Written July 27, 2022 by Jenna Hall, REDFIN
Have you been thinking about using your ADU as a rental unit, but you’re just not sure where to start? The potential earnings and benefits of renting your ADU are endless, but given that every city has its own ADU zoning restrictions, HOA
regulations, and building laws, actually renting out the unit can be difficult. For example, laws surrounding rental ADUs from Los Angeles, CA are completely different from the laws in Houston, TX.
To help you learn more, we reached out to ADU experts to share their best advice and tips about using your ADU as a rental unit. Keep reading to see what they had to say.
1. Always do your due diligence on potential tenants
The one thing we recommend to our customers is for them to do their due diligence on their future tenants. Let’s be honest; everyone can be on their best behavior for a 10-minute interview; however, documents never lie. We recommend asking your future tenants as part of the screening process for their three most recent pay stubs, a copy of the credit report, three references from previous landlords, and the current employer’s phone number to ensure they’re still working. Also, slowly saving the profits from the rental to about 6 months’ worth of rent in a separate account is a great idea. That way, if things go sideways with your tenants, it wouldn’t affect you that much. – The ADU Guru
2. Check with your city’s planning department
Because many of the cities that legalized ADUs did so to boost the supply of affordable housing, some frown on or have explicitly banned homeowners who use their ADUs as short-term rentals. If you want to use your ADU as a short-term rental, you might need to obtain a business license and meet certain criteria set by your local government. Just in case, be sure to check with your city’s planning department before listing your ADU on Vrbo or Airbnb. – Torii
3. Attract your ideal tenant
When renting out your ADU, consider this: the setup, design, and feeling of independence are what allow property owners to create a space for their tenants that truly feels like its own. It’s much easier to attract your ideal tenant than it is to find them – we recommend creating a private and luxurious space that can fit a small family. We think ADUs should be a fully-functional home that feels just like any other home, just a little more cozy. – Framework First, Salinas, CA
For your ADU to be the perfect rental property, you must have high demand, low supply, and a well-managed product. Tenants want the same things homeowners want: A good location, privacy, custom home amenities, and the ability to have a pet. I have found that many renters are looking for stand-alone ADUs with an in-unit washer/dryer, a dishwasher, and some outdoor space. – Derek Sherrell, That ADU Guy
4. Create a strong relationship with your tenant
If you’re going to rent out an ADU and share your backyard it’s vital to know what you want, and know the tenant you’re going to be sharing space with. A great tenant/landlord relationship makes everything else about managing the ADU easier. Invest time in building that relationship, and you’ll have less vacancy, less to worry about, and maybe even make a friend. – Coram Houses, Durham, NC
5. ADU rentals are a great way to earn passive income
Would you like to have an additional $1,500 or more in monthly passive income? Due to increased housing demands, rental properties are at a record high. Instead of growing grass in your backyard, envision a money tree that blossoms $100 bills at the beginning of every month. – D A Holt General Engineering
An ADU can earn you income to supplement your mortgage payments, retirement savings, or vacation fund. It’s easy to see why generating an income stream from renting out an ADU can be a smart move. However, keep in mind that it does require due diligence and careful oversight since regulations for short-term rentals vary by location. – MHBO.com
The ADU – it’s a misunderstood gold mine. If you consider building it and renting it, your investment return will be a third of the time compared to an average home in California, then it’s just equity money. – Giisamex Architecture Inc. South Pasadena, CA
6. Create an environment that retains tenants long-term
Even though rentals are in demand, creating an environment that retains tenants long-term is important. Things like new paint, wood floors, stainless steel appliances, and stone countertops can go a long way. Also, become familiar with landlord regulations for your area and vet candidates thoroughly for income and compatibility. A difficult or non-paying tenant can cost a lot of time and money, not to mention, in the case of an ADU, they literally live next door. – Windy City Builders
7. Focus on quality and updated features
To get the most value out of renting your ADU, your ADU must feel and be spacious with great quality and updated features to ensure satisfaction from your tenants. Builders like AKD Homes can design-build the exact size and quality you desire to assure you get the most out of your ADU. – AKD Homes, Hayward, CA
8. Consider a manufactured home ADU
If you’re looking to maximize your return on investment, we suggest that you consider building a manufactured home ADU. The cost of the manufactured solution is less than half that of conventional construction and can yield a net ROI OF 12%. – Sonoma Manufactured Homes, Petaluma, CA
9. Know the rules and how to interpret them to your advantage
Each council has different rules for granny flats (ADUs), so it’s vital that property owners check the requirements for building on their property. This can be a complex process as some councils can be reluctant to provide specific answers to your questions. Since we know the rules and regulations, we also know how to interpret them to our client’s advantage. For example, some councils restrict the size of ADUs but seldom limit the size of decks, patios, or balconies. So, we encourage clients to make them as big as their budget permits and position them off the living room. This helps with the indoor/outdoor transition and makes a small space feel larger and more livable. – Granny & Co. Homes
There are various ADUs available, and whether or not you can use your ADU as a rental all depends on local code and building zones. An ADU can be an addition, attached, detached, above the garage, or even a basement conversion. All of these can easily be used as a potential rental unit. However, ADUs typically cannot be sold as separate units and must remain an “accessory” on your property. – Gregg Camp, Santa Cruz Realtor®
10. Stand out from other hosts
We focused on the Accessory Dwelling Unit market because of the options ADUs create as rentals, a place for Mom, the boomerang college kids, added remote workspace, or a quiet place for you. A key to a good listing is fabulous photos taken with a real camera, maybe even by a photographer. Separate yourself from other hosts by creating a comprehensive binder stored on the desk or countertop that includes operating instructions for the entire DADU. Also, stock the unit well, from cooking utensils to a quality bed, and lastly, don’t forget the toilet paper. – Michael Murray, Founder of Ballard Backyard Cottages, Ballard, WA
11. Be sure to give your tenants privacy
Our advice for successfully renting your ADU can be summed up in a popular song lyric from the band Offspring in the mid-’90s, “Keep ‘Em Separated”. For you and your tenant’s comfort, privacy and security, strategically separating your main home from your rental unit is key. This isn’t necessarily focused on distance, which may be logistically or legally prohibitive, but includes strategic landscaping, building position, window placement, and even a water feature for a sound barrier. – Watershed Structures, Snohomish, WA
12. Educate yourself to be a fair and empathetic landlord
ADU owners have a unique opportunity to do their part in alleviating the housing crisis while also building wealth for the family that owns it. Two major ways to be a fair and empathetic landlord are to one, educate oneself on the local and state laws protecting landlords and tenants, in addition to historic tenant biases against certain communities. Second, learn about available local and federal programs that assist ADU owners in placing tenants, as well as supporting those who are building ADUs, and utilize them to be most effective. – Inclusive Action for the City, Los Angeles, CA
13. Tailor your rental agreement to your specific situation
Your tenant will live on your property, so you may want to include specific details about any shared space. That way, you can ensure your lifestyle requirements are aligned and avoid any sticky situations. Don’t want to hear loud music at 2 am? Put it in your rental agreement. – Casita Coalition, Los Angeles, CA
The Bottom Line
Today more than ever, creating a second source of income is vitally important, and ADU seems like an easy way to start and generate extra income without a major upfront investment.
However, building an ADU the right way and managing the tenants to preserve your peace of mind is more art than science. And for that, we would like to offer you our 15 minutes free phone construction to save you days of resereach and help you determine if ADU is a good fit for your situation.