Understanding the Market Potential for ADUs
Interest and investments in Accessory Dwelling Units (ADUs) will continue to grow for many years to come, as there is a confluence of events that is creating a low-risk marketplace to generate a positive return on an ADU investment. In this article, we cover the benefits of ADUs in general, prefab ADUs in specific, and steps that homeowners can take to gain a positive return within a short period of time.
What’s Special About an ADU?
Accessory Dwelling Units (ADUs) are secondary structures that are built on the same lot of a larger, primary home. Often called “Granny Flats”, these apartments, studios or two story homes, can accommodate a wide-range of tenants:
- Home Office Workers
- Aging Parents
- Adult Offspring Still Living at Home
- Home Caregivers
- Visiting Guests
Perhaps the most popular reason to build an ADU is the ability to generate significant, recurring rental income quickly, whether from long-term tenants or short-term arrangements, such as an Airbnb rental. This source of income is especially attractive for homeowners experiencing lower-revenue-producing years, such as: extended unemployment; lengthy medical issues; semi-retirement; or full retirement.
Home Office Workers
Having a dedicated area within the home for two busy professionals can be difficult, especially if conference calls are a substantial part of one’s work day routine. An ADU on the property allows for secluded, office space for writers, artists, and other busy professionals, while fostering a creative and productive environment that may be encumbered in the main home’s interiors.
As the alternate name implies, “Granny Flats” are ideal for housing aging parents. By allowing elders proximity to older children, grandchildren and other family members, while offering residential autonomy, seniors can maintain their independence and privacy, while being in the immediate vicinity of relatives should an emergency arise.
Conversely, some aging homeowners have preferred to downsize to an ADU on their own property lot, while leasing their main home either to family members or other tenants. More passive income can be earned from the larger home, while still residing in a familiar environment.
Adult Offspring Still Living at Home
The reality of today’s world is that many grown children have struggled to become self-supporting, independent adults. This does not mean, however, that parents are obligated to keep them under their financial wing for the remainder of their natural lives. Enter the ADU as “training wheels” for offspring who have been “failing to launch”. Parents can charge rent, set up individual utility arrangements, or assign property maintenance responsibilities, as alternative or partial payment to keep their adult charges under a watchful eye.
Twenty-four hour home care is quickly becoming the alternative to nursing homes and senior living communities. Highly trained, compassionate and committed home care is the preferred model for Aging in Place, a concept rooted in the belief that elderly citizens thrive in familiar environments, namely the home in which they have lived for a number of years. By allowing a home caregiver to remain onsite in an autonomous dwelling, you are providing housing which may offset the costs of private elderly care.
An additional benefit for resident caregivers is that they can also provide their services to other nearby neighbors, who are also “aging in place” or need assistance with other health-related issues.
Allowing your guests the freedom to spread out in private quarters, complete with a separate kitchen is perfect when guests arrive from a different time zone. No more being awakened three hours earlier when your New York guests arrive or guests from Asia adjusting from a half day time difference, are becoming acclimated to the local time zone. The ADU allows guests the privacy and autonomy of a hotel suite, while staying conveniently close to their host.
Additional Benefits: Premium Resale Value
Due to the many benefits and flexibility offered by ADUs, homes with ADUs are currently selling at a faster rate than homes without, especially in locations with limited affordable housing options. Though in-depth research on this topic is sparse, a 2012 small-sample ADU study published in the Appraisal Journal found ADUs generally contributed about 25% to 34% of each property’s assessed value. Furthermore, homes that added an ADU demonstrated an average of 51% increase in resale value. These findings should be viewed as directional, as they were derived from just 14 ADU-enhanced properties in Portland, Oregon. A good local real estate agent should be able to provide current data that more accurately reflects ADU trends in your immediate area.
All Eyes on California
There is no state or regional marketplace that best reflects the potential for ADU investments than California. The events and trends that have been occurring in California that are fueling investments and fostering a favorable marketplace for building these structures include:
- Shortage of Affordable Housing
- State & Local Government Incentives
- Growth of ADU Construction Specialists
- Proliferation of Innovative Prefab ADU Manufacturers
- Increasing Demand for Home Offices & Virtual Workforces
- Homeowners Desiring Passive Income
- Homeowners Desiring Flexible Living Arrangements
- Homeowners Wanting to Age in Place
- Strong Increase in Resale Value for Homes with ADUs
- Shorter Days on Market for Homes with ADUs
Why Prefab ADUs?
