What is an ADU and why would you want one?
Are you looking for a more affordable way to purchase a home? Or a way to generate wealth from your existing/future residence? Look no further! An ADU may be your golden ticket.
ADU stands for Accessory Dwelling Unit. An Accessory Dwelling Unit is a secondary living unit that sits on the same parcel as a single-family residence. ADU’s come in a few different forms. They can be internal to the home, attached to the home, or detached from the home. Let’s explore the different types you may see here in Colorado and then discuss the advantages of having one!
1. Detached stand-alone structure:
A detached structure means the structure is not attached to the home. An example of this in an ADU form would be a Tiny Home that someone puts in their backyard and rents out. Similarly, perhaps the structure is a shipping container that was finished to be a studio apartment. Carriage houses and guest suites also fall into this category. Another example is a detached garage that gets converted into an apartment. Provided that the unit is detached, there will be a private entrance for this type of unit, that is separate from the primary structure. In the case of a detached structure, the HVAC, plumbing, sewer, and major systems have to be configured separately from the primary structure.
(Examples of tiny homes, shipping containers, and guest houses are pictured)
2. Unit above an attached or detached garage:
Some garages are attached to the primary structure, while others are not. Either way, the top of a garage is a great place to find unused space on a lot to build additional living areas! Rather than building out or building on (additions, tiny homes, etc.), which takes up more of the usable outdoor space on a lot, above-garage units are a creative way to add an apartment, studio, “man-cave”, etc. while preserving your yard space. These types of units are external from the primary structure and will almost always have their own entrance to allow for more privacy in the primary structure. In the case of a detached garage, the HVAC, plumbing, sewer, and major systems have to be configured separately from the primary structure.
(An example of an ADU above a detached garage is pictured)
3. Basement with a private entrance
A basement with a private entrance is a form of an ADU that is internal to the primary structure. However, in some cases, there may be a private entrance to the space, therefore sectioning it off from the primary unit living areas. Although there may or may not be private entrances, this will feel more like a shared unit than a detached stand-alone structure, as noise may pass through both units. In other words, if you are renting out the basement and you are living upstairs, you may still hear your tenants in the basement or smell the food they are cooking. This is sometimes an easier conversion if your basement is not already finished, because the basement utilities can be hooked up to the existing HVAC, plumbing, and electrical systems of the primary structure. In the case of a detached structure, those systems have to be configured separately.
(An example of a finished basement with a private entrance is pictured)
4. Attached ADU (non-basement)
An attached unit is a form of an ADU that is internal to the primary structure. This unit structure is similar to a Duplex. Some examples of this form of ADU include an addition to the primary structure, an attached mother-in-law suite, etc. In some cases, there may be a private entrance, in others, there may not be! Although there may or may not be private entrances, this will feel more like a shared unit than a detached stand-alone structure, as noise may pass through both units. The additional unit’s utilities can be or are likely hooked up to the existing HVAC, plumbing, and electrical systems.
(An example of an attached non-basement ADU is pictured)
What is the benefit of either having an ADU or having a home in a municipality that is ADU friendly?
There are several big advantages to either purchasing a home with an existing ADU or adding one to your primary structure. For starters, a single-family home with an ADU will likely be cheaper than a formal Duplex in your market. If you’re looking for a 2-unit residence, this could be a great option for you! An additional advantage pertains to markets that will or do face density and affordability issues. If you consider re-sale on a home that provides a way to off-set the mortgage versus one that does not, you will see greater resale value on your home that contains an ADU! Another “un-seen” advantage is the lessened consequences for our environment by making use of existing structures and lots, as opposed to scraping and building new homes.
One of the largest advantages of having an ADU is the flexibility it can provide for you and your family. Do you need an additional space for an aging parent? Will your marriage perform better if there is a “man-cave” or “she-shed” for your spouse? Are you self-employed and need to physically walk out of the house and into an office in order to increase your productivity? Financial flexibility also becomes an option! Perhaps you lose your job or you’re saving for a large purchase, and you would like to not have to worry about your mortgage or a portion of it for a few months. Rent out your ADU with little disruption to your lifestyle and you’re covered!
Finally, but perhaps most importantly, there is a distinct financial benefit that is provided by ADU’s other than flexibility. In addition to collecting rent from a separate unit and the obvious benefit of off-setting your mortgage, ADU’s provide an opportunity to build wealth! As your mortgage gets paid down from your collected rents, the value of the property should be increasing over time. This creates a larger and larger pool of equity in the property. While this happens, you can be saving the money you’d otherwise be paying towards your mortgage, using that money to re-invest in the property, enhancing your lifestyle with that income, or saving up to purchase additional units. As soon as you start renting out your property, it essentially turns into a business in regard to rental income and expenses. While I am not a CPA and this is not tax advice, we’ll leave it at this: there are several tax advantages to renting out a portion of your home! If you're looking to build wealth, have financial flexibility, and reduce your potential impact on the environment, an ADU may be for you!
Shameless plug: Are you considering purchasing a property with an ADU or an opportunity to create an ADU in the Greater Denver Area? If yes, get in touch with us. If not, thanks for reading!