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ADUs: Great for Passive Rental Income

Renting out an ADU on a short or long-term basis can earn you substantial rental income. Discover what you need to know in order to maximize your earnings.

January 1, 2018

If you’re looking to earn some extra income without purchasing a full investment property, you should consider an Accessory Dwelling Unit. Renting out an ADU can provide you with substantial passive rental income no matter which approach you take.

Here’s what you need to know:

What Is an ADU?

An accessory dwelling unit or an ADU is a secondary housing unit located on a single-family residential lot. These units can be developed for a variety of different purposes.

ADUs can be used to house guests, aging parents, or adult children. These additions can also serve as an office, game, or workout space. However, one of the most popular uses for an ADU is for passive income by renting out the space.

Why Are ADUs Great for Passive Income?

Here are some of the reasons why ADUs are great for passive income:

High Demand

ADUs are great for passive income due to the high demand for housing. Unfortunately, the population is growing faster than new housing units can be built.

As a result, the demand for housing exceeds the supply in many areas — especially large cities. ADUs can help fill this gap with functional spaces that people want to live in.

Competitive Rents

The mismatch between housing supply and demand has caused rent prices to increase exponentially. While rent increases are nothing new, the extent of these increases is unprecedented due to recent global financial and health struggles.

For example, the national median rent has increased by 11.4% so far in 2021 compared with just 3.3% for the first six months of 2017, 2018, and 2019.

These increases have left many people struggling to afford housing since incomes aren’t increasing at the same rate, especially as inflation increases. However, ADUs can act as an affordable alternative for many people looking for a cost-effective housing solution.

Flexibility and Versatility

ADUs offer both landlords and tenants a lot of flexibility and versatility. This is because ADUs come in many different forms and layouts with many different features. In lieu of having to pay top-dollar for an apartment in a huge complex with tons of costly amenities, tenants can find the same amount of space with the same general features for a lower cost.

Instead of having to pay top-dollar to purchase a separate investment property, landlords can take advantage of the land they currently have to build an income-generating ADU.

Increase Property Values

Not only are ADUs beneficial to landlords in the short term, but they are also beneficial in the long term. In addition to collecting monthly rents from tenants, ADUs also increase the overall value of the property. So when it comes time to sell the property, the owners can list and sell for higher prices than properties without an ADU. Check out the analysis that Cottage did here for 2021.

How To Earn Passive Income With an ADU

There are a couple of different ways to earn passive income with an ADU: you can rent them out for short or long periods of time.

Let’s discuss some of the pros and cons of each option so that you can choose the approach that works best for you.

Long-Term Rentals

You could rent out your ADU on a long-term basis to earn passive income. The process would look similar to how you would rent out an apartment. You would find a tenant, make sure that they’re qualified based on income, past rental history, and criminal history, and have them sign a lease agreement of at least one year.

While you may not be able to charge as much monthly for a long-term lease as you would be able to for nightly or even weekly for a short-term lease, such an agreement can still be financially beneficial.

With a long-term lease, you don’t have to worry about vacancies as much. Instead, you are guaranteed at least 12 months of income. Additionally, longer-term renters are generally more inclined to take care of the space better than shorter-term renters would.

Short-Term Rentals

You could also rent out your ADU on a short-term basis to earn passive income. This process could involve listing the unit on vacation rental platforms like Airbnb or VRBO. These platforms allow users to book the unit anywhere between a few days to a few weeks. These platforms also do a lot of the work for you in terms of finding occupants, securing bookings, and processing payments.

However, there’s no guarantee that your unit will be occupied 100% of the time. Most likely, you will be dealing with gaps between reservations that could impact your income. Also, you will need to have the unit thoroughly cleaned between each booking, so that’s another expense to think about.

Keep in mind that many cities and counties prohibit short-term rental listings for Accessory Dwelling Units for trips less than 30 days. Check with your specific city to learn what the restrictions may be for your property.

How To Maximize Potential ADU Income?

With the right approach, you can earn substantial income from renting out your ADU. Here’s what you need to do to maximize this potential income:

1. Choose the Right Location

If you want to maximize your ADU income, then you need to think about location. ADUs are in high demand for long-term rentals due to rising rents in most big cities. On the other hand, ADUs are in high demand for short-term rentals in many of these locations as well. No matter your approach, just make sure that you prioritize location to earn top dollar.

2. Where Possible, Build a Detached ADU

There are three types of ADUs: detached, attached, and conversion. If you want to maximize your potential income, then you should consider building a detached ADU. When done right, a detached ADU can look and function just like an actual home. It’s more likely that renters are going to be willing to pay top dollar for the privacy, features, and space in a detached ADU because of its separation from the main home and new build.

3. Maximize Your Square Footage

Speaking of space, you also need to maximize the square footage in your ADU for a great return. The exact size of your ADU varies on several different factors. The space you have to work with is influenced by the size of the main dwelling, size of the lot, and the lot’s layout;

Working with an experienced ADU builder is perhaps one of the best ways to maximize your square footage both inside and out. Professional ADU designers can help you come up with the best possible floor plan for the space so that it feels bigger than it really is.

4. Furnish Your ADU

The last thing you can do to maximize your potential ADU income is to rent the unit fully furnished. Not only does this give you access to the lucrative vacation market, but it also allows you to charge more in monthly rent to longer-term renters as well.

Just keep in mind that furnishing a small space like an ADU can be challenging if you’re new to the space-saving game. Consider working with ADU designers to choose the best finishes, features, and pieces for your ADU.

Wrap Up on ADU Passive Income

With real estate prices skyrocketing, why not take advantage of the real estate you currently have? The odds are that you can build an ADU on your existing lot for passive rental income. To maximize your rental income, you need to work with the top professionals.

Discover Cottage — the best ADU builder and designer. Cottage takes care of everything from design to permitting and construction while involving you in every step of the journey.

Reach out today for a free consultation to see how we can turn your empty yard into a promising source of revenue!


2020: The Year of the ADU | Forbes

Why Rent Is About to Go Up Again | CNBC

What Do I Need to Put Into a Furnished Apartment to Rent It? | SF Gate