Expanding Your Home: Considerations for Adding an Accessory Dwelling Unit

Wish you had a mini home separate from the main residence on your property? Yearning for a rental unit that doesn’t require tenants cohabitating with you inside your home? Need a standalone space to house a relative? An accessory dwelling unit (ADU) known as a granny flat can accomplish these and other goals.

Take the time to better understand the purpose of an accessory dwelling unit, the pros and cons, accessory dwelling unit costs, and the best ways to finance them.

In this article (Skip to...)

• What is an ADU?
• ADU pros and cons
• Who is an ADU for?
• Factors to consider
• What is an ADU cost?
• How to pay for an ADU
• ADU FAQs

What is an accessory dwelling unit?

An accessory dwelling unit, also known by a less technical name of a granny flat, is a secondary type of residential structure built on a property that already has a single-family home on it. An ADU provides an entrance, kitchen, bathroom, and living space that is separate from the main home.

An ADU can be a standalone structure in your yard, an attachment or converted portion of your existing home, or a converted garage. They are sometimes called carriage houses, backyard cottages, granny flats, and in-law suites.

ADUs have become increasingly popular in recent years. According to Freddie Mac, 20 years ago, there were around 1.1 million homes with ADUs; nowadays, there are over 10 million homes with accessory dwelling units.

Pros and cons of adding an accessory dwelling unit

Lauren Adams, a licensed architect and co-owner of a design-build firm in Los Angeles, says building an ADU can provide a range of benefits.

“You can rent out an ADU for additional income, either as a long-term or short-term rental. It can provide flexible living space for family members, guests, or a home office. It can also help you maximize the use of your property without having to move. And it can be a smart long-term investment, helping to increase your property value,” she says.

A report by the National Association of Realtors indicates that in the largest cities, a home with an ADU can add 35%, on average, to a home’s value.

Building/adding an ADU is becoming more popular due to the high demand for affordable housing.

“We have a serious housing shortage across the country today. We are short 6.5 million homes in 2023,” says Nate Stover, founder/owner of Innovative Spaces. “Adding an accessory dwelling unit not only provides additional space and potential income, but it can help others seeking affordable housing.”

On the downside, depending on where the ADU is built and who is living there, it can present privacy issues and noise concerns for you (the primary homeowner) and those living in or renting the ADU. If not planned and designed right or well-maintained, an accessory dwelling unit can become an eyesore on your property, dragging down your home’s overall value.

Who should add an accessory dwelling unit?

“Adding an ADU or a granny flat can be a smart decision for homeowners who have enough space on their lot, want to increase their income, need extra living space for themselves or others, and want more flexibility and options for their lifestyle,” suggests Artem Kropovinsky, an interior designer and founder of Arsight.

However, check with your municipality on zoning rules before committing to an ADU. Some areas may not allow for a separate/standalone structure with living space to be built in a yard or adjacent to a primary residence.

“Areas zoned exclusively for single-family homes or that have a limit on the number of detached buildings on one property may not work if you plan to build an ADU,” cautions Martin Orefice, CEO of Rent To Own Labs. “Also, ADUs are especially time-consuming projects. Be ready for this project to take at least a few months from genesis to completion, with a full year not being out of the question.”

Factors to consider before adding an accessory dwelling unit

Plenty of planning is required before moving forward with an ADU or a granny flat.

“Some of the obvious factors to ponder include parking, access, and privacy. This is especially important if you’re going to be renting out your unit,” says Stover.

Additionally, give careful thought to your budget, the scope of the work involved, permit requirements, and whether or not to hire a professional builder or attempt to manage the project yourself, advises Adams.

“Furthermore, weigh the impact of the ADU on the surrounding neighborhood and consult with zoning and building officials to ensure compliance with local regulations,” Adams continues.

How much does it cost to add an accessory dwelling unit?

According to HomeAdvisor, the price tag to construct an accessory dwelling unit like an in-law suite will probably span $40,000 to $125,000, with the average cost clocking in around $82,500. Expect to pay around $100 to $200 per square foot, labor and materials included.

“Building an ADU from the ground up will likely cost you $50,000 at a bare minimum. If you can work with an already-constructed building like a garage or shed, especially if it already has electricity, you can cut that budget down to as little as $30,000 for a basic ADU,” adds Orefice.

How to pay for an accessory dwelling unit

This is the type of project that will likely require borrowing funds. Fortunately, there are several different financing options to explore, including the following:

• Home equity line of credit
• Home equity loan
• Cash-out refinance
• Personal loan
• Credit cards

Home equity line of credit (HELOC)

A HELOC is a revolving line of credit with a maximum spending limit. Whenever you need money, you can draw on the line up to your credit limit. As you pay down the balance (with interest), your available credit replenishes.

