Planning Guide: Build an Income Generating ADU

Have you ever wondered if you could use unused space better or more profitably? Turning that large shed or cluttered garage into a lovely backyard home could become a guest house, in-law flat, or pool house rental.

With so much uncertainty in today’s economy, having an additional stream of income could help provide peace of mind.  Renters could be either long or short-term, depending on where you live. One of the nice features of an Accessory Dwelling Unit (ADU) is the many different configurations and plans you can choose from. Imagine being able to lease a comfortable open floor concept with one or more bedrooms and a kitchen with full-size appliances. If it’s a short-term rental, you could configure it as a flexible backyard home office, guest house, and occasional rental!

How To Plan Your ADU

If you are adding a new structure, there will be some infrastructure costs associated with building an ADU on your property. You need to consider the costs of adding plumbing and electricity. Even if you are repurposing an existing space, you may need to upgrade infrastructure. The purpose your ADU will serve is the most important goal during the research and planning stages. For example, learning what similar units rent for in your area vs. the cost of construction will be important. Here are some other considerations:

• Property taxes

Adding an ADU to your property has the potential to raise your property taxes

• Rental operating expenses

As the landlord, you will be responsible for ensuring everything is maintained. If this will be a long-term rental utility billing need to be researched. Will use be billed to your main residence or does the city, utility provider allow the ADU to have a separate billing account? You also need to insure your property and possibly umbrella coverage for unforeseen accidents.

• Taxes on rental income

You will have to pay taxes on any rental income earned, but there are also tax benefits that can be deducted due to the operating expenses. If you plan to use a service like Airbnb or Apartments.com, there will be fees.

• Restrictions from the city

Depending on where you live, the city may restrict how much you can charge for rent, whether short-term rentals are allowed, and the process for dealing with problem tenants. Take time to learn what your rights are as the property owner and as a landlord.

Although it seems like a lot to digest, there is a changing landscape in cities that can’t be denied. Many cities have started relaxing their rules on second dwellings and even adding programs that help homeowners who rent to low-income tenants. As the pandemic continues reshaping how people live and work in this economy, having options is something to take full advantage of.

The team at Drafting Cafe Architects can provide plans that work for your location and desired ADU. We have years of experience in the Bay Area and can help. We offer packaged plans with interior design included and can add more customization if you choose.

Are you ready to take the next step and build an ADU for rental income? Contact the team at Drafting Cafe Architects to schedule a consultation today!