What are ADUs? Some call them “granny flats.” Others call them “she-sheds” or “in-law suites.” Recently, “tiny house” became a trendy topic among certain builders.
Nearly all of these—regardless of terminology or function—will fall under the category of “accessory dwelling unit,” or ADU. Amid a nationwide housing crunch, this alternate model of living, investment and space-sharing has seen massive growth as developers and homeowners seek ways to integrate post-pandemic lifestyles and policymakers scramble to address an acute shortage of living spaces.
But what is the value of an ADU, from a real estate perspective? Are consumers seeing them as worth the significant time and monetary investment? Will the trend of local authorities relaxing restrictions change the current market, and if so, how? Can ADUs outlast the current unprecedented housing crisis?
Not all of these questions have answers. But according to the people who are building, regulating and studying ADUs, if you are not asking about them right now, you might be missing out.
Amy Allgeyer founded and runs Architect Inc., an architecture firm in Boise, Idaho, that has come to specialize in ADUs. She said that in her market, interest in these specialized structures has been creeping up over the past five years, but exploded after the onset of the pandemic as people sought more living space or more value in their fast-appreciating properties.
Recently, she said she gets multiple calls a week from people interested in the possibilities of an ADU.
“Sort of a perfect storm—it’s a lot of different things that are coming together to help people get ADUs that they want, and encourage people to want ADUs,” she says.
The ABCs of ADUs
The first question most people have about ADUs is quite simply, what are they?
That, like a lot other things in the ADU world, depends on where you are. At the basic level, ADUs are separate living spaces on the same lot as another primary structure—sometimes physically separated from it, sometimes not.
Most states allow cities and counties significant latitude in defining and permitting the structures. Building codes in some cities restrict free-standing cottage-style ADUs more than attached structures. Often there is a requirement they offer separate amenities—bathrooms or kitchens—but not always. Maximum sizes can range from a couple hundred square feet to over a thousand. Permitting ADUs can be as simple as a quick visit to a county office or as complex as a multi-month public hearing process.
Local officials also seek to conform ADUs to local conditions or preferences. According to Sarah Berke, program officer at the Family Housing Fund in Minnesota, ADUs in that area must have frost-proof foundations so they can endure the harsh northern winters. Voters in the historic Boston suburb of Salem recently voted on a new ADU ordinance that, among other things, requires property owners to replace any trees they chop down when building an ADU. There are literally hundreds of other potential requirements, from street setback to paint scheme.
Across the country, though, policymakers are trending toward loosening these restrictions, making ADUs easier and cheaper to build and massively expanding the number of properties and neighborhoods where they are allowed, which potentially creates a new market and vast new opportunities for both homeowners and renters.
Why It Matters
There is one thing that nearly everyone agrees on in regards to ADUs: they have a tremendous value right now in a tight housing market.
“We do have more people who are interested in having their property help pay their mortgage in the wake of COVID,” Allgeyer says. “Definitely in the past two years, I’m seeing a lot of home offices going into ADUs.”
It is not clear yet whether a new interest in ADUs will have a lasting impact on the market—the kind of impact that could address supply scarcity or significantly alter regional trends or consumer behavior.
But the “perfect storm” Allgeyer referred to is a combination of policy, market conditions and consumer attitudes that right now are making ADUs a red-hot opportunity in the real estate market.
In Salem, Amanda Chiancola serves as the city’s Deputy Director of Planning. She is also a long-time advocate of inclusionary housing who recently helped spearhead an ordinance that serves as a major overhaul in how the town regulates ADUs.
In the three months since that ordinance was approved, the city has already surpassed the number of ADU permits it received over the previous three years, she says.
“We get calls all the time from people…who say, ‘I can’t afford to live here, I’m driving two hours to work everyday,'” Chiancola says. “We hear these calls and emails all the time.”
With a large proportion of their housing tied to single-family zoning, a lack of living spaces—and affordable units in particular—Salem needed to find a way to expand and diversify its housing stock in a meaningful way. Enter the ADU.
The focus for Salem is affordability, according to Chiancola, and so the ordinance actually set a maximum rent for ADUs—$1,635 for a two-bedroom and $1,214 for a studio. Even with this limitation, Chiancola says that estimates by her office projected that a property owner financing an ADU through a home equity loan or second mortgage will pay less than half of that cost a month—$500-700 on average.
That will hopefully make building an ADU an attractive investment for existing homeowners, she says.
In Boise, Allgeyer says that many families use the rental income from an ADU to allow them to move into an otherwise unattainable neighborhood, seeking better schools or shorter commutes.
“Younger families who wouldn’t be able to afford that property in the really good school district, but they want to raise their kids there and so they buy a house with an ADU they can rent out,” Allgeyer says
“It helps a first-time homebuyer be able to afford a mortgage,” Chiancola adds.
An ADU also adds “fantastic” resale value to a home, according to Allgeyer, because even if the buyer is not interested in renting the unit, ADUs are incredibly flexible no matter the demographic or needs of the homeowner, serving as everything from a caregiver’s apartment for an older resident to office space for young professionals.
“Anywhere between 30 and 90—it’s pretty evenly split,” Allgeyer says.
How ADUs can be used is something in flux across the country, driven mostly by policy at the local level. Many places—Salem being one of them—have banned short-term rentals like Airbnb from utilizing ADUs. Town officials actually scan those company’s websites to make sure homeowners aren’t surreptitiously listing them, according to Chiancola. Boise and other places allow Airbnb rentals, which Allgeyer has seen become very lucrative for homeowners especially in hot housing markets.
“I see ADUs really being enticing in an urban area,” she says.
Berke says that as the price of construction falls, more and more people will be ready and willing to build ADUs. A handful of developers are actually adding ADUs into their single-family constructions in the Twin Cities area, according to Berke, offering that kind of flexibility from the start.
“You can build a single-family home with a basement space that is suitable for conversion ADUs, and that creates a value addition opportunity in the future,” she says.
Minneapolis was ahead of Salem and many other cities, expanding their policies for ADUs in 2014—partly in response to an acute housing shortage that a recent study by the Minnesota Population Center rated as the worst in the country.
Just changing the policy created a huge influx of ADUs as many homeowners found that rooms they had rented off the books or garage conversion projects now qualified as ADUs—with the potential benefits of being able to advertise the structures more traditionally when selling or renting. Many only cost a few thousand dollars to permit or finish up, according to Berke.
All of this is coming together to allow more mobility, more flexibility, and potentially a shift in attitudes as people find new rental opportunities and a new way to look at work-from-home and age-in-place scenarios.
Despite all this, Allgeyer says that she does not personally see the run on ADUs outlasting the current housing crunch. Once urban areas get their fill of new ADU construction, she says the trend will peter out in suburbs and rural areas where space is less of an issue.
But for the cities and neighborhoods that are seeing an ADU boom right now, the potential for a transformational change is there, Berke suggests. Though Minneapolis has seen a relatively small increase in ADUs since they changed their policies, adding those structures to just 1.5% of eligible properties would make a huge difference in the local market.
“That could be 11,000 new housing units. So the impact on any one block…won’t change anything on how your neighborhood feels. But if you add a little here and there, it really does add up to a lot of housing,” she concludes.
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news ideas to firstname.lastname@example.org.