By Adding an ADU, Real Estate Values Can Be Substantially Impacted

If you're in the market for a new home, few features of your potential property may sound more appealing than a bonus structure to use as an office, an in-law suite, or a rental property. But while these structures—accessory dwelling units, or ADUs—sound promising, figuring out how to maintain and keep your new ADU up to code isn't easy. Plus, there are some special considerations for buying a property with an ADU.

ADU proponents say these structures can help solve societal problems while offering creative, manageable, and affordable homes, particularly compared to traditional houses. But these experts also have much to say about ensuring your ADU real estate addition complies with local ordinances: Here's what they want you to know, whether you're considering buying a property that already has an ADU or planning to build one yourself.

What Is an ADU?

It might seem like a long-winded term for "guest house," but ADUs actually have a specific definition based on where you live and the local ordinances governing these structures in your area.

"'Accessory dwelling unit' is the nomenclature that planning and zoning officials across the country use for distinct, standalone additional dwelling units on a primary residential property," says Kol Peterson, author of Backdoor Revolution: The Definitive Guide to ADU Development. "Boiled down, that tends to mean that you have everything that a house would have, including a kitchen, bathroom, bedroom, or living area independent from the primary dwelling."

Sheri Koones, the author of Bigger Than Tiny, Smaller Than Average, says ADUs were first popular in Canada, where units were built on alleyways and called laneway houses.

"A lot of people confuse small homes or ADUs with tiny houses," Koones says. "A tiny house is a house that's mobile, it's not code compliant, and it generally does not have sewage or water—it's really a mobile home."

Terms such as guest house, cottage, or even granny flat might be commonly used for structures similar to an ADU, but these structures can vary widely depending on your local municipality. On the other hand, ADU is an official term indicating the units meet local standards. In your area, that might mean any standalone structure with plumbing and electricity. It could also include basement apartments with full kitchens, separate entrances, and designated off-street parking spaces, or an apartment over your home's garage.

Understanding these different—and sometimes overlapping—definitions is key if you're looking for ADU real estate. You may read a property listing that indicates a home has a guest house, but as Peterson points out, whether it's permitted is another story, and these specific definitions matter.

Permitting and Your ADU

It's entirely possible that your ADU was built with permits through your local municipality, but those permits don't always amount to certification by your city as ADU real estate. For example, you might have paid a licensed contractor to install a bathroom in your backyard cottage, but that doesn't mean the city knows that your mother-in-law is living there full-time.

To remain compliant, Peterson says many areas require ADU owners to have an inspector come out to verify that their ADU meets the required standards and all associated stipulations. Once approved, your property taxes will likely then be reevaluated.

"Let's say you add an addition to your home of 500 square feet," Peterson says. "That triggers the county assessor to come to the property and do an assessment of the contributory value of those improvements to the property, which adds to your property tax roll. So that would increase your property taxes."

In other words, as with any other significant improvement, an ADU will likely increase your taxes.

If you're buying a property with an ADU, Koones suggests checking with your real estate agent to see whether the proper permits were pulled for the work. You can also look at tax documents to see whether the structure is accounted for as an ADU rather than a garage or shed.

"Find an agent with experience with ADUs," Koones says. "There are a lot of items to check off to make sure it works out; things like the setbacks, who can live there, electricity, the size and style of the unit."

If you're selling a property with a guest house or basement in-law suite, be careful to disclose the unit's status to buyers and avoid giving the impression that it is fully permitted or approved if it's not.

Peterson says he doesn't see many drawbacks to having an ADU on your property because the worst-case scenario is you don't have to use that structure as intended, and the best-case scenario is that you can opt to use the ADU for a variety of purposes over its lifespan. For example, Peterson points out that families used ADUs during the pandemic as homeschooling rooms for children. You might rent yours out to supplement your income for a few years and later allow older family members to move in to keep everyone close by.

Peterson's site, Accessory Dwellings, has a database of ADU laws and ordinances by state if you're unsure about the status of your property.

Costs Associated with ADUs

Nothing good comes for free, and Peterson says additional costs will likely be associated with owning a property with an ADU.

For one, you'll want to have the ADU insured. Peterson says this can typically be done under your current policy, but the policy will have to address insurance separately for the ADU.

Additionally, your local municipality might charge a tourism tax if you rent your ADU out on a short-term basis to visitors: Check with your local government to see if that's the case.

Another potential complication is that by building an ADU, real estate value likely increases, meaning you'll pay higher property taxes than your neighbors. If you want to purchase a property with an ADU, your real estate agent can pull local tax records to see the increase to help you decide if the added cost is worth it.

Finally, if you learn that your ADU is not compliant with local codes, you must spend money to bring it into compliance. Peterson says these fixes are often simple: You might have to swap a full stove in your ADU's kitchen out for a hotplate if your area doesn't allow for full kitchens in ADUs, for example. In more complicated situations, Peterson says you might have to limit the use of your basement apartment ADU if you don't have a lot that allows for a separate entrance or off-street parking.

Even in those situations, you won't have to demolish your ADU to meet codes. Instead, you'll have to modify how you use the property, Peterson says. In more extreme cases, that might mean removing a tenant or no longer offering short-term rentals, but you can still enjoy the space for personal use.

ADU Benefits

Peterson says that value and interest in these structures are growing: "People want to have flexibility on their property."

A 2021 survey by the AARP shows that while just 4% of adults surveyed had an ADU on their property, 26% would consider adding one to solve the housing problem for older Americans.

Koones says that ADUs are affordable, low-maintenance options for seniors who aren't yet ready for a retirement community but find their current home too much to manage. They can benefit the broader community, too.

"They allow for added density without adding large buildings that can change the nature of the area," Koones says. "Having an ADU is a win-win for society because there's a housing shortage."

If you're still on the fence about purchasing a property with an ADU, Dalas Dodd, Manager at Sundae Design Group—a marketplace for selling homes off-market—suggests talking to your real estate agent to gauge the local market.

"Make sure that studio or 1-bedroom apartments are desirable in your neighborhood before cutting any checks for an ADU," Dodd says. "Currently, there is a nationwide housing shortage, so if you live in a city that is pressed for rental units, then an ADU is a wise investment. An added bonus is that if you decide to sell your property, an ADU will almost always add value."

If you opt for an ADU, you can use it as an investment property like Peterson did. He built an ADU on his lot about ten years ago and began using it as his main home while renting out the primary residence to tenants. In only four years, he had paid off the mortgage on the entire property and was turning a profit.

"People want to provide housing for the community amid this affordable housing crisis, so you're accomplishing all these selfish goals, but it's also contributing to societal goals simultaneously," he says.

To start your ADU journey, research guidelines and requirements in your area: With any luck, the ADU of your dreams is within reach.