Building an ADU for Rental Income

ADU’s and DADU’s are becoming increasingly popular property additions. The benefits of these spaces include housing for visiting friends and family, close yet independent quarters for elderly parents or older children, and even just making the most of your property. However, one of the biggest advantages of building an ADU is the opportunity to use it for rental income.
Many cities are relaxing the regulations on single-family zoning as the concern for lack of affordable housing continues to grow. The opportunity to help solve this problem is available to developers and individual homeowners alike. Some cities are even incentivizing homeowners to construct these “backyard cottages”. For example, the city of Seattle offered to assist homeowners in the design and permitting process, among other incentives.

We will start from the beginning by defining what an ADU or DADU is.


ADU’s or Auxiliary or Accessory Dwelling Units are self-contained living spaces within an existing single-family dwelling, typically including their kitchen, bathroom, and separate entrance. While these spaces are attached to the existing home, they allow you to maintain your privacy and square footage, while creating a separate living space.

Commonly you will see ADU’s in the basement of a home or created as an apartment above the connected garage. The focus is on creating a space that allows the occupant to live independently from the rest of the household. Some are built as a fully functioning small home, with full kitchens and bathrooms, while others only have a kitchenette and a half bath.

dadu vs adu

DADU’s (Detached Auxiliary Dwelling Units) are the same, detached from the property’s main house. While it is easier than ever to permit adding a DADU to your property, there are a specific size and zoning restrictions. For example, in the City of Seattle, ADU’s are limited to 1,000 square feet in a single-family zone and 650 square feet in a low-rise zone.
Finding the right type of ADU for your property takes extensive research and planning. From city zoning codes and building setbacks to site-specific feasibility and potential impacts on utilities, there is a lot to explore in the planning process. It is vital to engage with a vetted, experienced, professional General Contractor to be sure that they account for even the smallest details. If you are curious about the requirements, you can check out your local jurisdictions building departments website.

What You Should Know

1. The Investment

investing in an adu
Constructing a quality ADU or DADU can come with a wide range of investment costs. The two basic routes you can take are prefab (prefabricated structures), or custom builds. You can find some prefab DADU’s for as low as $15,000, but these structures will likely be small and “bare bones”. You can also find prefab DADU’s for upward of $100,000. Custom-built DADU’s will probably be more expensive as you are essentially building an entire small home on your property. In some cases, working with a custom builder can be easier because they should be very familiar with your local municipal codes and zoning restrictions. If you choose to go the prefab route, make sure you thoroughly read through your city’s building rules, or better yet, consult a professional.

2. Increasing Property Value and Taxes

Adding an ADU to your lot adds exponential value to your property and opens up a new potential income stream for you. But with the increase in value, also comes the rise in property taxes. We recommend contacting your local accessor’s office in your planning stages to see what your increase may be. You will want to make sure the amount of rental income you earn will offset the costs of the property tax increase. If you are a first-time landlord, you should also consider the taxes you will need to pay on the rental income!

You can see the increase in the value of your property in more than just the potential for rental income, looking at the future. According to Umpqua Bank, “When a borrower is purchasing a single-unit primary residence with a 3% minimum down payment and there is an ADU present, 75% of the potential rents from the ADU can be used to qualify.” That can be an additional selling point if you are ever looking to put your property on the market.

3. Being a Landlord

Being a Landlord may be the most complicated consideration of the whole process. If you are considering becoming a first-time landlord, do your research! Renting out your ADU is not as simple as building the lodging then letting someone pay you to live there. You must consider your leasing terms, utility billings, how you will consider sharing outside spaces and laundry (if not included in the ADU), parking and so on.

renting out an adu

However, it would be best if you did not let these considerations deter you from creating an ADU for rental purposes. Being a landlord does not get more convenient than managing the property that you are already living in too. You always have the option of hiring or at least consulting with a professional property management company. Hiring an experienced property manager saves you time and stress and it comes with the experience and expertise of a professional. Properties that are managed by a professional company also tend to see lower vacancy rates.

This post is from guest contributor Marin Ryles, from Better Builders LLC. Better Builders is a general residential contractor in Seattle, Washington with a dedication to high-quality remodeling and green building.

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