Anytime you make major renovations to your home, it is wise to determine the return on investment (ROI). When it comes to assessing your accessory dwelling unit (ADU) the good news is that they very frequently provide a great return on investment. However, it can be a little tricky to figure out what the ROI really is. If you haven’t yet built your ADU, haven’t yet started renting it, or haven’t yet sold the home, then your ROI is only prospective. You’ll know the true ROI when you realize the gains from the renovation. Still, it is an important part of the planning process for an ADU to figure out what the ROI could be. Here are two ways to do it.
Scenario One: You Rent the ADU
When you rent out the ADU, the rental income is the primary return that the investment provides. Of course, if you’re renting to family and not charging, or using the space for something else and not generating income with it, then you won’t see a financial return until scenario two or three. However, if you are renting, you can calculate an ROI.
The ROI is the amount you have sunk into the ADU’s construction, plus the costs of maintaining it as a rental minus the monthly rent you achieve. As you can see, the amount is going to vary widely based on the decisions you made and the rental market you’re in. Sometimes it is more valuable to see when a rental unit pays off its initial investment rather than its ROI.
For example, let’s say you built a rental unit at $150,000. It costs you roughly $1,500 per year in maintenance (a ten percent of value figure is average.) You rent that space out for $4,000 per month, which means that, minus the maintenance, it makes you $30,000 per year. It takes you only five years to pay off that initial investment, and the rental income after that is your return.
Scenario Two: You Sell the ADU
You can sell ADUs separately from the main home in many areas of California. As a general rule, a property can sell for one hundred times its monthly rental value. This means that your $4000 per month rental could be sold separately from the home for $400,000. Considering your $150,000 investment, that is a return of $250,000.
Of course, all of this is heavily dependent on the market and what you can sell an independent ADU for. It also isn’t very convenient for homeowners to have a portion of their property owned by someone else, particularly if that person intends to rent it.
Scenario Three: You Sell the Whole Home
It is much more common for people to realize the gains from their ADU addition when they sell the entire property. In this case, the ADU adds roughly the same value it would if sold separately. So your return on just the ADU portion is the same as if you sold it, at $250,000. This is, of course, also highly dependent on the market.