ADU – What’s the big to do about Accessory Dwelling Units

  • More buyers are expressing interest in passive income with ADU’s
  • Some of the reasons for ADUs include income, adult children living at home and financial freedom
  • ADU’s may take the form of garage conversions, adding on to your existing home or a separate unit
  • The Federal Housing Authority (FHA) is expanding it’s loan policies to include financing for ADU’s

Have you seen ADUs popping up?  Everywhere you look, homeowners are adding either an Accessory Dwelling Unit (ADU) or a tiny home on their property.  We asked the question, “Why the big demand for ADUs?”  We queried multiple real estate and ADU experts.  We wanted to know if they were more difficult to sell? What about financing when purchasing an ADU?  And lastly, how much does building an ADU cost?  This article summarizes our findings.

Are ADUs Difficult to Resell?

Garage conversion to ADU
Twenty years ago, properties with more than one living quarters were difficult to sell.  Often referred to as “granny flats”, “in-law suites”, or “carriage houses”, ADUs appealed to very few buyers. Buyers were typically families looking for a place allow aging parents to stay close by.  As Peter Evering with Utopia Property Management in California notes, “buyers saw them as eyesores and most of them didn’t know what to do with them”. The properties would often sit on the multiple listing service and stagnate on the market.  However, that’s all changed says Evering, “we are now seeing far more buyers expressing interest in properties with ADUs”.  The main reason he continues is “because of the easy option of renting it out to someone else”.

Why Are People Buying ADUs?

Create Passive Income

Monica D Higgins ,Co-Founder and Chief Experience Officer at Garagify, identifies passive income as a major reason for building ADUs.  Her company specializes in designing and building backyard homes. Higgins says, “Eighty percent (80%) of people we’ve polled pre- and post-COVID are building ADUs to generate passive income”.  With housing becoming so expensive, many homeowners are looking for additional ways to create additional income and pay down debt.

Support their family

Others are building financial independence by adding an ADU to their primary home.  Greg Gaudet faced a $3,000 monthly loan on his family’s home in Hawaii.  He built an ADU to rent out and used the income to offset his primary home’s mortgage. Gaudet says he is investing that $3,000 extra in “savings to create financial independence for our family.”

Space for adult children

During the past 15 years, home prices have increased significantly, pricing many first time buyers out of the housing market.  Seth Williams, a real estate broker in Boston, notes the substantial impact on home prices.  He says, “Starter homes have become unattainable, increasing by 45% and reaching a record high of $243,000”.  For those looking to by an existing home, the median price in the United States hovers around $400,000.  To make matters worse, interest rates have almost doubled over the past two years, adding $121 each month to the average home loan in the U.S.  A typical mortgage for most home buyers in today’s market is $2,575 according to Redfin.

Some parents are converting basements, doing garage conversions or adding apartments over garages.  Others are building backyard structures for their adult children says Williams.  “As multi-generational living in a single housing unit can be chaotic and congested”, continues Williams, “an ADU lets all family members have privacy and space.”

Take advantage of existing equity

Higgins identifies another way increased home values have impacted the popularity of ADUs.  She says, homeowners are  “sitting on a record level of home equity that makes up the bulk of their net worth. But that equity is just sitting there, not working for them.” Higgins elaborates saying these homeowners are  “missing out on opportunities to leverage it to create a passive income stream.”

Are Accessory Dwelling Units More Difficult to Finance?

Financing ADU’s in the past, was difficult with FHA and VA loan programs.  However, starting in January 2024, ADUs will become easier to finance.  In an October 2023 press release, the Federal Housing Administration (FHA) announced new financing options for ADUs.  The new policy “allows lenders to count income from small units of housing built inside, attached to, or on the same property as a primary residence.”

Previously, FHA backed loans “only allow[ed] lenders to consider rental income from duplexes but not ADUs” says Higgins.  Now, lenders can count income from ADUs towards a borrower’s income.

Key elements of the new FHA ADU policy

  • The new policy would allow 75% of the rental income from an existing ADU to count towards the borrower’s income.  This additional income “will help to increase access to homes with ADUs for homebuyers with limited incomes”.
  • The policy allows 50% of the rental income for any planned construction of an attached ADU (attached to the primary residence) to count towards the borrower’s income when qualifying for a 203(K) rehabilitation loan.  This will allow for more homeowners with limited income to borrow funds to build an ADU.
  • Includes guidelines for appraisers to “clearly identify, analyze, and report on ADU characteristics and the estimated rent the ADU can be expected to generate”.
  • Include ADUs in the types of improvements that can be financed with FHA new construction mortgages.

As mentioned before, previous FHA rules prevented loans from being used for ADUs.  This new policy gives home owners wishing to add and ADU more financing options.

How much do secondary dwelling units cost to build?

Building an ADU in California can be very expensive, ranging from $200,000 to $700,000, depending on size and construction.  However, most people start with the wrong question says Higgins.  Instead of starting with “How much does it cost to build an ADU?”, continues Higgins, “a better approach is to ask ‘What is my ADU buying power?’”.  Start by getting pre-approved for financing, and then work with an ADU specialist to determine the “size and type of ADU that aligns with your project budget”.

Your budget will determine what type of ADU that is best for you.


In the past ADUs were difficult to sell, however, that has all changed. Accessory Dwelling Units have become popular for a number of reasons, most notably, for extra income.  It’s no longer about granny flats or in law suites.  Now, ADU’s are helping make home ownership more affordable, as well as creating wealth for more people.  With increased financing options available, Accessory Dwellings are becoming a more viable option for those with lower incomes wishing to add additional living quarters to their property.