Using an ADU as an Income Property

If you’re looking to offset the cost of your existing home, or to simply add another property to your real estate portfolio, using an ADU rental as an investment property is a great way to increase your monthly cash flow. 

Goals & Intentions for Your ADU Rental

When planning on renting out a property, the first step is to sit down and clearly define your goals for the property. This includes how involved or uninvolved you want to be in the day-to-day operation of your ADU rental. Adding an ADU to your property starts with a clear and concise plan.

What’s your initial budget?

An ADU rental can very quickly bring in extra income, but there is still an initial cost to purchasing or building the ADU and getting it ready for guests. 

The ADU budget will include, but not necessarily be limited to, the following types of purchases:

• Cost of the initial structure.
• Cost of contractors and specialists.
• Cost for permits.
• Cost of utility hookups.
• The purchase and installation of all flooring, fixtures, and finishes inside the ADU.
• The purchase or rent of furniture.
• The planning and purchase of decor and everyday essentials.

Will you provide short-term or long-term ADU rentals?

When it comes to ADU rentals, you have two options. You can rent out your ADU for short-term stays, for daily, weekly, or monthly stays. Or, alternately, you can look for renters that will occupy the space for six months, a year, or more. These long-term renters would use the space more as an ADU apartment.

With short-term ADU rentals, it is possible and commonplace to charge more per night compared to long-term rentals. If you then promote and manage the property well, you can keep the place booked most nights out of the month and stand to earn much more money than you would with long-term rentals. Of course, the downside to short-term rentals is that those renters will often use the unit for vacation, which could result in more wear-and-tear on the unit itself, and more frequent cleaning. It can be quite a bit of work to turn a rental unit over between booked guests.

Long-term ADU rentals usually reduce the nightly cost of booking, but in exchange, you have the peace of mind that comes from knowing the unit is rented out for multiple months on end. Typically, the cleaning of the unit, during that space of time, falls on the renters, and not on the ADU unit owners in this scenario.

With both short-term and long-term scenarios, you will still be responsible for the maintenance of the ADU apartment itself and all appliances held within the ADU. A general rule of thumb is that anything inside the ADU at the time of the rental remains the responsibility of the owner of the ADU apartment. Keep this in mind as you decide what fixtures and appliances to provide to renters in the first place.

Attached vs. Detached ADUs

Accessory dwelling units are located on the same property as a primary residence, but exactly where on the property can influence how they impact your daily life or the daily life of renters in the primary dwelling.

• Attached ADUs are part of the home in a direct way. These can be a basement, attic, converted garage, or an apartment over a garage. They could also be a new ground-up construction that shares a wall with, or is in some way attached to, your existing property.
• Detached ADUs are entirely separate, but still on your same property. They can be right next to your home, behind it, or somewhere more distant on your property altogether. 

When using your ADU as rental income, detached units are typically more in-demand for renters because they provide more privacy than attached units. Offer additional privacy to the ADU by building privacy walls, hanging plants, maintaining a row of hedges, or choosing other strategic landscaping.

What type of ADU makes the best choice?

When it comes to ADUs, there are four primary types of ADUs to choose from. The three types of new structures include:

• Ground-up, permanent builds
• Prefabricated ADUs
• Mobile ADUs

There is also the option of repurposing an existing structure, such as a barn or detached garage. All of these opportunities allow for including individual character and charm in the ADU that can be used to boost the appeal of short-term or long-term stays. If you are new to the prospect of using an ADU for rental income, check out our article on what type of ADU is right for you to get a full breakdown on the four primary options available, and the pros and cons associated with each type.

Smart Additions to Your ADU Rental

With modern technologies emerging every day designed to make life easier, there are plenty of ways to make ADU upkeep a breeze. Smart tech can schedule and maintain different settings, such as for lighting, appliances, and HVAC, which can help to lower the monthly energy costs of the ADU rental, increasing the net profits. Smart thermostats, energy-efficient appliances, and even smart window coverings are all available as you build out your property. 

Your renters will need to gain access to your property at various hours, depending on their travel schedules, their work-life, or their other personal commitments during the time they are staying on your property. Our keyless home entry guide will break down everything you need to know about adding a smart lock on the door allows you to program a custom entry code for each set of guests at the beginning of their stay. When their stay is over, you can remove the code again. Smart door locks also allow you to program different codes for cleaners and service people, allowing you to track who is accessing your rental unit. 

