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An introduction to accessory dwelling units (ADU)

More homeowners across the country are choosing to add accessory dwelling units, or ADUs, to their properties than ever before. Freddie Mac recently identified a total of 1.4 million properties with ADUs in the United States. Because they’re less expensive to build than a single-family home, additions like ADUs are one solution to increase the supply of affordable homes and rental housing. They can also increase a home’s worth, provide rental income and support multi-generational living.

What’s an ADU?

An ADU offers an independent living facility built on the same property as a principal home. They’re known by many other names such as granny flat, in-law suite, guest house, garage apartment and second unit. An ADU usually includes a separate kitchen, bathroom, sleeping area, and its own entrance. The California Department of Housing and Community Development identifies three main second unit varieties:

  • Detached free-standing structures on the same lot as a primary residence
  • Attached home additions to the primary structure, typically to the side of or rear
  • Converted existing interior spaces into separate units such as attics, master bedrooms or basements

Can an ADU have a separate address?

Whether or not an ADU can have a separate address depends on where you live. For example, some homeowners use a ½ address or add Unit B or Unit 2 to the existing main address. In some states, an ADU will be assigned an address during the building permitting process. In other states, the ADU may not have a separate address.

How to finance an ADU

According to Zillow, several states have adopted new laws and now offer incentives to promote development and entice homeowners to build ADUs on their properties. If ADUs are legal in your neighborhood, you may consider a home renovation loan. This type of financing lets you consolidate the cost to buy a home or refinance with estimated ADU construction costs. Fannie Mae’s HomeStyle Renovation mortgage guidelines allow detached accessory units from the primary dwelling. Any type of renovation is eligible, as long as it’s permanently affixed to the property. Renovations should be completed within twelve months from the date the loan is delivered.

Does an ADU add value to your home?

Home improvement projects such as updating your kitchen, adding a bathroom and installing energy-efficient windows may increase how much your home is worth. Building an ADU on your property can be another great way to add value. “When you start adding square footage, you start adding real value to your home. In some markets, the cost for adding square footage is half the price of a home’s per square footage sale price,” explains Danny Fitzpatrick, Guild Mortgage Renovation Branch Manager. Increased property value is one reason homeowners choose to build ADUs. Consider these other benefits for homeowners:

  • 1. Generate additional income

    By renting an accessory dwelling unit to a paying tenant, you’ll be adding long-term passive income for your family.

  • 2. Keep family close

    Whether caring for an aging parent or supporting kids, granny flats are ideal for multi-generational living. They give family members independence and privacy along with the security of living near one another.

  • 3. A work-from-home option

    If you’re tired of your cramped kitchen or bedroom and want an office to call your own, ADUs offer flexible space.

  • 4. More affordable to build

    Because they’re built on the same land as your home, they don’t require paying for new land and make efficient use of existing infrastructure.

Does adding an ADU increase property taxes?

Adding an ADU may increase your property taxes because it can add value to your property. The real estate resource Millionacres recommends reaching out to your county assessor’s office in advance of building to determine your tax liability. In addition, you should consult an accountant or tax advisor to discuss your specific situation. Are you ready to learn more about financing an ADU? Connect with a renovation loan specialist in your area to find the right loan for you.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.