How much does it cost to build an ADU and can I rent a backyard unit out?
How much does it cost to build a home addition or accessory dwelling unit (ADU) to rent out and how much can I rent it out for?
Return on investment is really important, especially when you want to spend money on a construction project. Granny flats, stand alone additions, in-law suites or commonly called accessory dwelling units (ADU’s) are small, usually 500 to 1,200 square foot sized dwelling units that can be built in your yard.
These units can serve a wide variety of purposes such as housing children, in-laws, friends, acting as a pool house or generating rental income. We’ve seen some amazing ADU’s on the beach or in cool places like Laguna Beach generating massive Airbnb and vacation rental income.
There are two main ways we can think of to generate the most cash flow from your addition:
Regular year-round rental - The math for this type of rental is straightforward and we have been managing properties like it for years. You can expect to make between 8-12% return on the project. Here is the breakdown:
Let’s say you collect about $2.75 per square foot of rent in your area. A 1000 SqFt. ADU will make you $2,750 per month of rent. (This can change, just plug in how much you think you can rent the unit for)
After insurance, taxes and other maintenance costs you can expect to keep $28,875. That is about 10 to 11 months of the rental income.
Vacation rental or Airbnb - If you live in a cool location where tourists like to visit, this is going to make you 2-3x what a year-round rental will make you. There are vacation rental and Airbnb management companies that will take care of your home so you can make mailbox money. You can expect higher returns in the 20% or more range if you are in a premium location.
Cost to build an ADU (mother-in-law suite, guest house, free standing addition):
Expect to spend between $200 to $350 per square foot depending on the size and the options you choose. For example, do you want a large kitchen, fancy bathroom with a stand alone tub and walk-in tile shower, or do you want a simple, clean place to live?
Did you know that the state of California has approved $40,000 in grants for anyone wanting to build an ADU which meets certain qualifications? This can be a huge boost and act as a down payment for a construction project or construction loan.
Anyway you look at it, building an ADU adds value to your home, generates cash flow and can give you and your family members extra space or income. If you’re interested in brainstorming or discussing a potential project, call us at 949-570-8300 or email us at firstname.lastname@example.org. We are here to help.