Using an ADU (Accessory Dwelling Unit) as a rental property is a great way to generate passive income. Your renters can pay the mortgage and once it’s paid off, that’s a potentially steady income for future use. Or you can use the property for other purposes such as housing elderly parents, housing grown children, or having a home office. Here are the rules in California for renting out your ADU that you need to know. 

Please note that you should discuss all of these options with your real estate professional, financial advisor, legal advisor, and insurance broker to get all the specifics for your unique situation first!

  1. Short Term vs Long Term Rentals – While many rules and regulations have been loosened concerning the building and usage of ADUs, there are strict guidelines that the State of California has put on renting out your ADU. ADUs were intended to help with the state housing shortage and therefore in most cases they cannot be rented out for a time period of less than 30 days. Conversely, Airbnb prohibits any property from being rented over 90 days (in case you were wondering). In most instances, long term rental properties including homes and apartments tend to have contracts that are on a year to year basis.
  2. Does the Owner Have to Occupy the Property? – No. This is an amazing opportunity for real estate investors. Let’s say you own a rental property that has a lot of square footage. According to the State of California, you can rent out the main home while also renting out your ADU. You do not need to live in the primary residence to rent out your ADU. However, according to the HCD ADU Handbook, “The updates to State ADU Law removed the owner-occupancy requirement for newly created ADUs effective January 1, 2020. The new owner-occupancy exclusion is set to expire on December 31, 2024.”
  3. Permits – As with any property, be sure to have your ADU permitted! If you rent out an illegally built ADU, you could face expensive fees, citations, and other legal actions that are best to avoid. You should also check with your city concerning zoning laws and what local requirements are enacted where you live. Some HOAs and cities have strict regulations when it comes to rental properties.
  4. Creating a Lease – A smile and a handshake are definitely not enough when it comes to renting out your ADU to a tenant. Here are some important details to have in writing:
    1. How much is the rent and when is it due each month?
    2. As mentioned above, how long is the lease good for? Are you going on a month to month basis or is it for the entire year? This decision could be based on if you live in a college town and month to month may make more sense if they return home during the summer or a year to year lease may be more convenient for someone who plans to stay put for a while.
    3. What parts of your property is your tenant allowed to have access to? For example, if you have a pool in your backyard, is your tenant allowed to use it? Can they sit on your back porch? Or should you create natural garden beds and paths to divide the backyard so that you each have your own private space?
    4. Are pets allowed in your ADU? Is a deposit required if someone does have a pet to pay for any possible damage the pet incurs? 
    5. Are utilities included in the rent or will that be an additional charge?
    6. Do you allow smokers? 
    7. Is there street or driveway parking available? Is parking on the property an option and is this an additional cost?
  5. Consider the Fair Housing Law – The Fair Employment and Housing Act (FEHA), the Unruh Act and other California state laws prohibit discrimination in housing because of:   
  • Race
  • Color
  • National origin
  • Religion
  • Sex
  • Familial status (including children under the age of 18 living with parents or legal custodians; pregnant women and people securing custody of children under 18)
  • Handicap (disability)
  • Age
  • Ancestry
  • Citizenship
  • Gender Identity and Gender Expression
  • Genetic Information
  • Immigration Status
  • Marital Status
  • Primary Language
  • Sexual Orientation
  • Source of Income
  • Any other arbitrary basis (for example, Occupation or Veteran Status)
  1. What are Your Responsibilities as a Landlord? – Yep, once you build the unit, renting out your ADU is just the beginning! Congratulations! You’re now a landlord and you’re responsible for the upkeep of your property. This means that any plumbing or electrical issues that come up are your responsibility. You are also responsible for bugs, the roof, locks, and security systems. 
  2. Liability – You should also discuss your plan for renting out your ADU with your insurance broker. If your tenant happens to slip on a loose stone in the backyard or if there’s a crack in the driveway that caused a tumble, you could be liable for damages. There’s a difference between homeowners and landlord insurance and you should make sure that you’re properly covered by your insurance provider.
  3. Taxes – Another important topic to discuss is how renting out your ADU will impact your taxes. Your ADU will increase your property value but there are also a variety of deductions that you can use on your tax return so be sure to discuss your plans with your financial advisor or tax professional. 

Of course, these are only pieces of the puzzle, so be sure to discuss all of these topics with your property manager, real estate professional, and insurance broker before you allow a tenant to move onto your property. When you choose to work with ADU Warehouse, we have these professional partners in place and they are ready and eager to help you with this process. Renting your property is not an easy decision to make, so we’ll help you to determine which ADU model is best for you, we’ll walk you through the building process, and our lenders and real estate professionals can share how much rent you can expect to generate to meet your estimated mortgage payment. Call us today to learn more!

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