This is not investment advice and is for informational purposes only.
Are you a homeowner looking for a way to generate passive income? An accessory dwelling unit (ADU) may be the perfect solution. With an ADU, you can easily create additional rental income without investing heavily in another piece of real estate; with mortgage rates increasing, this is doubly valuable. This guide will show you how to earn passive income from an ADU and help you can maximize your returns.
What Is an ADU?
Adding an ADU to a single-family home can provide homeowners with a range of possibilities, from housing family members to creating rental income. An ADU is a secondary housing structure located on a single-family residential property. While ADUs are often used for guests, aging parents, or adult children, many homeowners take advantage of the extra space by renting it out for passive income.
ADUs come in all shapes and sizes and can be customized to fit your needs and budget. To generate passive income, it is important to consider local zoning laws, building permits and regulations, utility hookups, and the local market. With careful planning and research, adding an ADU can be a great way to supplement income while providing additional living space for family members or guests.
Why Are ADUs Great for Passive Income?
ADUs are becoming increasingly popular as a way to generate passive income. High demand for these units means that rents remain competitive, making ADUs an attractive option for potential investors. Investing in an ADU is a great way to make money while also having the flexibility of being able to rent it out long-term or short-term, depending on your needs.
High Demand
With the high demand for housing, you can’t go wrong with an ADU: it’s a great way to add functional living space without breaking the bank. There may be a potential for high returns when investing in luxury condos, but they typically require a far greater investment than adding an ADU to your property.
As population growth continues to outpace new housing units being built, ADUs have become a favorite way to fill this gap and provide much-needed housing in many areas. Not only do they offer more affordable options than traditional homes, but they also provide an opportunity for passive income through traditional rental or short-term rental (STR). With so much profit potential, it’s no wonder people are turning to ADUs as a viable option for generating additional revenue.
Competitive Rents
You can take advantage of the competitive rent prices that ADUs offer and enjoy a cost-effective living solution without sacrificing comfort. By renting out an ADU, you can generate additional income to offset increasing rent prices in your area. Researching local rental rates and considering any amenities you offer will help ensure your rental rate remains competitive and attractive to potential tenants. Additionally, you can increase profits by offering long-term leases or discounts for multiple months paid upfront. This will allow you to maximize profits while remaining competitive with other available housing options.
Versatile & Flexible
You can tailor your living space to fit your needs with the versatile and flexible options that an ADU provides. With an ADU, you can choose whatever size and layout works best for you, whether big or small. Not only that, but ADUs also come in many different styles. From traditional designs to modern ones, there’s something for everyone. This makes ADUs a great way to add value to your property while giving you more control over how it looks and functions.
Flexible rental terms are key if you’re a landlord looking to generate income from an ADU. You can rent out the space on either a long-term or short-term basis, depending on what works best for both parties.
How To Earn Passive Income With an ADU
Passive income from an ADU can be earned primarily by two types of rentals: short-term and long-term.
Long-Term Rentals
Earning passive income from your ADU is as easy as finding a qualified tenant and having them sign a long-term lease agreement. With a long-term rental, you can guarantee at least 12 months of income without worrying about vacancies. Plus, longer-term renters are more likely to take better care of the space than short-term renters.
When setting the rent for your ADU, you may not be able to charge as much per month compared to what you could get with nightly or weekly rentals. However, the stability of a long-term lease makes up for this price difference.
Short-Term Rentals
Renting out your ADU for short-term stays can generate substantial profits, but it’s essential to be aware of potential drawbacks. Online vacation rental platforms simplify the process of advertising your unit and finding tenants, but it’s important to note that consistent occupancy is not guaranteed. It is crucial to account for gaps between reservations when estimating your income. Furthermore, you should budget for cleaning services after each booking, which adds to your expenses. Before listing your ADU on a short-term rental platform, consult local regulations imposed by your city or county to ascertain any restrictions on such rentals.
How to Maximize ADU Income
Choosing the right location, orientation, and type of structure for your ADU is vital to maximizing income.
Choose the Right Location
Finding the right spot for your ADU can mean the difference between a lucrative investment and one that leaves you wanting more. Location is key to maximizing ADU income, whether you’re looking to rent it long-term or short-term. An ADU can be a great source of steady rental income in big cities with rising rents. And if you want to get into short-term rentals, you’ll need to pick a location that’s attractive and convenient for travelers.
You should also consider local zoning laws when choosing a location for your ADU. Make sure that it’s legal to build an ADU in the area before investing in it too heavily. Researching potential locations will help ensure that your investment pays off and give you peace of mind knowing that you’ve taken all necessary steps to maximize your ADU’s income potential.
Where Possible, Build a Detached ADU
Maximizing your ADU’s potential means looking into building a detached one: the privacy, features, and space make it more desirable to renters, so you’re more likely to get top dollar for it. Detached ADUs are separate from the main home and can look and function like a house. Several factors—including the size of the lot, layout, and characteristics of the main dwelling—dictate the possibilities for the ADU.
Working with an experienced ADU builder will help maximize square footage inside and out to maximize your investment’s return.
Passive Income is Within Reach With ADUs
You now better understand what an ADU is and how it can be used to generate passive income. You can maximize your return on investment by designing a suitable layout for your ADU, setting up long-term rental agreements, and taking advantage of tax incentives. By committing to this journey, you’ll enjoy the benefits of having a steady stream of passive income from your ADU—all while living comfortably in your home.
