How to Rent Out Your ADU in San Diego: A Homeowner’s Guide

Mar 8, 2024 | Guides & Process, Investment & Rentals

Diving into the world of accessory dwelling units (ADUs) for extra rental income? You’re not alone. Many homeowners, just like you, are exploring the potential of their property by adding an ADU. Whether you’re eyeing immediate rental returns or planning for future space when the nest empties, the journey to turning your ADU into a profitable rental space is both exciting and rewarding. From understanding the basics to navigating the nuances of short-term versus long-term rentals, this guide is your all-in-one resource for making the most out of your ADU investment.

What is ADU Rental?

ADU rental involves leasing out your accessory dwelling unit to tenants, providing an additional income stream. ADUs can be standalone units, attached to the main house, or converted spaces like garages or basements. Renting out an ADU is a practical way to maximize your property’s value and make use of available space efficiently.

Increasing Popularity and Benefits of Renting Out ADUs in San Diego

The popularity of ADUs has surged in San Diego due to several factors:

1. High Demand for Housing: San Diego’s housing market is competitive, with a high demand for affordable living options. ADUs offer a more cost-effective solution for tenants compared to traditional housing.
2. Flexible Living Arrangements: ADUs provide flexible living arrangements for various needs, whether for multigenerational families, young professionals, or students. This versatility makes ADUs attractive to a wide range of potential renters.
3. Supplemental Income: Renting out an ADU can significantly boost your income. This additional revenue can help offset mortgage payments, cover property taxes, or fund home improvements.
4. Increased Property Value: An ADU can increase your property’s overall value. Potential buyers may view an ADU as a desirable feature, whether they plan to use it for rental income or as extra living space.
5. Community Benefits: ADUs contribute to the community by increasing housing availability without the need for large-scale developments. This can help alleviate housing shortages and provide more options for residents.

Whether you’re eyeing immediate rental returns or planning for future space when the nest empties, the journey to turning your ADU into a profitable rental space is both exciting and rewarding. From understanding the basics to navigating the nuances of short-term versus long-term rentals, this guide is your all-in-one resource for making the most out of your ADU investment.

Understanding Different Renting Options for ADUs in San Diego

At its core, renting out an ADU is akin to managing an apartment—only this time, it’s right in your backyard. It’s about transforming a part of your property into a space that others can call home, whether for a few months or years. The flexibility of ADU rentals, governed by both your preferences and local laws, offers a unique opportunity to tailor your rental strategy to fit your lifestyle and financial goals. Let’s dive deeper into what it means to rent out an ADU and how you can capitalize on this opportunity.

Can I rent out my ADU? Can I build an ADU on a rental property?

Yes, you can rent your ADU. And you can build an accessory unit on a rental property for ADU rental income. Previously, California state law enforced specific legislation regarding owner occupancy requirements. However, a bill permanently banning owner occupancy requirements was passed in October of 2023. This means any previous requirements are permanently eliminated, so property owners can add ADUs to their rental homes.

Short Term ADU Rentals in San Diego

Can I rent out my ADU as a short-term rental?

ADUs can typically be rented for periods of 30 or more days per California state law. This rule is intended to encourage the use of ADUs as long term housing and not vacation rentals. A few municipalities have waived this requirement, including Los Angeles and San Francisco. Rental limits are a consideration you must agree to in the form of a covenant before any building permits can be issued for the construction of your guest house. Platforms like Airbnb or VRBO allow you to set minimum rental periods to help you comply with the law.

Another option we’ve been seeing lately is to sign a “master lease” with a company that manages corporate housing. That housing company rents for periods of 30+ days to military, healthcare and other business professionals relocating to the area for work. The corporate housing company leases directly from the homeowner. The company typically works on the rental contract before the ADU is even complete so that they can start renting immediately.

You can of course rent out the ADU on a long-term basis to a tenant (e.g. a one or two year lease), or hire a property management company to handle that for you. In most cities, you also have the option of moving into the ADU and renting out your primary residence as a short-term rental (except in Oceanside, where neither the ADU nor the primary may be used as a short term rental).

