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Monthly cashflow, tax incentives, and owning a hard asset are some reasons why rental property has always been one of my top financial priorities.

I’ve collected rent from tenants who were also my roommates. 

I’ve also rented-out single-family property while living out-of-state.

However, given personal preference to reside in the San Francisco Bay area, I decided to sell my rental property and invest the proceeds in a primary residence with a lot size large enough to accommodate a detached accessory dwelling unit (ADU), commonly referred to as a “granny flat”.

ADU Options

While my preference is for a detached ADU, there are several different options to choose from:

Given the housing shortage in my area, aging parent considerations, and California’s expensive housing market, having the option to build an ADU on my property was a priority, especially since the advantages overwhelmingly outweigh the disadvantages.

11 Reasons to Build an ADU

While there are many advantages to build an ADU, below are the most-compelling:

1. Monthly Income

  • Collecting monthly checks is a wonderful thing
  • As housing costs and inflation rise, the property owner can always raise ADU rent

2. Increased Property Value & Market Appeal

3. Tax Advantages

  • Costs like maintenance and landscaping are deductible
  • You can also depreciate the cost of construction over 27.5 years

4. Non-Living Space

  • Home office
  • Gym/ yoga studio
  • Art/ music studio
  • Pool house

5. Short-Term Rental Space

  • Leverage platforms like VRBO or Airbnb
  • Short-term guest space for out-of-town family & friends
  • Emphasis on the phrase “short-term”

6. Nanny/ Au Pair/ Housekeeper Quarters

  • Many nannies and housekeepers spend a significant proportion of their incomes on housing
  • Including housing as an employment perk removes this burden and helps increase the likelihood of retaining talent

7. Aging in Place

  • Space for caregiver or older relatives
  • Move-in yourself & rent-out primary residence

8. Adult children/ college students/ recent graduates

  • An affordable living situation can help recent graduates more-quickly pay off student loans
  • It can also accelerate saving for a house down payment

9. Desirable for Tenants

  • More-affordable option versus renting a full house
  • Compared to apartment complexes, ADUs offer more peace and privacy

10. Tenant is Next Door

  • Easier to keep tabs on your asset since out-of-town travel isn’t necessary
  • As maintenance needs arise, you can take a look yourself and potentially avoid a costly handyman call

11. Good for the Environment

  • Requires less resources to build and maintain compared to full-sized homes
  • Uses much less energy for heating and cooling

7 ADU Headaches

Having an ADU isn’t always fluffy clouds and unicorns. There are certainly drawbacks that could induce some headaches.

  1. The cost to build
    • ADUs aren’t cheap
    • Pre-fabricated ADUs are less-expensive than the more-custom stick-built ADUs due to construction savings and pre-approved permits
    • However, even pre-fabricated ADUs start in the neighborhood of $220K+
    • For reference, some top pre-fab ADU companies in the bay area are Abodu, PrefabADU, & Villa Homes
  2. Tenant is next door
    • One of the best things about an ADU is that your tenant is next door
    • One of the worst things about an ADU is also that your tenant is next door
    • Some folks can handle this; others can’t
  3. Possible tenant issues
    • Having a tenant issue at a rental property is frustrating
    • Having a tenant issue when the tenant lives on your property is extra intense
    • Be VERY picky when screening tenants!
  4. Unwanted family & friend expectations
    • Some may feel entitled to “crash at your place for a couple weeks” since you have the space
    • You may be the first call when someone falls on tough times in need to free/ discounted housing for an unknown amount of time. This could be uncomfortable if your financial plan is to rent-out your ADU at the market rate
  5. Diminished privacy
    • A tenant will always be on your property
    • Tenant visitors can also impact privacy
  6. Property taxes increase
    • With a reassessing of property value, taxes will most-certainly go up
    • This increase, however, should be negligible
  7. Neighbor issues
    • Some “NIMBY” (Not In My Backyard) neighbors may not like extra folks in the neighborhood
    • Be extra sensitive in communicating expectations to tenants (like where to park, etc.) to stay on the good side of your neighbors

Key Takeaway

For those with the space to accommodate an ADU and the resources to build, the advantages overwhelmingly outweigh the headaches. Whether the ADU is intended for the primary homeowner’s usage, like an office or gym space, or to house tenants or aging parents, the use cases are only bound to one’s creativity.

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