However, you can only draw from the credit limit for a set amount of time (referred to as the “draw period”), after which you can no longer borrow money and must repay your outstanding balance. In addition, HELOCs are “secured loans” that require using your home as collateral. In exchange, you may get a lower interest rate than for a credit card or personal loan. But you could lose your home if you don’t make your loan payments.

Home equity loan

A home equity loan is a loan type that allows you to borrow against your property’s cash value, commonly at a low fixed interest rate. Also dubbed a “second mortgage,” a home equity loan is usually a smaller, second loan taken out in addition to your existing mortgage. This permits you to tap your home’s value without altering the rate or terms on your primary mortgage. You can also take out a home equity loan if your home is fully paid off and borrow only the amount you want to cash out.

A home equity loan can be a worthwhile choice because it commonly charges a lower interest rate than other debt types, such as personal loans and credit cards. But note that, since your home acts as collateral, missing loan payments could result in foreclosure.

Cash-out refinance

A cash-out refinance replaces your existing mortgage loan with a new, larger home loan. The difference between your new and old loan amount is given to you as cash back at closing. A cash-out refi permits you to tap the equity in your home and use it for any purpose, such as constructing an accessory dwelling unit. It’s a good way to access a large sum of money at a competitive interest rate.

However, cash-out refinance rates are slightly higher than traditional mortgage refinance rates. Your refinance rate will depend on your credit profile and how much cash you take out. You can usually cash out up to 80% of your home equity. Additionally, your new loan will be larger than your old one, so you’ll pay more in mortgage interest in the long run. But since mortgage rates tend to be lower than a personal loan or credit card rates, cash-out refinancing can be a better way to finance a large project like an ADU.

Personal loan

A personal loan, also referred to as a signature loan, is a type of unsecured loan. With a personal loan, you don’t need physical collateral—such as your home—to secure the funds. Here, the lender usually only requires your signature and pledge to repay the loan.

Thankfully, it’s usually easy to qualify for a personal loan for an accessory dwelling unit. What’s more, you might get the money within a matter of days. But a personal loan is considered riskier for the lender. That’s because no collateral is needed. Consequently, they may charge a higher interest rate on a personal loan than they would for a secured loan like a home equity or auto loan.

Note that personal loans may put your credit score at risk. That’s true if you don’t pay back the loan on time or abide by its terms. If your credit score drops, it may be tougher to get other types of credit in the future.

Credit cards

Using new or existing credit cards remains the easiest, quickest, and most convenient way to fund your ADU project. Depending on your card’s borrowing limit, you may be able to charge thousands that can go toward your project. Just be aware that will come at a steep price, as many credit cards charge the highest interest of all forms of financing unless you repay your balance due in full early on.

Money-saving tip: Explore credit cards that offer a 0% introductory APR for a limited period. This can be a smart option if you intend to repay your outstanding balance relatively quickly.

The bottom line                                                    

Building and financing an accessory dwelling unit or a granny flat can be a good investment of time, effort, and money – provided you know what you’re getting into and have a clear goal for using the ADU.

“The added income potential, increase in property value it will bring, and living space flexibility it offers makes an ADU worth it,” says Stover.

Kropovinsky agrees.

“A granny flat can be an excellent way to add value and versatility to your property. Whether you envision a cozy guesthouse, a cutting-edge external home office, or a rental unit, a granny flat can fulfill your needs,” he says.

Accessory dwelling unit FAQs

How much does an average ADU cost?

The cost to build an accessory dwelling unit will range from $40,000 to $125,000, with the average expense being around $82,500, per HomeAdvisor. You will pay around $100 to $200 per square foot, including materials and labor.

Does adding an ADU increase property value?

The National Association of Realtors reveals that, in the largest cities, a home with an ADU can add 35% to a home’s value, on average.

Are ADUs worth the investment?

The effort, time, and cost of constructing an accessory dwelling unit can be justified depending on your goals for the ADU. You can choose to rent out the ADU and earn extra income. You could let a relative or loved one live in the ADU. The unit might serve as a handy home office. Data suggest that adding an ADU will also increase your home’s resale value.

Can I use a mortgage to build an ADU?

You can use a mortgage loan to help pay for the costs of an accessory dwelling unit. For example, you can refinance your existing mortgage loan and take cash out at closing to help pay for the ADU. Or, if you are planning to buy, finance, and renovate a fixer-upper, the plans for which include constructing an ADU, you could pursue a conforming mortgage loan program like Fannie Mae’s HomeStyle Renovation and Freddie Mac’s CHOICERenovation; or you can explore government-backed renovation loans include the FHA 203k mortgage, the VA renovation loan, and the USDA renovation loan.

What is a granny flat?

A granny flat or an accessible dwelling unit is a comfortable solution for families in need of extra space. Built on the property grounds, it’s a separate space typically used to accommodate elderly family members, live-in nannies, or house guests.