Are you a homeowner looking for additional rental income? Perhaps you’re thinking about adding an accessory dwelling unit (ADU) to your property so that you have additional space to rent out for income. You may want to rent the ADU out immediately, or down the road when family members move out. Renting out your ADU as a short or long-term living space is one of the most popular and lucrative uses of your new space. Let’s start with the basics of adding an accessory dwelling unit for rent.
What is an ADU Rental?
An ADU rental is no different than an apartment rental, in the sense that it is a privately-owned property a landlord is leasing out to residents. As we will discuss later, these rentals can be long-term or short-term, depending on the landlord’s needs and desires, as well as local regulations.
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.
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 ADU. 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).
What factors should I consider before building an ADU to rent?
Before deciding on creating an ADU rental space, there are a few points to consider:
- Your property value (and taxes) will go up. 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.
- You will want to optimize your ADU floor plan and design 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 do you optimize the 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.
- 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.
Explore ADU floor plans.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
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.
Average ADU rental rates in Greater San Diego (2022)
|92009||Carlsbad||La Costa Oaks||$2,500||$3,600||$4,200|
|92010||Carlsbad||Calavera Hills Village||$2,500||$3,350||$4,200|
|91910||Chula Vista||Chula Vista||$1,620||$2,575||$2,850|
|91913||Chula Vista||Rancho del Rey||$1,985||$2,625||$3,120|
|92014||Del Mar||Del Mar||$2,115||$3,095||$4,100|
|92037||La Jolla||Upper Hermosa||$1,875||$3,875||$5,750|
|91942||La Mesa||Rolando Village||$1,715||$2,600||$2,925|
|92064||Poway||Caramel Mtn. Ranch||$1,800||$2,560||$3,195|
|92102||San Diego||Golden Hill||$1,595||$3,215||$3,595|
|92105||San Diego||City Heights||$1,600||$2,595||$3,495|
|92111||San Diego||Linda Vista||$2,100||$2,600||$3,200|
|92113||San Diego||Logan Heights||$1,540||$2,755||$2,900|
|92115||San Diego||College Grove||$1,625||$2,600||$3,400|
|92116||San Diego||Normal Heights||$1,725||$2,995||$3,400|
|92119||San Diego||San Carlos||$1,890||$2,400||$2,795|
|92126||San Diego||Mira Mesa||$1,875||$2,680||$3,195|
|92128||San Diego||Rancho Bernardo||$1,695||$2,475||$3,195|
|92129||San Diego||Rancho Bernardo||$2,000||$2,395||$3,195|
|92130||San Diego||Carmel Valley||$2,665||$3,405||$4,000|
|92131||San Diego||Scripps Ranch||$1,920||$2,745||$3,200|
|92069||San Marcos||San Marcos||$1,800||$2,600||$3,175|
|92078||San Marcos||San Marcos||$1,970||$2,700||$3,110|
|92075||Solana Beach||Solana Beach||$2,120||$3,350||$4,225|
|91977||Spring Valley||Spring Valley||$1,650||$2,335||$2,800|
Source: Rentometer Nov 2022
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.