The smart options don’t stop with the door lock. Smart lighting can be voice-controlled, as well as a few other cool features that are definitely worth researching. (Don’t worry, we have a buying guide for smart lighting, too.) Install a series of cameras around the exterior perimeter of your property for added safety and security. Visible security measures can boost guests’ security during their stay and may, in turn, improve your property’s reputation. It can also come in handy for neighborhoods or communities with noise or party ordinances, as obvious security efforts can help ensure that no more guests arrive at your property than those originally specified in the rental agreement.

Inside the ADU, smart home appliances and technologies provide added convenience for your guests. If you design the ADU with these broadening horizons in mind, it may be easier to adopt them as the smart home options improve. If you’re interested in learning more about how to integrate more smart features into your ADU, check out our smart home buying guide.

Considerations for Choosing Your ADU

Once you have decided to add an ADU to your property, there are a few different things to think about. These considerations will help you not only determine which type of ADU is right for you, but what size unit to build or buy, and what features to incorporate into the design.

Where will you place the ADU?

One of the first decisions is to determine where on your property the accessory dwelling unit will be placed. Keep in mind the foot traffic to and from the ADU location and what (if any) walkways are necessary to make navigation easier. 

It is also important to check your local regulations on how close to the edge of your property you’re allowed to build a structure. There may be firm guidelines preventing you from building too closely to the property line, so make sure to research proper ADU setback in your area in advance. If you find that there are regulations, and you have limited space available, mobile ADUs may be a great solution. They are not a permanent placement, and you could even move them to various properties if you have a larger investment portfolio.

Once you know where you will place your ADU, take careful measurements of the area. Use those measurements as a guide for determining the total dimensions of your accessory dwelling unit.

HOA Rules

Every neighborhood community may have their own set of rules and convenances when it comes to accessory dwelling units or additional structures of any kind. If your HOA does allow for accessory dwelling units, they may have limitations on what colors you are allowed to paint the unit, or how visible the unit is allowed to be from the front of your home, or the types of privacy screens that can be used. Make sure to get written approval from your HOA before adding an ADU your property.

Local Building Codes, Permits, Etc.

Every city, county, or township has their own list of rules when it comes to construction. Before you start your ADU project, it is important to familiarize yourself with local building codes and what permits may be necessary before you break ground. If you hire a general contractor to manage your project, this task should be something they take care of, but it never hurts to proactively do the research yourself.

Timeline for Adding Your ADU

How long do you have before you want the ADU to be complete? In comparison, how long will each step take along the process of building an ADU? A specific timeframe that you want to start earning money with your ADU can help you set a construction and set-up timeline. Knowing how long it will take to build the unit may help you determine which unit makes the best choice. Obviously, ground-up construction is the most time-consuming. In contrast, mobile ADU units are the fastest to complete.

Styling Your ADU

One thing all ADUs have in common is their small footprint. No matter how you plan to use your ADU, be very intentional about carving out usable space for everyday tasks. With intentional space planning and the use of compact appliances, you can make your ADU just as functional as a primary dwelling unit, and we are here to show you how.

Choosing A Cohesive Design Style

These homes are built on a much smaller scale than a primary home, but that doesn’t mean you have to sacrifice on design. ADUs are a fantastic opportunity to try out a fun design style you’ve always been drawn to try. Keep it sleek and minimal with a modern look, go heavy-duty with in industrial flair, honor the shore with a casual coastal vibe, or pay tribute to the history of your area with a design style showcasing historic roots. Often, the city you live in can help determine which design style makes the best choice for you. 

With long-term rentals, you may want to opt for a more neutral design aesthetic that will coordinate with the furnishings and décor of your renters. When considering short-term ADU rentals, think about why renters will be flocking to your area, for vacations or schools or jobs or any other reasons for quick stays, and give them something they may not have at home.

Compact Appliances

Today, there are so many appliances that pack in all the features you need without taking up so much countertop real estate. To get you started, look into compact appliances and what they can offer for your ADU rental. Stackable washers and dryers, all-in-one washers and dryers, compact refrigerators, wall-mounted ovens, and small cooktops are all space-saving solutions that provide the functionality you need in a much smaller footprint. 

Choosing Durable Finishes

Whether you’re renting your ADU by the day, the week, the month, or the year, choosing building materials and fixtures that will hold up to heavy foot traffic is essential. You’ll have to clean after each guest, so you’re going to want items that are easy to clean and will show minimal signs of wear. 

Stocking Your ADU

With the build of your ADU complete, the next step in turning it into a successful income property is to stock the unit effectively. Renters will have different expectations of what will come in the ADU based on how long they’re renting the unit. Long-term rentals require fewer items to get them started, where short-term rentals will expect all the comforts of home, or a great hotel, all provided for them. 