Can you airbnb an ADU in San Diego?

In San Diego, the Municipal Code explicitly prohibits the use of Accessory Dwelling Units (ADUs) for short-term rental purposes, such as Airbnb. Utilizing an ADU as a short-term rental – e.g. for a period of less than 30 calendar days – will lead to a Code violation, reflecting the city’s commitment to prioritizing long-term housing solutions over vacation rentals. The only exception to this rule applies to companion units that were permitted before the September 2017 prohibition, which may still be used as short-term rental units (STROs).

Long Term ADU Rentals in San Diego

Long-term ADU rentals in San Diego offer numerous benefits, but they also come with certain drawbacks. Here’s a comprehensive look at the pros and cons, legal considerations, and tips for preparing and marketing your ADU for long-term rentals.

Pros of Long-term ADU Rentals

1. Stable Income: Long-term rentals provide a consistent and reliable source of income, helping homeowners manage their finances more predictably.
2. Lower Turnover Costs: With tenants staying for extended periods, there are fewer turnover costs associated with cleaning, repairs, and marketing between renters.
3. Stronger Tenant Relationships: Long-term rentals allow homeowners to build stronger relationships with tenants, leading to better communication and potentially fewer issues.
4. Predictable Occupancy: Homeowners can enjoy more predictable occupancy rates, reducing the stress of frequent tenant changes.

Cons of Long-term ADU Rentals

1. Less Flexibility: Long-term leases limit homeowners’ flexibility in using the ADU for personal or short-term rental purposes.
2. Potential for Difficult Tenants: If a long-term tenant turns out to be problematic, it can be more challenging to address issues or evict them compared to short-term renters.
3. Maintenance and Wear: Over time, long-term tenants may cause more wear and tear on the property, necessitating more frequent maintenance and repairs.

Legal Rules and Regulations for Long-term Rentals

Renting out your ADU in San Diego involves adhering to specific legal rules and regulations. Here are some important points homeowners should be aware of:

1. Rental Agreements: Use a written rental agreement that outlines the terms of the tenancy, including rent amount, lease duration, and responsibilities of both parties.
2. Tenant Rights: Familiarize yourself with California’s tenant rights laws, which include regulations on security deposits, eviction procedures, and habitability standards.
3. Rent Control Ordinances: Some areas in San Diego may have rent control ordinances that limit the amount you can increase rent each year.
4. Building Codes: Ensure your ADU complies with local building codes and safety standards, including requirements for smoke detectors, carbon monoxide detectors, and proper egress.

Things to Consider Before Renting Your ADU in San Diego

Before deciding to create an ADU rental space, there are several important points to consider:

Impact on Property Value and Taxes

Your property value (and taxes) will increase. Your property will become much more valuable with the addition of an ADU, and your taxes will also go up somewhere in the range of 1-2%. Your property will be subject to a “blended assessment,” which means your home’s assessed value will not change, but the ADU’s assessed value will be added onto the overall property value. However, keep in mind that renting out the space will likely offset a good portion of these expenses. Read more about tax effects from ADUs.

Evaluating Insurance Needs

Assess the insurance requirements for your ADU. You may need additional coverage for rental properties, which can protect you from liability, property damage, and loss of rental income. Here are key considerations:

• Landlord Insurance: Covers property damage, liability claims, and loss of rental income. This type of insurance protects you from potential financial losses due to tenant-related issues.
• Liability Coverage: Protects against legal claims if a tenant or visitor is injured on the property. This is essential to cover medical expenses and legal fees.
• Loss of Income Insurance: Reimburses lost rental income if the ADU becomes uninhabitable due to covered damages, such as fire or severe weather.
• Contents Insurance: If you are renting the ADU furnished, consider contents insurance to cover the cost of replacing furniture and appliances in case of damage or theft.

Consult with an insurance agent who specializes in rental properties to ensure you have comprehensive coverage tailored to your needs.

