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Dee Gill: ADUs part 3 — Sample projects show costs, returns of building additions

Dee Gill, Rate.com on

Published in Business News

If you've looked into building a rentable addition inside your house or in your backyard, you may, understandably, be shocked at the cost. Those basement apartments, garage units and other accessory dwelling units cost more per square foot to build than most traditional homes.

If you'd like to learn the basics of accessory dwelling units (ADUs), read Part 1 and Part 2 in this series. Here, we'll explain why building one might be a very good financial decision regardless of the cost. With examples of three types of ADU projects, we show how financing and rental income interact to create considerable profits for many homeowners, despite the upfront costs. These are immediate monthly gains beyond the increase in resale prices, which we don't attempt to calculate here.

While we've chosen a few common projects to highlight, note that there are many ways to create an ADU. Basement conversions are often the cheapest, especially those starting with a partially finished family room. (The space needs a kitchen, bath and outside door to become a rentable ADU.)

Ground floor garage conversions also are relatively modest ADU projects, but adding one on top of an existing garage adds about $50 a square foot to construction costs, according to ADU consultants at the informational site Maxable. Detached units with traditional construction can be as expensive as you want to go.

For simplicity, the examples below assume a 30-year, 6% home equity loan that covers 90% of the cost of the project. (Closing costs not included.) However, many homeowners find it cheaper or more feasible to use other types of financing, such as a home equity line of credit or cash-out refinancing.

And finally, the disclaimer: You're not going to see these figures on your real-life project. Your space is different, your contractors are different and your distance for deliveries is different from these examples. Your permitting fees may be tens of thousands of dollars more or less than those included here, depending on your design and the rules of your local planning department. Your rent will largely be determined by your neighborhood. And you'll have some ongoing costs we don't calculate here, such as increased property taxes and maintenance.

 

Further warning: All three of our examples are from California, where rental incomes are generally higher than other areas across the U.S., and some construction costs may be higher, too.

We've researched generalized local costs and rents to give you reasonable estimates of returns on each sample project. Use the information to mull the possibilities. Then scrupulously do the math for your own project.

--One-bedroom, one-bath detached, prefab in San Jose, 495 square feet

Buying a manufactured ADU is a relatively fast, easy and cheap way to get income from a new detached unit. For a single price, companies like Abodu in San Jose will handle the project from permitting until you're ready to take the keys, which removes the hassle of hiring contractors. Oftentimes there are extra costs for specific property issues, such as the need for an upgrade on the property's main electrical panel.

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