According to the U.S. Department of Housing and Urban Development, housing affordability is becoming an ever greater challenge. In the last few years, the combination of a housing shortage, inflation, and higher interest rates have led many homeowners to look to new ways to optimize the investment they’ve made into their home.

One of those ways, for homeowners with unused living space or a large lot, is construction of an ADU. An ADU is the common acronym for an Accessory Dwelling Unit. For many, an ADU is otherwise referred to as an attic apartment, garage conversion, granny flat, or in-law cottage. Whatever you may choose to call it, it is a secondary housing unit typically built on a single-family residential lot, although ADUs can also be built in a multi-family residence, such as a duplex, triplex, or fourplex.

If you’d like to learn more about how California defines an ADU, as well as the acceptable types, then click here. <hyperlink to the free PDF ADU Guide – name and email address required for download>

If you are searching for ways to accommodate aging family members, adult children, or hoping to generate some passive income, then an ADU may be your best solution.

What follows is an examination of the three top reasons so many of today’s homeowners are choosing to build an ADU. Read on to best determine if an ADU will be right for you.

Reason #1: An ADU Increases Property and Potential Resale Values

The number one reason to consider an ADU is increased value – both to your property value and to the potential resale value of your home. How much an ADU increases the value of your property is dependent on the type and size of the ADU you choose to build. Not all ADUs are considered equal.

Typically, a detached (permitted) ADU will be the most valuable upon completion. This is because with a detached ADU you will have livable square footage added to your property that an appraiser can use to determine your property’s fair market value. By example, an ADU of 1000 square feet adds 1000 square feet of new livable space to your property. If we assume construction cost per square foot of $350 to $450, then a detached ADU of 1000 square feet could increase your property value by an average of $350,000 to $450,000.

If your ADU is attached – an addition to your existing home – this is the second most valuable of ADU types. Given it offers less privacy than a detached unit, it is slightly less preferred, but appraisers will use the same cost per square foot analysis when determining the value-add to your property.

With an attached ADU, as previously mentioned, you’re only allowed to increase the current size of your home by 50%. By example, if your home is 1600 square feet, then your attached ADU unit cannot be more than 800 square feet. This limitation placed on an attached ADU,, together with the decreased privacy this type of unit affords, helps to explain why detached ADUs are of greater value-add.

According to available research, in California, an ADU will increase the value of your home by upwards of 30% or more, depending on the ADU and the rental market in your specific area – which helps explain why increasing numbers of homeowners are building ADUs.

One study that was conducted revealed properties with ADUs improved their resale value by more than 50%. In Southern California and parts of Northern California, as well as the Greater Bay Area, this has certainly proven to be true. Consequently, we are finding more and more of our clients are interested in exploring ADU options for their residential property.

Reason #2: An ADU Provides Passive Income

While most property owners build an ADU to increase the value of their property, given an ADU is potentially one of the wisest investments an owner can make, there are those who are seeking passive income. This is what makes the rental income generated by an ADU so very attractive to homeowners and prospective home buyers.

The third type of common ADU is a conversion, and its increase to your property value can be somewhat less simply because you must forfeit use of existing space to accommodate that type of ADU unit. This forfeited space may prove to be the type of space a future buyer would not want forfeited. If you convert your attic, rarely-used family room, spare room, or your garage into an ADU, the value of that type of ADU lies in the rental income it can command. In certain parts of California, that rental income can be considerable, as in the Bay Area or Southern California, where housing costs are high and limited rental space is at a premium.

However, certain home buyers – those who definitely want and need a garage for all their family’s vehicles, or a family room for casual entertaining – would typically bypass a property with an ADU conversion simply because that property lacks the particular space they require. This helps to explain why ADU conversions are third in line, with respect to increases in property value, despite offering passive income generation to the homeowner.

Reason #3: An ADU Provides A Safe and Affordable Housing Solution

Interestingly, a California Department of Finance study revealed that in 2024, ADUs accounted for 20% of new home construction – that amounts to 1 ADU out of every 5 homes built in California. This is a rather impressive jump in ADU construction given that back in 2020, only 1 in 10 new homes was an ADU.

So what accounts for the considerable jump in ADU construction, beyond the increases in property value and the passive rental income? One look at the housing shortage, which is driving the already high costs of housing ever higher, and it’s understandable why many residential property owners are now looking for safe and affordable housing solutions for their aging parents or adult children. More and more, these very same people are turning to ADUs to address that problem and meet their express needs.

The high cost of living is making multi-generational households ever more common. Now-a-days, it’s not uncommon for a household to have 3 or 4 generations all living together under one roof or on one property. Aging or infirmed parents are moving into the homes of their adult children for reasons of added safety, security, as well as lower cost of living, while the younger generation, although now also adults, isn’t yet earning enough to support the costs of higher priced starter homes. An ADU can offer separate privacy and independent living all on one property lot without incurring exorbitant new construction costs.

If this blog has piqued your interest in an ADU on your property, then take ACTION and engage with Ed Neir Construction today for a free estimate!

Warm regards,

Ed Neir & Team