Optimizing Your ADU for Rental

If you are building an ADU with the specific intention of renting it out, you will want to let your contractor know. The design you choose for your build will most likely vary depending on what use you have in mind for your ADU. Optimizing the layout will make it more attractive to renters. Contractors will likely have a number of ready-to-build floor plans you can choose from, as well as years of experience discovering how to build to maximize the value you will get out of the ADU.

How to Optimize Your ADU Rental Design and Floor Plan

Use space-efficient features

Open floor plans, eat-in kitchen islands, standard size bathrooms, and plenty of storage and are all ways to best utilize the space to make the unit livable yet efficient for your tenants.

Be aware of important size breakpoints

500 sqft, 750 sqft, and 1000 sqft are important thresholds to keep in mind. You can fit 2BR/2BA in 750sqft, and if you stay under that number, you will save thousands of dollars since no impact fees will be assessed, per state regulations. Explore ADU floor plans.

Choose durable yet cost-effective finishes

Some favorites are luxury vinyl plank flooring, quartz countertops, and shower inserts. These materials will look great, clean easily, and are less expensive than some other options.

What are Renters and Tenants Looking for in ADU Rentals?

Alongside design and floor plan optimization, there are specific features that many renters will be looking for in an ADU rental residence.

1. Privacy from primary residence. Data from a City of Carlsbad ADU study pinpointed privacy as the most important factor in potentially renting an ADU (more important than cost!!).  Privacy from the main residence might include a physical barrier blocking the ADU from the house, like a wall or hedge. You could also install something more subtle, like a personal storage space for the renters that is completely cut off from the primary residence. Anything allowing the resident to feel a sense of independence and separation from the main residence can work.
2. Access to the unit. Consider how your tenants will access the unit. Ensuring there is a walkway or path with clear and easy access is ideal. Also consider how the tenants will access the unit from where they will be parking.
3. Full kitchen & laundry. A full kitchen and onsite laundry were also in the top 5 features desired by ADU renters in the Carlsbad survey. Offering a private laundry space and full kitchen setup will make rental life more convenient for your tenants. Making sure to add these features when designing your ADU will make a world of difference and allow you to charge higher rent rates for the added convenience.
4. Attractive finishes. Many renters are willing to pay more for attractive finishes, such as stylish cabinets, countertops, and fixture selections. Even better, many options like quartz counters and luxury vinyl plank flooring are both attractive and durable.
5. Outdoor space. Creating an aesthetically pleasing space around your ADU will make your rental a more pleasant space to live in. Adding an outdoor space like a patio, terrace, or yard access adds to the welcoming & relaxing atmosphere that many renters are looking for. Check out Trueline for patio design ideas for your ADU build.

Read more about how to find the ideal lot for an ADU when you are looking to purchase an investment property.

Example: Privacy fence for an ADU rental

Considering upgrades: Luxury ADU rentals

Incorporating luxury touches into your ADU can elevate status to a premium rental. This can attract tenants who are willing to pay more for high-end features. Consider the following enhancements:

• High-Quality Appliances: Upgraded appliances, smart home features, and energy-efficient systems add to the aesthetic appeal. They also offer long-term savings and convenience.
• Quality Finishes: Tiled showers and high-end plumbing & electrical fixtures can increase the attractiveness of your ADU.
• Modern Amenities: Built-in USB ports, high-speed internet access, and modern entertainment systems can make your ADU stand out.
• Outdoor Living Spaces: A well-designed patio or garden can extend the living space and add a sense of luxury to the property.

Adding these luxury elements can be particularly beneficial if your ADU is located in a high-demand area. Attract renters who are seeking more than just a place to stay. They are looking for a lifestyle.

Furnished ADU rentals as a short-term strategy

Offering a furnished ADU can be an excellent strategy to attract short-term renters or those seeking a turnkey living solution. Furnished rentals often command higher rents due to the convenience they offer. They are particularly appealing to:

• Business professionals on temporary assignments
• Traveling nurses and other medical professionals
• Students attending local colleges or universities
• Individuals relocating and in need of immediate accommodation

By providing a fully furnished space, you cater to a niche market that values ease and efficiency. This can also justify a higher rental price, reflecting the added value of the furnishings.

