Don't Put Grandma in the Shed

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You may be familiar with the term “accessory dwelling unit” or more informally “mother-in-law unit”. Accessory dwelling units, or ADUs, are secondary dwellings on a property (typically a single-family home) which are outfitted with complete living facilities, typically for one or two people. They may be a stand-alone building, basement conversion, or an apartment above the garage, and can be occupied by extended family, renters, or whichever child the rest of the family votes off the island. While ADUs aren’t new, there is some news about ADUs: across the nation, many municipalities are lifting restrictions in order to make the process of building ADUs easier and more streamlined.

In R Street’s Policy Study on Accessory Dwelling Units, author Jonathan Coppage explains the development of the American housing and zoning models, which were built on the ideal of a nuclear family occupying a single-family home. Well, times, they have changed, and the prohibition against ADUs from decades ago is still hanging around. Single-parent and one-person families have increased, while married couples, with and without children, have decreased. It’s also no secret that the amount of multi-generational households are increasing too, whether as a result of boomerang kids, a poor economy, or a lack of available housing. Simply put, the 1930s housing model where every family has a single-family home with a spacious yard, is a relic of the past - and we’re still trying to make it work.

ADUs offer a number of benefits. Many homeowners utilize them as rentals, providing them with additional income. An analysis of U.S. Census Bureau data reflects record numbers of multigenerational households (one in five Americans lives in one) which ADUs are perfect for. Other homeowners use these additions as a workspace or a short-term rental.

Perhaps the most attractive aspect of an ADU is flexibility. An ADU can house an adult child, a friend out of work, an elderly parent, a nanny, a live-in aide, or that weird cousin. With sites such as Airbnb, they can flex between long-term and short term rentals as well, unless the city has an owner-occupant restriction which prohibits rental of the unit. However, Coppage reports that lenders and appraisers aren’t yet attributing ADUs their full value, which makes financing challenging and appraisals low.

ADU Considerations

Not all cities or states have jumped on the ADU train. California loosened statewide restrictions in 2017; Hawaii did so back in 2015. Austin, Vancouver, and other cities have embraced ADUs. Portland has allowed them since 1998, but jump-started the market when the city waived high impact fees in 2010.

Rules governing ADUs generally dictate minimum and maximum sizes, or ratios relative to the main dwelling or the lot size. These can vary and run the gamut from reasonable to burdensome. Some of the less reasonable rules include restrictions on independent entrances, who may occupy these units, and amenities that can be installed. For example, Atlanta permits ADUs - but not kitchens inside of them. Other prohibitive aspects of ADUs can be financial, such as the impact fees that Portland waived (“systems development charges” which can average $8,000). While adding an ADU is expensive in and of itself, if you want the unit’s utilities metered separately, it could cost you. In Austin TX, that adds to $20,000 to your bill. Another major concern for ADUs in high-density areas can be parking - if rented, where will new residents park their vehicles?

Building and Marketing ADUs

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The primary task to face if you’d like to market and build ADUs is, first, to know the laws in your area that govern these dwellings. Each municipality is different, and the rules are changing quickly.

Home builders and designers who are skilled at adapting building plans to a specific site, and who can figure out how to utilize modular or prefabricated construction, may be able to capitalize on this market and do well. Joe Robertson, who owns Shelter Solutions in Hillsboro, Oregon, is developing prototypes to fit the city’s size guidelines, although each ADU is different.

If it’s not a violation in your area, consider building the ADU at the same time that you construct a main house. In spite of being small, ADUs aren’t necessarily cheap - but constructing them alongside a main dwelling may help offset the cost, and won’t require any extra marketing.

ADUs have been most successful in cities with prohibitively expensive housing markets, or with nowhere to expand to (Vancouver checks both boxes). Even if you don’t live in a city like that, consider looking for opportunities in established neighborhoods close to downtown or college campuses. Established neighborhoods can also be made up of older residents who are getting ready to confront the idea of needing help to stay in their home. ADUs can fit that bill by accommodating another resident, without a loss of privacy.

Finally, consider partnering with an organization. For example, The Alley Flat Initiative, in Austin, partners with homeowners who agree to rent an ADU to an income-qualified tenant for 5 years in exchange for assistance funding the ADU.

ADUs present a flexible and achievable housing addition that many homebuyers will see as a bonus. Although these units are still undervalued by banks and appraisers, most consumers understand the added value of an extra living unit and won’t let it go to waste. In the R Street Policy study, Coppage notes that the biggest obstacle that ADUs face is their “widespread illegality”. Accessory Dwelling Units have the potential to provide our changing society with a flexible, feasible way to increase housing availability, allow options for income, or accommodate a multigenerational household. It’s a free market solution that more cities should encourage, and that contractors should be ready to capitalize on.

Elisa Meyer is a researcher and writer for At Your Pace Online, where she specializes in real estate and construction trades.