ADU Housing

In-law apartment. Backyard cottage. Granny flat. Casita. Carriage house.

They go by various names, but there’s been a boom in California ADU housing in recent years. In 2016, state legislation streamlined the permitting process for ADUs in the Golden State to create more starter homes and alleviate the housing shortage. Over the next 6 years, the number of permits jumped by 15,334%, leading to 83,865 ADUs being permitted.

Read on to learn why so many homeowners are adding these dwellings to their property.

What is an ADU?

An Accessory Dwelling Unit (ADU) is a second residence located on the same property as a primary, single-family home. An ADU generally has (at least) its own kitchen, living area, bathroom, and separate entrance.

Some ADUs are private spaces tucked inside the main home, while others are standalone mini homes in the backyard.

Types of ADUs

If you’re a homeowner and you’d like to add an ADU to your property, you have plenty of choices.

Converted ADU

• A basement, attached garage, attic, or other space that’s been converted into a residence.
• A space above a garage that’s been redesigned as a living space.

Attached ADU

• An addition that is built onto the primary home.

Detached ADU

• A prefab home. This is a freestanding home that the manufacturer builds, delivers to you, and assembles on your property. Some prefab homes are modular, meaning the builder assembles entire 3D sections of the ADU in advance. While factory-made, prefab ADUs come in a variety of sizes, floorplans, and styles — from ultra-modern to classic Cape Cod.
• A stick-built home. This type of ADU is a great choice if you want a highly customized dwelling. A stick-built ADU is built entirely on-site from raw materials like concrete and wood, just like your primary home was. The construction crew builds the frame — or sticks — then cuts other components to fit, right there on the property.

Why build an ADU

Accessory Dwelling Units have gained popularity for good reason. Adding an ADU to your property provides a myriad of benefits.

An ADU can:

• be affordable because you can add living space without buying land.
• generate income if you rent it out.
• provide extra living space for family members. You might want to house an aging parent or provide a home for your 20-something child until they get their financial footing. An ADU lets you do that while protecting everyone’s privacy. The number of multigenerational homes has quadrupled since the 1970s, according to Pew Research, with about 60 million Americans now opting for such an arrangement.
• serve as a guest house for visitors.
• be used as a work-from-home office. If you enjoy working remotely but need peace during working hours, a detached ADU may be a great solution.
• increase your property’s value. The amount of added value depends on factors like your location and the real estate market. (That added value will prompt a property tax reassessment, so keep that in mind.)

How does it work if you sell your property?

There are a few things you should keep in mind when selling property that includes an ADU.

Property value

An ADU can boost your home’s value by 30% to 40% — or even more. To get an accurate assessment, work with a real estate agent who has experience selling properties with an ADU.

Proper documentation

Before putting your property on the market, make sure that your ADU is ready and its paperwork is in order.

• Permits. Mortgage lenders may require that your ADU is permitted. If it isn’t, find out if you can get a retroactive permit.
• Title. Your ADU should be included in your title documents and property records. If it isn’t, you could run into issues at closing.
• Inspections. Your buyer’s lender may require proof of inspections, so have these handy.

A real estate attorney or title company can help you review or obtain documentation and confirm your ADU’s legality before you sell.

Rental or condo?

Until recently, homeowners were required to sell their main home and ADU as a package.

That changed in 2023, when the California legislature passed Assembly Bill 1033. This legislation — intended to create more starter homes in California — allows homeowners to “condo-ize” their ADU. That means some homeowners can sell their main residence to one homebuyer and their ADU to another. (The two buyers would then share ownership of the land.)

If you want to convert your ADU to a condo, however, it must be properly permitted and have its own separate utilities. Also, check your county and city’s local ADU laws. Some municipalities have their own requirements.

Tenant-occupied ADUs

If you have an ADU tenant, you can market your property as an investment property. Having a reliable tenant who pays rent on time helps entice potential investors.

On the flipside, more traditional buyers may not feel prepared to become landlords. If you hope to sell your ADU empty, proceed with care. California has some of the strongest tenant protections in the country, so selling your property doesn’t necessarily negate your tenant’s lease agreement.

