Benefits, Risks & Things to Consider Before You Add an Accessory Dwelling Unit to Your Home

Have you ever rented a unit in someone’s basement? Maybe your significant other’s mom moved into the apartment above your garage? Or have you ever travelled and stayed in a pool house? Commonly referred to as “Mother-In-Law” units, homeowners use these as a way to fill the space in their home and gain residual income, either from vacationers or long-term tenants.

The official terms for these units are Additional Dwelling Units (ADU) or Detached Additional Dwelling Units (DADU), and are defined as extra spaces in homes and on properties where someone can live completely independent of the main house.

These units can be almost anywhere on the property, but they are usually located in the basement, in the backyard, or above the garage. They have their own bathroom, kitchen, and sleeping space and they will sometimes share laundry with the residents in the main house.

Thinking of adding a unit to your home? Here are some benefits and risks, as well as important aspects to consider before you build:

Benefits

Homeowners can maximize their investment by renting out the extra space to long-term tenants or short-term vacationers. These tenants can help pay off debt or create an extra stream of income.

Depending on several factors, including the size of the unit, the local real estate market, and other factors, each homeowner should decide which option they are more comfortable with. These decisions should be made before they list the unit for rent to find the right audience.

More: How to Rent Out Your Vacation Home This Summer

Risks

If you’re considering renting your space to someone for a long-term lease, there are some things you can do to minimize the risk of ending up with a tenant who turns into a financial burden. It’s strongly recommended that you use an application process to check backgrounds and employment history as a tool to get to know the potential tenant. Make sure to adhere to the National Fair Housing Laws and your local regulations.

If a short-term vacation rental makes more sense for you, many of the posting sites available have regulations and procedures to minimize the risks of having ill-intended strangers come through your property. You can determine which options are the best for you and be sure to take precautions like changing codes between visitors.

Things to Consider:

What are shared spaces?  

Identify the areas where it will be comfortable sharing those spaces, and potentially appliances, with other people. This is just as much about your privacy preferences as it is a consideration of what makes the most sense depending on your set up and what you’re willing to invest to make it more comfortable.

For example, you might be okay with sharing the washer and dryer with tenants, but if those are located in the main house and the unit is detached, it might not make sense. For long-term tenants that likely means adding laundry to the unit, however you don’t need to supply a washer or dryer for vacation renters who will only stay for short periods.

How close are the units and what noise level are you comfortable with? 

As a long-term landlord, tenants have the right to quiet enjoyment without the landlord impeding on their space or controlling their activities. If the unit is in the basement and the tenant has friends or family over, that noise could permeate into your unit in the late hours of the night. A way to prevent this is to be sure to layout quiet hours and expectations before they sign the lease or make an agreement so that you and the tenant are on the same page.

The same goes for the rules in the vacation rental listing. Managing expectations is the first way to create a relationship with the tenants, even for those who are only there for the weekend. Be clear in your rules and guidelines and have reminders in the unit.

What improvements are required?

Consider what elements and amenities the unit needs for the type of renter you want to attract. For example, long-term renters will need a kitchen, but vacationers will only likely need a kitchenette. Depending on the project, you might not get your money back in the short term, but if you’re dedicated to making the space worth it to rent it out over the next few years, improvements can be well worth the investment.