Perhaps one of the easiest and most cost-effective ways to deal with an ever-shrinking housing stock, and increase a property’s value, is the Accessory Dwelling Unit, also known as an ADU or “Granny Flat.”
Pasadena has led the way among Southern California cities in making ADU construction easier with loans and eased-up regulations.
In fact, Utah-based Ivory Innovations named Pasadena’s ADU program as a Top 10 finalist for the 2021 Ivory Prize for Housing Affordability, a national award recognizing “ambitious, feasible, and scalable solutions to housing affordability,such is their importance to the national housing landscape.”
But how important? How valuable? That may depend on what you build and where you build. Not every place is Pasadena.
Kol Peterson, a Portland, Oregon ADU consultant, quoted in a recent study, said some cities have made progress in helping ADU development along, but too many others have made it impossible to build ADUs in their cities.
“In some jurisdictions this is a new housing phenomenon so they’re scared of it because they perceive it’s going to alter the fabric of their neighborhoods,” Peterson said.
“They worry about parking, and they worry about their single-family neighborhood becoming a slum.”
But in cities where ADUs are welcomed, their presence raises another question—how much value do they really add to a home? Is it a selling point for realtors?
In Los Angeles, for example, according to Cali-ADU, an ADU construction company, with an average cost per square foot of approximately $470, a new 1,000 square-foot detached ADU could increase its property value by an average of $470,000. For an investment of around $250,000, homeowners in Los Angeles can add an average of $470,000 to the value of their property.
According to a 2020 article by The National Association of Realtors, the US housing inventory crunch has sparked a dramatic increase in the number of accessory dwelling units in the U.S., most notably in high-cost areas that have seen growing populations over the last decade.
“The nation’s affordable housing crisis has intensified in this turbulent economic environment, and ADUs are increasingly providing a viable affordable housing option for people of all ages,” said Sam Khater, Freddie Mac’s Chief Economist, said in a 2020 study. “This analysis is both unique and large in scale, giving us insight into the growing movement of accessory dwelling units. Across the U.S., Portland, Dallas, Seattle, Los Angeles, and Miami metro areas have led the remarkable growth in ADUs.”
According to the study, seventy thousand properties with ADUs were sold in 2019, representing 4.2 percent of total homes sold on MLS. By comparison, only 8,000 properties with ADUs, or 1.1 percent, were sold in 2000.
According to Cali-ADU, there are three popular types of ADUs that can raise your home’s value the most.
A detached ADU or “Granny Flat,” separate from the existing home, will typically be the most valuable when complete. It adds livable square footage to the property which appraisers can then use to determine how much your property is worth.
An attached ADU added as an addition to your existing home is the second most valuable addition.
It may afford less privacy than a stand alone unit , but appraisers will still use a cost per square foot analysis when determining the value of the new construction, and the $470 square foot average for the City of Los Angeles would still be applicable, say the builders.
A garage conversion ADU is just as it sounds—converting your existing garage into an ADU. It will definitely increase your value, but not as much as detached or attached units.
They are often the most cost-effective, but it will cost your property its garage, so it’s a tossup. This is what makes this ADU type the least valuable in terms of resale and property value.
According to CAli-ADU, , converting a garage into a new space could cost anywhere from $30,000 to over $60,000. A brand-new addition to the home could cost between $50,000 to $100,000.
But here are ways that an ADU project can add value to your property. It can generate rental income, the most common reason that homeowners may build an ADU unit.
According to Architectsla.com, detached ADUs can be so lucrative that the rent may cover a mortgage and other housing costs.
While this may seem hard to believe, the housing market makes this possible, according to architectsla.com. Trends show that more than 75% of homes house 1-2 person families. These houses, however, were built back when 3-4 person families were the average. This rate has been declining for several years, and nowadays, most families are small and do not need the amount of room that an ordinary single-family home generally offers.
The income generated from an ADU can not only cover maintenance and utility costs, but it will also pay for itself in as little as a few years, depending on market fluctuations.
