Is An Accessory Dwelling Unit A Good Investment?

Are you a developer wanting to maximize your profit margin on one of your properties? Or, are you a homeowner with some extra yard space that you would like to put to good use? Many investors are finding creative ways to enter the real estate market any way they can. With the housing supply at an all time low and prices at an all time high, this is proving to be more and more difficult. The best way to combat this? Build more housing! One way to accomplish this is to consider investing in Accessory Dwelling Units, commonly known as ADU’s.

What is an Accessory Dwelling Unit?

An accessory dwelling unit is a smaller permanent living quarters on an existing property. Sometimes called in-law suites, these buildings are traditionally used as a guest quarters or an extension of the main living space.

These small homes can be built on an extra piece of land on the property you live on, or it can be a way to split up one of your existing investment properties to increase profit. An investor may choose to rent the property as a whole, as two separate rental units, or even split up the two units into a condo regime. This means that the primary residence and the ADU can be sold separately as condominium units on a shared property. This can be a lengthy and expensive process with lots of paperwork. Be sure to partner with experienced legal counsel to assist you in the creation of a condominium regime.

Though creating an ADU involves sacrificing a significant chunk of your yard space, many investors and residents alike are finding increased value in these types of homes. More and more residents are finding that they would prefer the privacy and quality of a smaller modern home over an outdated unit in an apartment building with noisy neighbors attached to every wall and ceiling.

What Are The Regulations For ADU’s?

There are many regulations surrounding the size and amenities that an ADU must have to be permissible. These regulations can change from state to state, city to city, and town to town. 

In the city of Austin in Texas, the minimum lot size was altered to accommodate for the rapidly decreasing housing supply. Many of the lots on the East Side of Austin are long and skinny with a sizable yard, which is perfect for adding another smaller home. Per Austin regulations, the maximum size of ADU’s can be no larger than 1100 square feet or 15% of the lot size, whichever number is smaller. The minimum lot size to build an ADU there is 5,750 square feet. Since 15% of 5,750 is 862.5, this would be the maximum allowable square footage of that ADU.

There also may be regulations surrounding parking spaces, driveways, short term rentals, and the amount of feet allowed between the primary residence and the ADU. 

Be sure to thoroughly read up on your city’s local regulations to guarantee that the ADU you want to build is legal and up to code.

How Much Does It Cost To Build An ADU?

Though normally considerably smaller than the main unit on a residential plot of land, ADU’s can still cost a pretty penny. This price is even higher because of the rise of lumber prices that we’ve seen throughout the pandemic. The cost to build an ADU is similar to the price of building a home– averaging at about $180,000.

There are many additional costs associated with the construction of an ADU. These can include but are not limited to permits, driveway construction, and utility hookups.

What about a Prefab ADU?

Another option for those wanting to add an ADU to their property is to purchase a prefabricated or modular home.

The costs for this type of building are different than that of constructing a building from the ground up on the property, but the increased speed of delivery could be your best option. The price of these can vary greatly depending on many factors including size, quality, and location.

As with the on-site construction of ADU’s, other costs must be taken into consideration. If not included in the price tag of the modular home you are purchasing, these costs can include construction, permitting, foundation preparation, utility hookups, and even a crane to lift the home onto the property. 

How Much Value Does An Accessory Dwelling Unit Add?

Though the price of building an ADU may cause your pockets to hurt a bit in the beginning, the value added to your property will surely make up for it. 

An ADU can add an average 35% to the value of a home in the United States. This is a great investment for those looking to increase the price of a property or add rental income.

The average price of a home in Nashville Tennessee will set you back $357,500. Adding an ADU will increase the property value by 75%.

In Houston Texas, the average price of a home is $226,900. With an ADU, the average price is $582,000. That is a whopping 157% increase! 

Funding Your ADU

Thinking about turning the extra space on your property into an ADU? When nailing down the details of these projects, be sure to take into consideration the desired speed of completion and the way you will be funding it. In order to complete the addition of your ADU at a quick pace, you may want to consider taking out a hard money loan. This type of loan will allow you to secure funding quickly enough to pay every expense in a timely manner.

Between the application and approval processes, traditional loans take much longer to secure than hard money loans. Going the route of a traditional loan may be a better option if your project has less time constraints.

Ready To Add Value To Your Property And Increase Housing Supply? 

Finance the cost of building your new ADU through our construction loans, or get a hard money loan to purchase a prefabricated modular home. Contact us to learn more about Loan Ranger Capital’s loan options for your properties in Texas and Tennessee.

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