Strategies for Successfully Renting Your ADU in San Diego

Balancing Cost and Benefit with ADU Rentals

Adding furnishings and luxury elements can increase rental income. It’s also important to balance the initial investment with the potential return. Research the rental market in your area to determine if there is a demand for furnished and luxury rentals. Consider the following:

• Target Market: Understand who is looking for rentals in your area and what they are willing to pay extra for.
• Competitive Pricing: Ensure that the rent you’re asking for aligns with the value you’re providing.
• Return on Investment (ROI): Calculate how the additional income compares to the upfront costs of furnishing and upgrading the ADU.

Ultimately, the decision to offer a furnished rental or to add luxury touches should be informed by market demand, the potential for increased rental income, and your personal investment goals. By carefully considering these factors, you can maximize the profitability of your ADU rental.

How do I rent out my ADU?

One of our clients shared his insights on renting out his ADU. Check out the video below to hear more about his approach to finding a tenant and successfully becoming a landlord with an ADU rental.

Preparing and Marketing Your ADU

Renting out your ADU in San Diego can be a rewarding endeavor, but it requires careful preparation and strategic marketing. Here’s a brief guide to help you get started.

Preparation

• Maintenance and Repairs: Ensure the ADU is in excellent condition by addressing any necessary repairs or maintenance issues. This includes checking plumbing, electrical systems, and ensuring all appliances are in working order.
• Insurance: Make sure you have appropriate insurance for your unit before renting it out. Standard homeowners insurance may not cover rental activities, so you will likely need additional coverage.
• Safety Checks: Install smoke detectors, carbon monoxide detectors, and ensure all safety features comply with local building codes. These safety measures not only protect your tenants but also reduce liability.
• Furnishing: Decide whether to rent the guest house furnished or unfurnished based on market demand and your target tenant demographic. Furnished units may attract higher rents and shorter-term tenants, while unfurnished units are often preferred by long-term renters.

Marketing

• Quality Photos: Take high-quality photos of the ADU to showcase its features and appeal. Good lighting and clean, staged spaces can make a significant difference in attracting potential tenants.
• Detailed Listing: Create a detailed and attractive listing highlighting the benefits of living in your ADU. Include information on the location, amenities, nearby attractions, and unique features of the unit.
• Online Platforms: List your ADU on popular rental platforms like Zillow, Craigslist, and local real estate websites to reach a broad audience. Utilize social media and community boards to increase visibility.
• Open Houses: Host open houses or virtual tours to allow potential tenants to view the property. This can be an effective way to showcase the ADU and answer any questions in real-time.

Screening Tenants

• Background Checks: Conduct thorough background checks, including credit history, employment verification, and previous rental references. This helps ensure that you select reliable and responsible tenants.
• Interviews: Interview potential tenants and ensure they understand the terms of the lease. Discuss expectations, rules, and any specific requirements you may have.

How to Draft a Rental Agreement for your ADU in San Diego

How much can you rent out an ADU for in San Diego?

In San Diego, ADU rental properties can usually be rented out for the same or higher rent rates as comparable apartments in the immediate area. Comparable apartments would be based on similar square footage, bedroom & bathroom count, and features like a garage and laundry. Also consider the level of finishes for comparables. Platforms like Zillow and Craigslist are still some of the best places to find current rental listings. You can use these sites to compare your ADU to other available rental units on the market in your neighborhood. This will help determine your potential ADU rental income. Comparing your property to other units will provide a better idea of what rent rate your ADU rental unit could bring.

Our research below is based on pulling the past 12 months of data. We also limited to ADU-sized rentals: 1BR at 750 sqft, 2BR at 1000 sqft, and 3BR at 1200 sqft.

Average ADU rental rates in Greater San Diego (March 2024)

Source: Rentometer & SnapADU Analysis, March 2024

These example rents are just a starting place. Keep in mind you’ll want to look for units with comparable amenities and finishes for accurate rent rates.