Unlocking additional income with an Accessory Dwelling Unit (ADU) can be a great way to utilize your property and generate extra revenue. ADUs are secondary living units that are standalone structures that are built on a single-family residential lot. Since they are a separate building, they make a great rental unit to help you generate passive income. Here are steps you can take to maximize additional income with ADUs:
Legal and Zoning Requirements
Before you can generate additional income with ADUs, ensure that your local zoning regulations and building codes allow for ADUs on your property. You might need to obtain permits and comply with specific regulations related to size, design, parking, and occupancy. But fear not! With California’s affordable housing crisis, many regulations have been loosened to help provide more housing for the masses. For example, Gov. Code, § 65852.2, subd. (a)(3) and (b) reduces the maximum ADU and JADU application review time from 120 days to 60 days and AB 670 provides that “covenants, conditions and restrictions that either effectively prohibit or unreasonably restrict the construction or use of an ADU or JADU on a lot zoned for single-family residential use are void and unenforceable.”
Design and Build
Plan the design and construction of your ADU. Consider factors like the size and shape of your property, where the unit would connect to your home for water and electrical lines, and how your renters or guests would access the unit. Also think about the style that would best work with your existing structure and the environment. If you have a craftsman home, then a simple, clean ADU would complement your home. If you have a large backyard, you might want to consider going for the larger two bedroom unit to maximize space and additional income with your ADU.
Calculate the costs associated with constructing the ADU. This includes construction, materials, permits, utilities, landscaping, and any necessary upgrades. Compare this to the potential rental income to determine your return on investment. As a landlord, also think about what materials last the longest. Carpet in the bedroom may warm up the room, but stains and wear and tear are inevitable and will probably require new flooring for each new tenant. A marble backsplash may look timeless, but the upkeep probably isn’t worth the effort. Go with a quartz instead.
Additional Income with ADUs
Research the local rental market to understand the demand for housing in your area in order to get the most additional income with ADUs. Analyze the rent potential for similar ADUs to set a competitive rental rate that maximizes your income while remaining attractive to potential tenants. This is where a trusted real estate agent is invaluable. Not only can they tell you what your property is worth before the ADU addition, but they’ll give you the new potential value and what rental income you could generate. Furthermore, they probably know good property managers that can get you started as a landlord.
Marketing and Tenant Screening
Once the ADU is ready, market it to potential tenants. Create compelling listings with high-quality photos and detailed descriptions. Implement a thorough tenant screening process to ensure reliable and responsible renters. When you ask for the right amount of rent (too low and you may attract the wrong crowd, too high and you won’t attract any potential renters) you’ll likely have a pool of renters to pick from. The more options you have, the more secure you can feel in renting out your ADU.
Draft a comprehensive lease agreement that outlines terms, rental rates, security deposits, and tenant responsibilities. Ensure that the agreement complies with local landlord-tenant laws. While it may seem cheaper and easier to just pull one from the Internet, don’t. There’s a lot at stake here. The additional income with ADUs that you could make could be negated with a poor contract.
Decide whether you’ll manage the ADU yourself or hire a property management company. Property managers can handle tenant communication, maintenance, repairs, and rent collection for a fee. While this may seem to dip into your additional income with ADUs, consider the time and energy it would cost for you to maintain it yourself. Let’s also take a moment to bring up landlord insurance. Let’s say you have a gravel path that leads from the front of the house to the ADU. If a renter slips and falls, you want to be covered if they decide to sue you. Or maybe you’re afraid of vandalism and careless renters. For an additional fee, you may want extra coverage.
Long-Term vs. Short-Term Rentals
Depending on your location and property, you might choose between long-term and short-term rentals (such as through platforms like Airbnb). Short-term rentals can potentially yield higher income but require more active management. With a short-term rental, you’re likely going to have to clean it on a weekly or monthly basis (based on how long your renters stay) and short term renters are usually harder on the property. You’ll also have to consider your location; if you live near a beach or amusement park, take into consideration the on and off seasons and adjust your rent accordingly. However, with a long-term rental, your renters will usually sign a one year lease. While you may make less on paper, you won’t have to pay for extra cleaning costs or create ads to constantly generate new traffic.
Furnishing and Amenities
Furnishing the ADU can make it more attractive to potential tenants, especially if you’re targeting the short-term rental market. Consider including essential furnishings and amenities like a fully equipped kitchen, internet access, and laundry facilities.
Keep the ADU well-maintained and address repairs promptly. Providing a clean and functional living space enhances tenant satisfaction and encourages positive reviews, which can lead to higher occupancy rates.
Adapt to Feedback
Pay attention to tenant feedback and reviews to make necessary improvements and adjustments. Happy tenants are more likely to renew their leases, saving you the effort and cost of finding new tenants.
Legal and Tax Considerations
Consult with legal and tax professionals to understand the implications of rental income, property taxes, insurance, and other financial aspects of managing an ADU.
Remember that the success of generating additional income from an ADU depends on factors such as location, market demand, property condition, and your management approach. Thorough research, careful planning, and effective management will contribute to maximizing your income potential from an ADU. Call ADU Warehouse to learn more! We work with reputable real estate agents, insurance brokers, and property managers to help you every step of the way!