zillow are great ways to test the waters to see what the going rate in your area is.
How Do I Find Renters?
It can be scary renting out a room on your personal property to a stranger so this part of the process is clearly an important one. You have several options to ensure that you get a great renter. Some landlords choose to let friends and family members know first that they have a space for rent. This is great for character references and to find people who are referred to you. Another option is listing on Zillow. They have a great program called Zillow Rental Manager that will help you price you ADU, an app that lets you receive payments, you can screen applicants to sort out the ones with the most potential. Finally, run a credit check, background check, contact references and interview the top potential tenants. Is this part fun or easy? No. But it could save you a lot of hassle down the road. And do all of these checks and interviews even with those referral applicants!
What Are My Responsibilities as a Landlord?
Remember, this is a business and good reviews mean long term income. You’re responsible for the overall well being of the property which includes the plumbing, electrical, gardening, roof, and pest control. If you’re handy, great! If you’re not, make some connections before you have a problem.
Should I Hire a Property Manager?
So what if you have a full time job and you want the income of a rental property but not the hassle? A property manager or management company might be a great option for you. They’ll handle posting the ad for renters, getting the lease signed, finding contractors to address repairs, and collecting and depositing checks. The downside is that they’ll also charge you 5-10% of what you bring in in rent.
A property manager is also a great idea for the legal aspects of renting out your ADU. For example, some cities don’t allow ADUs to be rented on Airbnb sites so that they can be reserved for residents of that location. Also, if a tenant gets hurt on your property, neglects to pay rent, or damages your property, it could be helpful to have a third party to help navigate you through these hurdles.
How Do I Start?
Is an ADU the right investment for you? Call ADU Warehouse today to talk about your options. Let’s discuss your long term goals with your ADU (will you just rent it out for an income stream or do you want it to pay for itself to be a home for aging parents or grown children?), your budget and rental income potential, the options that come with our variety of backyard homes, and the timeline that is involved with this type of structure. We’re a team of contractors, real estate professionals, and the nicest people you’ll ever meet and we’re ready and excited to work with you.
