Are ADUs worth the investment? Learn how to save money, generate additional income, and avoid costly mistakes when buying a tiny home.
Are you thinking about investing in an Accessory Dwelling Unit? Many people are wondering if it’s worth the investment and there are a variety of things to consider from building costs to maintenance to paying taxes. We know that it’s a big decision for you and your family, so here are a few things to think about:
Building and Maintenance Costs
Here are a few financial reasons why people are choosing to invest in an ADU rather than purchasing a traditional home:
- The average cost of a traditional sized home in the U.S. is over $250k and the average home in California costs $440k. The average price of a tiny house is around $75k.
- The average home loan is about 10% of the cost of the home. For the average California home, that would amount to $44k and your monthly payment for a 30 year loan at 3% would be $1,855/month. Conversely, a tiny home would require $7,500 down and $316/month.
- It’s estimated that it costs $17,000/year to maintain a traditional home in California (and up to $27k/year in higher end communities). The cost of a tiny home per month is around $650/month (based on $500/month lot rental if applicable, insurance, and utilities).
- ArchitectsLA site that, “When done right, detached ADUs, in particular, have the potential to increase your property value by a whopping 20-30%.”
Reasons for Building an ADU & Their Associated Costs
From housing family members to generating additional income, here are additional factors to consider:
- Many people are using granny units for their grown children to live in while they’re going to college or to save up for a down payment for a home of their own. The average cost of a California apartment is $914/month for a studio apartment and $1,050 for a one bedroom according to RentData.org.
- As Baby Boomers enter their Golden Years, many grown children are struggling to decide how to care for aging parents. It can be costly and worrisome, and an ADU is a great solution. Consider that the average cost of a senior independent living community in California is $2,814 per month. (Clearly there are different levels of needs, and independent living is for seniors without major medical conditions or memory issues and can care for themselves.) This brings up another possibility: your loved one can live in your home and a live-in caregiver can live in the ADU to reduce costs and to ensure consistent and high quality care.
- Did you know that you can rent your tiny home out on websites like Airbnb or Vrbo? Rates run around $50 per night depending on location, size, time of year, etc.
Thinking about renting your ADU year round? Consider that just a room in a house costs anywhere between $650 to over $1,000 a month in the San Francisco Bay Area. However, there are a lot of laws and regulations pertaining to rentals of this kind, so contact your legal representative to ensure that you won’t be penalized.
Payments/Fees to Consider
As Benjamin Franklin poignantly said in 1789, “In this world, nothing is certain except death and taxes.” While we’ve talked about the financial benefits to owning an ADU, let’s take a moment to discuss additional costs of owning a tiny home.
- Property taxes – Once you build your ADU, this building will be assessed separately from your primary residential structure and you’ll be required to pay 1% of it’s taxable market value. For example, if the granny unit is valued at $100,000, your property tax will be $1,000. Thanks to Prop 13, this tax cannot exceed 2%. If you spread your tax payments over 12 months, that’s only $83.
- Rental Accounting – If you’re thinking about renting your ADU for additional income, consider creating an LLC. One benefit is if your renter gets hurt on the property and tries to sue you, your personal property and assets (your home, bank account, car, etc.) are not at risk in this lawsuit. Additionally, you can write off your ADU on your taxes up to $5,000. This includes start up fees, permits, and more. Additionally, the cost of the ADU is allowed to be depreciated over 27.5 years and you can write off this depreciated value. (Please discuss your options with your tax professional for details. Also, laws and regulations vary within the state concerning renting ADUs, so check with your local government to avoid penalties.)
Money Saving Tips
A basic granny unit can start at $20,000 and an all inclusive model including permits, site preparation, assembly, landscaping, and the unit itself can cost $200,000. Here are some suggestions that may help you save some cash:
- Prefab homes are cheaper than customized homes.
- Contact your city to see if they have pre-approved tiny home models to avoid complications and delays.
- Units less than 750 sq. ft. will cost less to build, and in accordance with state law, as of Jan. 1, 2020, these smaller units will not be subject to impact fees such as parkland and school fees.
- Before you begin, check with your city to see if they have an ADU Checklist like this one provided by the City of San Jose.
- Choose a reputable ADU company like ADUWarehouse that will carefully guide you through the process to avoid costly mistakes and will give you an honest, upfront price quote. ADU Warehouse also has a variety of floorplans, material options, and price points so you can invest in the tiny home that best suits your needs and budget.
Purchasing an ADU can be a great financial investment both to save money and to create an additional income. Investing in your future starts today, and ADUs can provide the convenience and affordability that you’re searching for. If you have any questions or are thinking about purchasing a backyard home, give us a call! We’d love to hear from you!