We strongly encourage that you consider a prefab model for your ADU for five important reasons:
Though we are confident that many traditionally built ADUs can meet these requirements, our stance is that, on average, prefab units will dramatically reduce the chances of setbacks that can cause delays or increase costs, such as:
- Weather Delays
- Design Iterations
- Lengthy Permit Processes
- Availability of Subcontractors
Given that ADUs serve many common purposes, with similar layout dimensions on comparable lots, our position is that rarely should there be the need to create a custom ADU design. Without truly unique requirements, you should refrain from “reinventing the wheel”. Additionally, established prefab ADU manufacturers may already have pre-approved designs with your local city government.
Regardless of the build type you choose (prefab or traditional), we absolutely recommend working with ADU Specialists – specifically, proven builders who understand all of the nuances of your local ADU building codes, requirements, incentive programs and processes.
Prefab vs Traditional “Stick” Builds
ADU’s are gaining favor with local city and county committees, as ordinances in many cities are making it easier for homeowners to construct these additional residences to address state housing shortages. To overcome the housing dearth in a shorter span of time, many homeowners are turning to prefabricated (prefab) ADUs instead of traditional “stick” builds.
Prefab housing has been around in North America since as early as 1902, when Sears Catalog Homes began offering kit homes primarily via mail order from Florida to California. The two main types of prefab homes are Manufactured and Modular, which differ in construction and materials.
This home type is usually built onto steel beams and transported in completed sections to the final home site, where they are assembled. During transit, the home sits atop a “flatbed” with wheels and an axel. This assembly is removed once the foundation is prepared for the home’s eventual placement.
As the name suggests, this home type is built in “modules” or sections in a factory, which are later assembled on the final home site much like a traditionally built home. Once the prefabricated sections arrive at the foundation, the home is constructed and installed much like a typical constructed home.
For more guidance on understanding the tradeoffs of construction types for your ADU see our article Choosing Between a Prefab ADU and a Traditional Stick-Built ADU.
Traditional Prefab Home Manufacturers
Based in Los Angeles, CA, Connect Homes offers 14 different models of prefabricated homes, which are built in their San Bernardino factories. Over many years, the founders, Jared Levy and Gordon Stott have perfected and patented a modular prefab system that meets the needs of the average homebuyer: high-end, modern functionality, at a lower cost. Connect Homes is one of the pioneers in the prefab construction industry and strives to remain a major player by improving and reimagining the building and buying of quality homes.
Plant Prefab’s overarching mission is building high-quality, sustainable custom homes. With prefab construction facilities in Rialto, CA, Plant Prefab offers the patented Plant Building System to create custom homes much faster and more efficiently than site-based contractors and other prefabricators, since 2016. The company claims to be the first prefabricated design & construction company in the US dedicated to end-to-end sustainable construction – materials, processes and operations.
Founded in 2017 in Los Altos, CA by David Klein and Sara Dean, Modern Empathy’s mission is to build livable, beautiful, functional homes that are both ADA and Aging in Place friendly. With several different floor plans of varying square footage, the company offers open and light ADUs, with full, functional kitchens and bathrooms that take ADA compliance into consideration. Even their smallest unit, at 250 square feet, is sized for ADA requirements with wheelchair accessible showers, toilets and bedroom spaces that allow a full-sized bed, with space allowances and reach ranges in mind. Their models also take into consideration energy efficiency and universal design.
3D Printed Prefab Home Manufacturers
With the advent of technology and improvements in materials science, robotics and automation, a new method of prefab manufacturing has been quickly gaining interest by Proptech Investors and early-adopter homeowners. 3D printed homes are addressing the issues of:
- Building Cost
- Construction Waste
- Time to Build
- Construction Quality
Based in Oakland, CA and founded in 2017, Mighty Buildings is an innovation-driven construction technology company with the goal of creating beautiful, affordable, and sustainable homes using 3D printing, robotics, and automation. The overarching mission of the firm’s founders – Slava Solonitsyn, CEO, Alexey Dubov, COO, Dmitry Starodubtsev, CTO, and Sam Ruben, CSO – is to disrupt the construction industry by delivering a Production-as-a-Service business model.
