You have several options if you’re considering increasing your property’s value, from improving curb appeal to completing a much-needed kitchen renovation. One of the best ways to add property value is adding an Accessory Dwelling Unit (ADU). ADUs are secondary housing constructs located on the same property as your main house. These projects increase your living space and may provide an additional source of income.
Before you add an ADU to your home, it’s essential to consider how much value an ADU adds to your property. Because determining this figure can be complicated, we’ve compiled this guide to ADU property value to help you understand the real benefit of an ADU.
How Much Value Does an ADU Add?
To understand how an ADU can affect your property’s value, you first need to determine how much it will cost you to build it. ADUs can cost anywhere from $80,000 to well over $100,000, depending on the size, type of construction and materials used. Additional costs to consider include permits, surveying costs and the cost of design. The best way to estimate an ADU’s price is to consult with a design-build construction firm and get an estimate.
So how much value does an ADU add once you’ve considered the expense of building? Despite the cost, ADUs are significant sources of value. With the right budgeting and construction team, your ADU can bring in value in two important ways:
1. Generating Rental Income
Many homeowners build an ADU property to generate rental income. This is a significant way to increase your ADU’s return on investment (ROI). Renting out a detached ADU can be so profitable that it pays for the construction and your main house’s mortgage. Your ADU’s potential for generating rental income depends on the type and size of the ADU and your location, but having the extra income can make a huge difference.
2. Increasing Resale Value
Another reason why you may want to build an ADU is if you’re getting ready to sell your property. Building an attached ADU increases your property’s square footage, boosting its value substantially. Detached ADUs are also popular with new buyers looking for a property for their relatives or renting out. The improved resale value of your property offers an ROI for your ADU that more than compensates for the cost of construction.
What Types of ADUs Increase Property Value?
When designing an ADU, you can choose from several types of constructions. Each of these ADU types can bring different value to your property, so it’s crucial to consider your needs and goals for your ADU when you decide which type to build.
Here are the three types of ADUs that can increase property value:
1. Detached ADU
Detached ADUs are built on the same property as the existing house, but they are entirely removed from the home. Detached ADUs typically add the most value to a property since it adds the greatest square footage. As home value is determined by square footage, adding even 1,000 livable square feet to your property can increase its value by a few hundred thousand dollars.
2. Attached ADU
Whereas detached ADUs are separate from the existing home on the property, attached ADUs are an addition. While these ADUs can also add considerable value to your property, they usually don’t add as much value as a detached building. The main reason attached ADUs are less valuable is that a California law limits an attached ADU’s maximum square footage to 50% of the main house’s square footage. Although the property is still valued per square foot, its potential value is limited.
The types of attached ADUs include:
- Internal ADUs: Built from an existing room within the main house, internal ADUs might share several walls and entrances with the home.
- Addition ADUs: Also known as bump-out ADUs, this type of construction juts off from the side of the home and has a private entrance.
3. Garage Conversion ADU
You can also choose to convert a garage into an ADU, making it a fully livable space that looks nothing like a garage once complete. If your property has an unused garage, turning the first and second floor into an ADU can increase the property’s resale and rental value. Garage conversation ADUs are also pretty modest investments compared with the cost of a detached ADU.
This type of ADU is the third most valuable because adding a living space also removes the functional garage space. Your property value might decrease slightly, although you’re still likely to come out with a net gain because of the additional value of the garage conversion ADU.
Do ADUs Increase Property Tax?
Many homeowners are concerned about how building an ADU might affect property tax. Property tax increases are especially a concern with Proposition 13, a 1978 amendment to California’s Constitution limiting property tax increases. Consider these ways that ADUs impact property tax in California:
1. Property Tax on Your Primary Home Remains the Same
Before Proposition 13, real estate property was appraised for property tax valuation on a cyclical basis. With Proposition 13, reassessment for property tax can only be triggered by two circumstances — when the property changes owners or when there is new construction.
New constructions include garage and basement conversions and other extensive renovations. However, building an ADU on property that you will not occupy counts as an exclusion and does not trigger a property tax reassessment.
2. ADU Triggers a Blended Reassessment
Typically with detached ADU constructions, assessors value the existing home and the ADU separately. When the ADU is assessed on its own, 1% of that assessment is rolled into your current property tax bill. This blended reassessment does not include a reassessment of the main home.
If you plan to rent your ADU for supplemental income, you’ll likely recoup any increase in property tax within a couple of months. Adding an ADU to your property results in a relatively small tax increase compared to your property’s increase in resale value and the potential for rental income.
Can I Rent Out My ADU in California?
The simple answer is yes, you can rent your ADU in California. In fact, with rental prices rising across California, especially in places like Los Angeles, most ADUs fill up quickly. Recently updated laws in California’s ADU handbook also lifted several restrictions on property owners interested in building an ADU, making the process easier.
Take a look at these updates that might make building an ADU even more attractive:
1. Owner Occupancy Is Not Required
The new laws no longer require the property owner to live in either the primary home or ADU before building. This change allows landlords to build ADUs on their rental properties, opening up new opportunities for ADU construction.
2. Size and Lot Requirements Are Eased
Before the updated handbook, several municipalities had minimum lot size requirements. Homeowners can now build an ADU of at least 800 square feet regardless of the property’s size.
3. Incentives for Building
The California Department of Housing and Community Development developed a grant program and other incentives for homeowners to build ADUs. Counties and cities are also required to create a plan for promoting ADU construction that can be affordably rented to low- and moderate-income households.
Build Your ADU With Daniels Development Group Inc.
So how much value does an ADU add in Los Angeles and surrounding areas? You might be surprised just how much you can gain from building an ADU on your California property. With virtually endless options, an ADU can serve as a suite for aging parents or generate rental income as a separate home.
If you’re looking to build an ADU on your property and need ADU builders in Los Angeles, turn to Daniels Development Group Inc. At Daniels Development Group Inc., our experienced contractors work directly with clients to ensure we meet your needs and produce the best results possible.
Our family-owned and operated construction firm offers construction and remodeling services across the Los Angeles region. If you’re ready to start building your ADU, contact us today for an estimate!