An accessory dwelling unit (ADU), sometimes called an additional dwelling unit, can be added to some properties with a huge potential financial gain. However, there is a lot to know before you go down that path.

What is an Accessory Dwelling Unit?

An accessory dwelling unit is a second livable unit on your home’s property. These can come in many forms and names. You might have seen them before as a guesthouse, coach house, mother-in-law suite, “granny flat,” or an apartment above a garage or in a basement.

An accessory dwelling unit will generally come from one of the following:

• Converting existing living area
• Finishing an existing basement or attic
• Building a new structure
• Making an addition to an existing structure

Most accessory dwelling units could not house an entire family, but they work great for 1-2 guests or permanent residents. An accessory dwelling unit could be a single room studio or a multi-room apartment. That depends on the property and how it was built.

Understand Accessory Dwelling Unit Laws

Every city and county has the right to set their own laws and zoning regulations around accessory dwelling units. Some cities make adding a second unit very simple, while others make it very challenging.

In Portland, Oregon, the city has clear rules for accessory dwelling units and has a permit process to add a second unit. In Denver, Colorado, accessory dwelling unit laws are much newer, having been created in 2012. However, that does not mean you can use them however you would like.

If you are considering adding a second unit to a property, look into the laws, regulations, and zoning before you get started. If you get stuck, you can hire an attorney or licensed real estate agent to help you navigate the process.

Benefits of an Accessory Dwelling Unit

Rental Income

The most obvious benefit of an accessory dwelling unit is the ability to rent it out for income. If you can add on a new unit for $30,000 and rent it out for $1,500 per month, you break even in 20 months. Beyond that, everything is profit in your pocket.

Remember that construction costs can vary dramatically depending on the type and quality of construction. Also keep in mind that rents vary based on location, and your unit could rent below the market average rental rate.

Higher Property Value

While you will not see the benefit until you sell the property, you can expect a nice increase in the value of a home when adding a second livable unit. A study found that an accessory dwelling unit could contribute as much as 34% of a property’s value.

Remember that not all accessory dwelling units are created equal, and that your results may vary.

Downsides of an Accessory Dwelling Unit

Cost to Build

Building an accessory dwelling unit can be very expensive. Finishing a basement with an ADU may cost $10,000-$20,000. Adding an outside unit could cost well over $30,000 depending on how you decide to approach the project.  It’s always cheaper if you do not have to add on to the slab.  Enclosing a porch or garage is always cheaper than adding a new room of the same size where a slab doesn’t already exist.

Managing Tenants

When you rent out an accessory dwelling unit, you become an instant landlord. Your primary residence is now also an investment property. This opens you up to an exciting but sometimes stressful future as a landlord.

As a property owner, you must comply with tenant laws, provide maintenance, and be ready to deal with problem tenants.

A Trusted Agent Can Help

If you are looking to buy or sell a home with an existing accessory dwelling unit, make sure you get the best value by working with a great agent. If you want a great agent, start your search at AgentHarvest.

If you are buying or selling a house and are looking to hire a successful real estate agent to help you through the process, take a look at AgentHarvest's list of top-ranking local Realtors in your area. We found these agents by examining their sales track records, awards, rankings, client testimonials and by conducting personal interviews.