What is an Accessory Dwelling Unit (ADU)?
An accessory dwelling unit is a self-contained living quarters inside of, attached to, or on the same lot as the property’s existing single family home. You may have heard the terms “mother-in-law suite” “carriage house” or “granny flat” to describe this type of dwelling. In order to be defined as an accessory dwelling unit, the designated area must be a self-sufficient home that includes a living and sleeping area, a kitchen and bathroom.
ADUs can be as small as 250 square feet and can be a remodeled existing space in the home such as an attic, basement or garage. An ADU can also be a standalone structure with multiple bedrooms and more than one story built on its own foundation.
Zoning laws vary greatly and the criteria that define an ADU dwelling may differ by local municipality, so it is critical to contact the proper agencies in your area for clarification on codes, laws and design criteria prior to making a decision about including an ADU in your house flipping business plan.
Will an Accessory Dwelling Unit Add Resale Value to Your Fix and Flip Property?
The degree to which an ADU adds resale value to a property can be challenging to measure, and it will definitely be impacted by local market conditions and trends. A 2012 study published in The Appraisal Journal Understanding and Appraising Properties with Accessory Dwelling Units concluded that ADUs contributed between 25% to 34% of the assessed value of each property included in the study. Additionally, it was concluded that adding an ADU to a single family home affected an average of 51% increase in resale value.
An ADU's value in your local market will vary depending upon population size, housing availability, HOA restrictions and other factors. The decision to include an accessory dwelling unit in a house flip will be heavily influenced by inventory shortages, aging-in-place trends, and other market forces that impact home buyer decisions.
For example, some local municipalities around the country have changed zoning laws to encourage homeowners to build an accessory dwelling unit on their properties to help ease housing shortages and provide options for aging family members or children reaching adulthood who are challenged by high housing costs.
It is also important to note that with the skyrocketing popularity of the short term rental industry, homeowners are discovering that having an ADU on their property provides an opportunity to list it on AirBnB, VRBO and other vacation rental sites where they can offer the space to short term guests and earn significant extra income.
Should I Consider Adding an ADU to My House Flip?
As with any of the decisions you will be making to maximize your fix and flip project ROI, the decision to include an accessory dwelling unit must be informed by due diligence. You will need to determine the as-is value of the property, the construction costs associated with project improvements and the potential after-repair value (ARV) those improvements will return in the existing market. If you know how to determine ARV based on local comps, and your calculations indicate a significant return on investment—adding an ADU can be a great strategy for attracting home buyers and quickly reselling your house flip.
Here is an example of a house flip completed by an Anchor borrower that included an accessory dwelling unit. As you can see by the purchase price, construction costs and sale price, the investor earned a hefty ROI with their decision to add an ADU.