Does Adding An ADU To My Property Make My Home Worth More?
Adding an Accessory Dwelling Unit to your property will almost always make it worth more than without an ADU because you increase your living space and add rent potential to your home. However, adding an ADU to your property may not always make your home worth more than the current value of your home and the cost to pay for the ADU combined. To find out if an ADU will increase your equity, you’ll need to do a little due diligence.
ADUs are relatively a new trend appraisers are navigating; this means valuing your home with an ADU can be a bit tricky.
Typically, home valuation is done by an appraiser who gauges their estimate of your home’s worth based on market activity. While the adage is true: “Something is only worth what someone is willing to pay for it”, the goal of an appraiser is to estimate what that price is. Appraisers look at other homes in your area that have sold recently and are comparable properties to your home. Sometimes this is easy, sometimes more difficult, especially if your property is unique (Take for instance a track home versus a custom-built home). Appraisers look at everything from location, lot size, condition, views, living square footage, pool or no pool, unit count, bedroom/bathroom count, you name it – appraisals are very analytical assessments of what buyers tend to be willing to pay (i.e. the going rate) for properties similar to yours and basing your home’s value off of that. Companies like Redfin[i] and Zillow[ii] have technology that does a general comparison that can be helpful, but not relied on for home valuation.
Appraisers have been navigating ADU valuations differently. Some appraisers use multi-family properties to determine worth (for instance, if you build one ADU at your home and you also have the main house, an appraiser might compare your property value to a duplex in your area). Some appraisers use price per square foot to determine worth (if the going rate for homes in your area is $350/ per living square foot, the appraiser might value your 1,000 square foot ADU and home to be worth $350,000 more than your property without the ADU). Some appraisers, although likely not most, might even consider the rental income of the property in their appraisal, especially if the general buyer base for the property purchases by the rental income over the structural value of a home. There are so many ways to determine worth – it is important to consider the multiple ways your ADU might be valued, even consult with an appraiser, before you launch into your ADU project assuming it will increase your equity.
ADUs can be a good investment without adding equity to your home.
Most investors who build ADUs realize that ADUs can be good investments even if they don’t add much equity to the property itself – in other words, even if the ADU doesn’t make your home worth more in sale price. A lot of homeowners have one of two reasons for building an ADU, extra living space for them or family OR rental income (either to supplement the mortgage on their main house, or generate extra cash every month). Homeowners who see ADUs as an investment understand that equity and rental income investment should be considered separately – you don’t need both to make an ADU a good option.
Rental income can be a big investment opportunity and make your ADU a valuable asset even if it doesn’t increase the value of your house. If it costs you $2,000/month to pay off the ADU project you built, but you can generate a rental income of $4,500/month from that ADU your project still may be worth doing, especially over the long term. While considering rental income as the driving factor for your ADU build shouldn’t leave out the need for management and maintenance costs, unforeseen situations (like squatters and evictions), or temporary vacancies, ADUs can still be valuable assets even if they don’t make your house worth more when you go to sell.
ADUs, like all real estate, are never a certain investment – it all depends on the market.
Like any real estate investment, and just about any investment in general, an increase in worth is not certain – it all depends on the market. However, like most investments, over time the value tends to hold and even increase if you stick with it. Consider the housing boom of 2000s and the housing crash of 2008. The same home you had in 2005 was “worth” more than in 2009 when home sales flooded the market – it was simple supply and demand (and subprime mortgage lending). However, consider today, this market right now: the same home you had in 2005, even though it lost value when the housing market took a dive, is now worth even more than it was in 2005 when you would have initially purchased it. Over time, your investment held, but its value dipped in between – if you sold in 2009, you would have taken a loss. If you sold now, you would have gained equity. When it comes to ADUs, the market plays a role in their value and whether your home is worth more with an ADU.
ADUs do not increase the value of your home when you pay more for your project then the market will return through sale or rents.
Don’t be fooled by all of the hype – While ADUs are an incredible opportunity for a lot of homeowners, adding an ADU to your home is not a good idea for everyone. If your end goal is to make your home worth more, consider the numbers estimated for your resale and/or projected rental income: if at the end of the day the numbers come up short and in the negative, adding an ADU to your home just might be a trend to pass on. Then again, after you’ve done your due diligence, you might just find ADUs will indeed make your property worth more after all.
REIG ADU Construction has been a contractor for over a decade serving Southern California. We build ADUs in San Diego and work side by side with expert design firms to make your ADU project as smooth as possible from A to U. On average, clients who build with us pay $190-250 per square foot for their builds and about $250-350 per square foot for the complete project (all-in) when all costs and timelines are considered. We love to help people and their families increase the value of their assets through the opportunity in ADUs. We pride ourselves on excellence and transparency. Contact us for free with any questions about your project. We are here to help. (Connect Today)