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Accessory Dwelling Units: A Great Alternative Income Path

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Last month, a New York Times article with a nondescript title crossed my Twitter feed, Grandma Never Had It So Good. The article really has nothing to do with grandmothers, but I think it could revolutionize personal finance. I wish I had noted who Tweeted it.

Years ago, I wrote about how living in a tiny house could make you rich. The idea was simple. Live someplace really cheap (which is possible with some extremely tiny houses) and you have a very small mortgage. For most people, the cost of their home is their biggest expense. If this is small, the rest of the money can be invested in other appreciating assets. It can be dumped into the stock market. It can be used to buy a rental property. It can be used as start-up capital for a small business.

All of these can snowball like compound interest and grow to become a big piece of the financial freedom puzzle.

The New York Times article brings up a concept that I had never come across before "Accessory Dwelling Units" (let's go with ADU since it rolls off the tongue a little better). The idea is to create a small living environment in around 300 to 700 square feet of space on property that you already own. ADUs are often referred to as granny flats, which is where the "grandma" in the article's title comes in.

The article profiles people who have rented out the small properties through websites like Airbnb as well as those who choose to live in them renting out their main house.

In either case, the people doing this are in position to make some good money over time. The renovation costs seem to vary from $60,000 to $100,000. It will take some time to make the money back renting it out on Airbnb. I'm not sure what rents are like, but I'll guess it is $100 a day (full kitchen makes it more attractive to me than a hotel), which means it could pay off in about 5 years at 70% occupancy. Even if it takes longer, that's not too bad. If the owners ever sell the house and move on, they'll get more for it because of the ADU.

The people living in the ADU who are renting out the main house have it made financially. The rent from the big house pays for their mortgage. I don't know if they have property taxes and such wrapped up in their mortgage, but if they did, they are paying nothing for their home! Not only that, but they are building equity on a big property each month!

Imagine eliminating your rent or mortgage payment every month, while you build equity. It doesn't get much better than that.

The downside is that city and state regulations place strong restrictions on ADUs. For example, my city allows them, but one must sign an affidavit that the person occupying the unit is a relative (parent, sibling, or child) of the owner. With that restriction, it was dead in the water for me. I didn't even look to see if I could charge rent.

It seems like the article's profiling of Portland, Oregon is the exception rather than the rule. It's too bad, as this seems like it could be a win-win for owners and renters. If it works in your area and you have the means to get it off the ground, maybe it can help you get to financial freedom.

Last updated on June 9, 2014.

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Real Estate

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6 Responses to “Accessory Dwelling Units: A Great Alternative Income Path”

  1. Kevin says:

    The thing that would worry me is unexpected large expenses. If you start treating your house like a hotel you open yourself up to bed bugs etc. which can easily cost thousands of dollars and would eat up a whole years worth of revenue.

    I like the idea of renting out to a long term tenant much better, but I’m not sure why the $100,000 renovation is needed. Just rent out a room. This can pay off your mortgage itself. Obviosly it depends where you live, but plenty of people I know do this.

  2. Big-D says:

    I have a different idea which kind of goes along with this. Houses are expensive to build, for many reasons. Flooring, walls, lighting, appliances, heating and cooling, fixtures (counters/tops), etc. are all issues because when you design a house, these things have to be “in vogue” if you are looking for resale. I did a lot of soul searching and found out that I really don’t need a huge house, but like the things I own. I figure I could live in a house that is about 400 square feet. However I could also have a lot of my stuff in another place which I don’t have to have up to the levels of “societal upkeep” as a traditional home.

    After talking to a home builder, you can build a garage/barn type structure, which is 4 season, for about 1/3 the cost of a traditional home. So my current plans are would be to build a 400 sq/foot home, with a 3000 sq/foot garage. In the garage I could keep my two cars and camper on one side, on the other, I could put couches, cheap entertainment, my sauna, my recording studio, etc. out there. When I entertain, we are in the garage. The house is basically for food, bathroom, sleeping and things like that. What this does is you spend $20k on a tiny home (many designs of these out there) and $30k on a garage. You are not starving for space, you have all the creature comforts, and can be rather a good value.

  3. Lazy Man says:

    I’ve been on vacation for a couple of days. Now I’m back and I have to say that I like this idea a lot.

    I just wonder if the price of the garage/barn starts to spiral. For example, I would think add a recording studio would up the price. Then you might get to the point where you’d want some place to go to the bathroom or something to eat without the interruption.

    If you go down this path, I’d really like to hear how it works for you in practice.

    I’m really getting tempted to finish our basement (probably less than 200 sq.ft.) into a tiny home (sans bathroom). Looking into things like a Murphy Desk Bed and a tiny kitchen.

  4. Big-D says:

    I just want to say that when I say “recording studio” I mean my drums, amps, guitars and basses, in an area with my mics and soundboard and computer. I am not talking enclosed room with sound proofing. The price estimates are still valid.

    As for the bathroom, I have considered it, but the 4 seasons nature of it make that difficult without some solid heating and cooling. The thing I did not mention was that in the house, 200 sq ft of the house is underground (with the bedrooms and a bathroom, and a tunnel to the garage (underground). The reason for this is security and convenience. At the base of the stairs going into the tunnel, will be a small head (toilet) for just those reasons. I didn’t want to bore everyone with the details, but yeah, I did think of that.

    The big reason why I am looking at this design is security as I am moving to the country when I retire here soon, and part of my time is going to be spent traveling for many months. I want to lock the place up, and have it “secured” while gone. There will be movable doors to cover windows and garage door openings while I am gone to make sure breaking in takes a while. Washington’s squatter rights laws are really stupid, so you have to take that into account.

  5. Lazy Man says:

    I was thinking of the soundproofed studio.

    I like the idea of the tunnel and especially the security. I really like the idea of traveling. I was thinking that if we ever went somewhere long enough we could put stuff in storage and rent out our house. Perhaps it would be good for an RVing situation.

    You got me thinking now…

  6. I love the idea, and can see doing that at some point. I know we can;t put a trailer on our property, but one of these may be an option, I’ll have to look into our townships ordinances. I own the empty lots on both sides of my house, so I do have the space to add something like that without it being an issue. I wonder how low I could get the costs for a detached ADU or tiny house in my yard.

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