Their 3D printing technology enables them to produce modular homes and components much faster than traditional construction. Their 3D printers use Light Stone Material (LSM), that hardens when exposed to UV light, making it a more effective building material. They are certified under California’s Factory Built Housing program to build units using 3D printing, and the first company to achieve certification under the UL 3401 Standard for evaluating building structures and assemblies.
Co-founded by Jason Ballard, the former CEO of Treehouse, a sustainable home improvement retailer, ICON’s mission is developing sustainable technology and revolutionizing homebuilding. They are addressing three critical problems facing the housing industry:
Their approach to construction innovation includes using 3D printing robotics, software and advanced materials. Though they do not yet offer ADU models directly to homeowners, they are important to follow to stay abreast of the latest capabilities of 3D printed home technology.
Advantages of Prefab vs. Traditional Build
Prefab incurs lower costs due to efficiencies built into the indoor manufacturing & construction processes:
- Less waste in construction materials
- Cost-savings from large purchase volume of standard materials & fixtures
- Fewer construction workers and hours needed for on-site work
Prefab reduces construction time by:
- Virtually eliminating construction delays due to inclement weather
- Continually improving indoor construction processes
- Reducing design & customization choices
- Specializing in specific types of structure types, like ADUs
Producing similar structures over time, while improving internal processes & material choices, increases the reliability and effectiveness of the manufactured structures.
Highly precise building practices can ensure standardized air-tightness that will improve the heating and cooling efficiency of your home. More prefab manufacturers are also incorporating energy efficiency & sustainability features into their designs, materials and constructions.
ADU Investment Cost Analysis
Using an ADU Cost Estimate Calculator is one of the easiest ways to get a rough estimate of your proposed project’s cost. The best ADU Cost Calculator is available on the San Mateo, CA City Resources Center website.
Even if you are not planning to build in San Mateo County, this calculator can estimate the upper limit of your construction costs. If your city and state are not represented in the drop down, choose South San Francisco as the area for the construction build. Make sure to add information in all of the areas requested by moving along the top navigation bar from Structure to -> Construction to -> Finances to -> Rents. Then review the estimated results in the Costs, Value, and Projections tabs.
By entering in a few key characteristics of the proposed ADU – such as square footage, type of construction (prefab, new construction or garage conversion), number of bedrooms and baths – the homeowner will receive a quick estimate of hard and soft costs to build the project.
Hard Costs only cover constructing the accessory dwelling unit, such as labor and material fees. Items such as architectural and engineering report fees are included in Soft Costs. Depending upon your particular local government, city and local impact fees may or may not be available, as ADU’s have just recently become allowed in many counties, so data is still being added to the database.
If you are building in California, you can further modify the results so that it more accurately reflects your particular area by using this City Cost Multiplier Google Sheet for the correct multiplier for your exact city. Simply multiply the cost number received in the estimate by the multiplier for your particular city.
The calculator also provides a helpful Estimated Rental Fee for the finished property to help you arrive at Return on Investment numbers to help the investment decision process. Simply click on the Value button of the navigation bar to see how long it will take for the ADU to pay for itself based on the given rental fee.
Next Steps: Getting Started
- Research Your Local Building Codes for ADUs
- Perform Cost Analysis & Create a Budget
- Define Your Prefab ADU Requirements & Features
- Use Dwellito to Research Models & Vendors
- Request Proposals From at Least 3 Vendors
Additional ADU Resources
- The Impact of ADUs on Your Neighborhood: Perceptions vs. Reality
- Choosing Between a Prefab ADU and a Traditional Stick-Built ADU
- Financing Your Renovation or ADU with a Noah Shared Equity Contract
- Aging In Place Technology for Today & Tomorrow
- What to Consider Before Purchasing a Shipping Container Home
- Shipping Container Homes: FAQs
- What Homeowners Should Know About Proptech
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