On May 1 the City of Tacoma began allowing detached accessory dwelling units (ADUs) on residential properties. These are also known as in-law apartments and granny flats. The purpose is to address housing choice and affordability.
Should you build one? The short answer is that it depends on your intended use.
Portland Already Allows ADUs
An agent friend in Portland, Richie Metzler, tells me ADUs are popular there, especially among younger homeowners, and that they do pencil as an investment. He sees clients spending $100,000 to $150,000 to build 2 BR / 1 BA units that rent for about $2000 per month. That is an insanely good return on the initial cost. The “cap rate” is off the charts. If you were going to hold onto the house a very long time, I think an ADU probably does make sense. Our rents are lower than Portland’s, but the numbers would still be very favorable for those who held the investment a long time.
Resale may prove to be the monkey wrench. I think it is risky to view an ADU purely as an investment if you think you might sell the property in the near future. I worry most about how the Tacoma resale market and Tacoma appraisers will value ADUs. I do NOT foresee future buyers paying back the full cost of cost of construction. As with most improvements I predict ADUs might return part of their cost when selling, perhaps 50 cents on the dollar or less. Let’s assume for a moment the ADU cost $100,000 but only adds $50,000 to the resale value. That is a $50,000 loss. The income generated during ownership should be factored in, as should likely tax benefits. (Tax consequences will vary depending on your circumstances, so ask an accountant.)
The Bottom Line
Whether you finance construction (somehow), or simply factor in the opportunity cost of tying up a big pile of cash, is that there likely won’t be enough income to make up the loss in value when reselling. Even with very good cash flow and tax benefits you would have to keep the property a long time to recover $50,000!
ADUs will probably not be attractive investments for most people here. The market might prove this wrong: Costs may lower, rents may go up, or ADUs might be in greater demand on a resale basis than my guess above. Also, consider the following:
Many desire an ADU for personal reasons having little to do with the investment calculation. Homeowners commonly wish for a family member to live close (but not TOO close!) This is an intangible benefit that might be worth the price of admission. A quiet home office might be another such reason to build. And consider the type of use may change several times over the years, returning value all the while. Flexibility of use is probably the more compelling reason to build an ADU than viewing it strictly as an investment. The same should can said of most home improvements; they should be done for your enjoyment, not for improving the value of the property.
Another caveat: If you are handy and don’t plan to pay a general contractor to build the ADU, your cost basis might be significantly less than the example above. Perhaps you have a sweet hook-up on inexpensive or free leftover materials. Perhaps you are a contractor by day, or just very handy and feel you can build for much less than most.
We are happy that homeowners in Tacoma will now have this option and eager to see how it actually plays out for our clients. If you have a story about building or owning an ADU, we would love to hear it!
Pictured photo: ADU in Colorado; cost was approximately $230,000. Photo courtesy of L&D Construction