Styling a Short-Term Rental

Short-term ADU rentals are a fantastic opportunity for a person, couple, or family to experience a new area for vacation or on a short-term basis. Because they are using your ADU much in the same way they would expect to use a hotel, they’ll want to have everything in place that they’ll need for their stay. 

This means that every room of the ADU should be fully furnished and stocked with all the essentials. Bedrooms need to have furniture, lighting, linens and all the other comforts of home. The living room should feature furnishings, decorations, lighting, television, and either cable or an effective streaming service. You might even want to set up a specific internet access point to provide wi-fi for their devices as an extra (though often expected) perk. Kitchens and bathrooms should be equipped with everything your guests will need to enjoy their stay, as well. 

Avoid any conflicts with renters by providing them with a full listing of what the ADU will come stocked with in advance, right down to the number of rolls of toilet paper and paper towels that will be on site to get them started.

Styling a Long-Term Rental

Long-term ADU rentals have a different set of needs, because typically those renters will want to fill the space with more of their own personal items. If you’re renting out the space for a year or more, you typically won’t be expected to provide linens, dinnerware, flatware, glassware, or larger furnishings. Of course, this could change if you’re offering a long-term rental in a hard-to-get-to location, such as Hawaii. It is important to state in your listing whether your rental comes furnished or unfurnished. If your budget is tight, a long-term rental could be more affordable on the onset because you won’t be expected to fill the unit with as many items.

Turning ADU Rentals into a Successful Business

Choosing to turn an ADU into an income opportunity is a business just like anything else, and for your own sake, it should be treated as such.

Consider a Home-Sharing Site

If your rental ADU is available short-term, you may end up using a professional home-sharing site to enhance exposure and to provide secure booking for both you and your guests. When this is the case, do your research into the site and their reputation, make sure to consider all the terms and conditions, and price your ADU accordingly to be competitive with similar properties in your area.

Start with Rental Agreements

Every ADU rental, whether short-term or long-term, requires a proper rental agreement to provide legal protection for both the renter and the property owner. These agreements need to be signed prior to giving the renter access to your unit, to help avoid any future problems. Today’s legal documents can be signed online in some areas. It is always a good idea to have your lawyer or legal representative look over all forms for legal validity before any signatures are collected. 

Budget Money for Repairs

Wear and tear on any home is inevitable, whether you live in it, or it is being occupied by renters. In short-term rentals with a lot of activity and turn-over, you can expect more repairs than usual. Make sure to keep an ongoing budget set aside to deal with repairs in a timely manner. Renters are often willing to overlook an inconvenience of something breaking mid-stay, but only when repairs are made quickly. Have the cash on hand to repair an AC unit, replace an appliance, or deal with an untimely leak immediately. 

It is also a good idea to interview a reliable handyman or service providers in advance and get them familiar with your property from the beginning. Often, if you sign up for an ongoing service agreement with them, companies will lower their rates, or waive some labor costs for that loyalty.

Communicate Effectively

Most home-sharing sites and other online booking solutions allow for reviews, and those reviews could play a significant role in the success of your ADU as an income opportunity. Many online review sources do not allow for customer complaints to be taken down, and an unhappy guest can scare off potential future business for years. 

Having respectful and reliable communication from the beginning is often all that is necessary to solve hiccups or issues before they lower your rating. Usually, getting that coveted 5-star rating is as easy as:

• Anticipating the needs of your guests.
• Answering calls or emails quickly.
• Accommodating guests’ requests whenever possible.
• Ensuring your property is always clean and well-maintained.

Hire Professional Cleaners

Aside from making your job around the property a little easier, hiring a professional cleaning company from the start can make guests happier because they’ll always walk into a clean unit. It can also help to lower your maintenance costs because it will help keep the finishes and fixtures of your unit in outstanding shape. 

Interview cleaners in advance and make your unit part of their regular cleaning schedule. Work with them on a fee for their services and incorporate that fee into your rental costs, especially if you’re renting out your ADU on a short-term basis. When scheduling bookings, make sure to allow enough time for a thorough cleaning between check-out and check-in. 

Ensure Proper Bookkeeping

Many of the expenses you incur throughout the year could be a business expense. If you aren’t privy to all the ins and outs of tax law, make sure to hire a tax professional from the onset of your venture to ensure you’re not only paying all the proper taxes, but that you’re also maximizing all the potential write-offs.

Personalizing Your ADU Rental

Set your ADU income property apart from the rest with the little touches that finalize your design. Leave out a small welcome gift for short-term renters, provide exceptional property management to long-term rentals, and look for small ways you can represent your location in the design of your accessory dwelling unit.