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.