If your tenant signed a month-to-month lease agreement, you may be able to end their tenancy.

• If the tenant has lived in the ADU for at least 12 months, you must have just cause to end their tenancy, as described in the Tenant Protection Act. You are also required to give them 60 days’ advance notice.
• If the tenant has lived in the ADU for less than 12 months, you must give them at least 30 days’ notice.

If your tenant signed a fixed-term lease, they are legally entitled to live in the ADU until their lease ends, even if you sell your property.

• If your tenant remains in the ADU after you sell, they would simply begin paying rent to the new homeowner.
• If you prefer to sell your property with the ADU empty, consider offering your tenant a “cash for keys” deal. Essentially the tenant would agree to vacate the ADU. In exchange, you would give them cash — usually several thousand dollars — to cover their moving expenses.

When putting your property on the market, always give your tenant 24-hour notice of any showings to prospective buyers.

Whatever your approach, it’s best to speak to an attorney or real estate agent who is familiar with ADUs. You might also want to consult a tax advisor. If your ADU generated rental income, for example, that might impact capital gains calculations.

Is a tiny house an ADU?

Backyard tiny houses aren’t usually classified as ADUs. An ADU is attached to a foundation and connects to the main home’s utilities. That means it must adhere to local building codes. Tiny homes, especially those on wheels, tend to be mobile and use off-grid utilities.

ADU financing

If you’d like to add an ADU to your property, there are various financing options available.

• Fannie Mae and Freddie Mac now offer loans for adding an ADU.
• a Home Equity Line of Credit (HELOC) uses your home as collateral. Your lender approves you for a line of credit based on your home’s equity, and you can borrow from that line of credit as needed. In some cases, you don’t pay fees for closing costs. Consider a Patelco ADU HELOC, which offers a competitive rate.
• a second mortgage, which is a second loan, may be an option if you have enough equity in your home. A second mortgage allows you to tap into your home’s equity to pay for your ADU. Second mortgages generally have shorter terms than a typical 30-year first mortgage. Unlike with a HELOC, you’ll pay closing costs.
• a construction or renovation loan might make sense if you have less than 20% equity in your home. You qualify for this type of loan using your property’s future appraised value — its value with the completed ADU. Construction loans are for ground-up projects, such as building a standalone ADU in your backyard. If you’d like to convert the space above your garage into an ADU, you might apply for a renovation loan.
• city financial assistance. Some cities offer loans and other support to homeowners who build an ADU.
• a personal loan can help pay for an ADU conversion or construction.
• borrowing against your retirement account is another option.

Not sure which path is best for you? A financial advisor can help you sort through options.

If you’re buying a home that has an ADU, financing options include a conventional mortgage loan or a home loan through the FHA, Fannie Mae, or Freddie Mac. In many cases, you can include the ADU rental income as part of your qualifying income when applying for the loan. Your lender can go over the specific rules with you. For some loans, you may need to have previous landlord experience or complete a landlord education program when buying a property with an ADU, for example.

ADUs in California

If you plan to build an accessory dwelling unit on your property, make sure you understand the current state regulations, your city’s regulations, and your HOA’s rules.

There are regulations, for example, that address:

• whether you can build an ADU. Check with your city to make sure that ADUs are allowed in your area.
• how many ADUs you can build on your property. California allows one conversion ADU, one junior accessory dwelling unit (JADU) of up to 500 square feet, and one detached ADU up to 800 square feet. Local regulations may override these, however. The City of Sacramento, for example, limits homeowners to two ADUs (of any combination) but has more generous square footage limits.
• an ADU’s height. In California, your ADU can rise to 16 feet or, in certain cases, 18 feet.
• solar requirements. Most newly constructed, detached ADUs must provide solar systems to meet the California Energy Code requirement.
• building standards. ADUs must comply with building code requirements as well as health and safety requirements.

Check with the California Department of Housing and Development’s Accessory Dwelling Unit Handbook for more information about the state’s ADU regulations. And be sure to check with your city’s planning department as well as your HOA, which may have their own requirements.