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What Do ADUs Cost? Part 2

Updated: Mar 28

Accessory Dwelling Units (ADUs) can be utilized in multiple ways including extended living space, a home office, multigenerational living, or as a rental unit. If your goal is to create rental income, you’ll want to know the cost to build, financing options, and rental comps. We’ll cover each of those factors here so you can make sure your ADU will be cash flow positive!

1 bed / 1 bath RTown+ in Grant Park. Financed with a home equity loan.

Currently, the cost of our one bedroom, one bathroom, 504 square foot “RTown+” ADU is in the range of $190,000 - $215,000 all in. Some will see $420/sft and move on before considering the potential for cash flow. First, it’s worth noting that cost/sft is most often only a construction cost and does not consider other factors like surveying, architecture, civil engineering, permitting, or the cost of one's time. Our cost is for our turnkey service that includes everything from start to finish. There’s only one number. Nothing is unaccounted for. All our clients do is pick a unit type and exterior paint color. We handle everything else, which means our 'project cost' is very different from 'construction cost'.

Second, price per square foot is not a helpful or accurate metric for ADU viability in general. ADU construction still requires all the same trades (plumbing, electrical, etc.) and has to meet all the same building standards as a 3000 sft home. You’ll save on materials, but other inputs remain the same even though you’ve reduced the size of the home by 80%, which inflates the cost per square foot. Those willing to take a closer look will also find that housing, zoning, and demographics are changing. 80% of American households, for example, are not traditional nuclear families, but 72% of American housing units cater to traditional nuclear families. There is a growing demand, and limited supply, of smaller housing units, which increases ADU rental price points and positively affects cash flow.

AARP Publication: Making Room.

ADU financing is making progress but it still has a ways to go. The primary limiting factor in Georgia is that traditional financing options, like a Cash Out Refinance or a Homestyle Renovation Loan, require a refinance of the homeowners primary mortgage, which of course, no one wants to touch right now. The most recent update from Fannie Mae allows ADU rental income to be included in a borrower's qualifying income when purchasing a home with an existing ADU. While this doesn’t help a homeowner looking to build/finance an ADU, the good news is the ADU will add even more value to their property because of the future buyers' increased purchasing power. For those looking to buy a home and finance an ADU simultaneously, a Homestyle Renovation Loan can be a good option.

Currently, ATL ADU clients are utilizing cash and/or some version of home equity, either a Home Equity Line of Credit (HELOC) or a Home Equity Loan to finance their ADU project. Generally, you can borrow 70-85% of the equity in your home, and most importantly, it doesn’t require a refinance of your primary mortgage. Utilizing a HELOC to finance an ADU can be a great strategy for someone who has equity in their home, and wants to invest in a rental property, but doesn’t want the risk of purchasing a single family home in this current market. You already own the land, which reduces cost - a key ingredient to create positive cash flow.

RTown+ in Inman Park. Financed with a home equity line of credit. It's rented to film industry professionals including actors, stuntmen, and production crew members.

Based on the rental comps of our clients, you could rent the RTown+ for $1700 - $2100 per month long term, depending on your location. For those stuck on price per square foot, you should also consider rent per square foot, or PSF, which is more common in commercial real estate, but can also be used when comparing two apartments. For example, If you paid $4000/mo to rent a 3000sft home in Virginia Highlands, that is $1.3 PSF. To rent a 500 sft ADU in the backyard of that same Virginia Highlands home would be roughly $2100/mo, or $4.2 PSF. That is over 3x PSF for an ADU compared to a single family home!

Market demand continues to prove that buyers and renters are happy to pay for less space. Less space means lower utility bills, less maintenance, less furniture, less stuff. Plus, ADUs provide neighborhood living, with their own four walls, and without elevators, parking garages, and busy streets synonymous with apartment communities. Add it all up and ADUs pack a serious punch when it comes to rental comps. Put simply, you can charge a premium price because you are providing a premium product.

365 sft Studio / 1 bath "East Lake" ADU nearing completion in Avondale Estates. ATL ADU started in 2017 and did not build the East Lake (our smallest unit) until this year. We currently have three under construction. One small example of a shifting market.

With these factors in mind, let’s say you finance the 1bd/1ba RTown+ ADU by paying $50,000 cash and have access to a $160,000 home equity line of credit. At a rate of 8%, your monthly payment would be roughly $1350 per month. Add an extra $150 per month for estimated taxes and insurance and you have an all-in cost of $1500 per month. The rental comps mentioned above would provide $200 - $600 of monthly cash flow. And if you manage a short-term rental like this ATL ADU client, you could increase cash flow two to three times. While this isn’t a life changing amount of supplemental income, anyone invested in real estate will confirm that cash flow is hard to come by in today’s market. And it may very well be life changing - Lindy, ATL ADU client and Airbnb host shared, “With rising taxes, the income has helped us maintain, not a lavish lifestyle, but our lifestyle, even through unemployment. We don’t want to go anywhere else, and this ADU helps make that possible. It’s one of the best decisions we’ve ever made as a couple!”

If we can help you build an ADU, and you're in the Atlanta area, we'd love to chat!

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