Liz Weston: Will adding an extra unit pay off?

Additional living units go by many names, including suites, guest houses, backyard cottages, or basement or garage conversions. What all ADUs have in common is that they are a separate living space that is usually added to a single family home lot and they have a moment.

Building an ADU could increase your property value while providing rental income or additional living space for a family member. On the other hand, adding an ADU could be an expensive expense that you’ll regret.

If you are considering an ADU, here are a few things to consider before committing.

Why ADUs are becoming increasingly popular

In recent years, several cities and some states — including California, Oregon, and New Hampshire — have passed laws making it easier for homeowners to create ADUs, in part to address housing shortages and rising costs that have created an affordability crisis in many communities. ADUs are considered a relatively inexpensive way to increase the supply of affordable housing without drastically changing the character of neighborhoods.

Demand is also being fueled by the aging US population, says Rodney Harrell, vice president of family, home and community at AARP, which publishes a guide called “The ABCs of ADUs.” People are considering adding space for older family members or caregivers. The pandemic may have accelerated this trend as people sought alternatives to the nursing homes where at least 175,000 Americans died from COVID-19, Harrell says. ADUs can also provide independent living quarters for young adult family members who may not be able to afford housing of their own.

“It’s an enclosure solution that doesn’t solve every problem, but it does help address multiple problems at the same time,” says Harrell.

Costs – and acceptance – vary widely

Converting an existing space like a garage, attic, or basement into an ADU can cost around $50,000, while a new freestanding ADU often exceeds $150,000, says Harrell. And depending on where you live, getting approvals to create your ADU can be relatively easy, a long struggle, or downright impossible.

In California, homeowners have the legal right to build ADUs, and local governments should not create barriers to obtaining permits. Some cities have streamlined the permitting process, and some, including Los Angeles and San Jose, have pre-approved construction plans that can further reduce delays.

However, some California cities are fighting the trend by delaying or denying permits. Most U.S. cities either don’t allow ADUs or have strict regulations that impede their development, says Kol Peterson, ADU consultant and author of Backdoor Revolution: The Definitive Guide to ADU Development. Even where ADUs are legal, cities can require zone exceptions, called deviances, require expensive upgrades, or levy fees that can significantly increase costs, Peterson says.

Tried to skip the permissions? That’s probably not smart. Unauthorized construction could make selling or refinancing your home more difficult and leave you vulnerable to enforcement action from your area’s building authority, says real estate appraiser Jody Bishop, president of the Appraisal Institute, a trade group. It just takes an angry neighbor to report you.

How ADUs are like swimming pools

If you’re building an ADU primarily for the extra income, you should be aware that any rent you charge will be offset, at least in part, by higher costs such as higher property taxes, higher homeowner insurance premiums, and payments on loans taken for the home Construction of the unit used could offset other expenses.

As with any home improvement project, there’s no guarantee you’ll get your money back from an ADU when you’re ready to sell the home, Bishop says.

ADUs have a lot in common with swimming pools, he adds. In-ground pools are an accepted and even expected feature in some neighborhoods, allowing you to recoup at least some of the cost of building a pool when you sell your home. In other areas, pools are uncommon and could reduce a home’s value if buyers are concerned about maintenance issues or drowning risks, Bishop says.

Likewise, ADUs may not add much value in areas where they are uncommon, he points out. Some people may appreciate the ability to rent out the ADU for extra income, while others don’t want to be a landlord. And remodeling an existing attic, basement, or garage could deter buyers who would rather leave those spaces untouched.

Perhaps the best indication that an ADU is adding value is when your neighbors are building it, Bishop says. And if that’s the case, a properly licensed and thoughtfully designed ADU could be worth the investment.

“If it’s well made, well thought out, and functional, then you probably have something that the market would embrace and wouldn’t mind paying for,” says Bishop.

Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of Your Credit Score. Email: lwestonnerdwallet.com. Twitter: lizweston.

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