This post is all about how to make money with an ADU. I’m going to share my tips and strategies that help me earn extra money and allow me to travel the world.
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Introduction
In today’s world, finding ways to make money has never been more important. Whether it’s to supplement your current job, save for a big purchase, or simply create financial security, having multiple streams of income can make a significant difference. I was attracted to the idea of time, location and financial freedom and was able to achieve these with multiple Accessory Dwelling Unit (ADU).
ADUs have gained popularity in recent years as a great way to make extra money but also increase the value of your property. My business shifted from home additions and renovations into designing more garage conversions to ADU and new construction ADU. I’m also building as many ADU’s as I can afford in my own properties to boost my (side gig) rental income.
In this article, we will explore expert tips and strategies for making money with an ADU, helping you unlock a new pathway to financial success.
So, if you’re looking for an exciting opportunity to boost your income, keep reading to discover everything you need to know about making money with an ADU!
What is an ADU and How Can It Make Money for You?
An Accessory Dwelling Unit, or ADU, is like a second home that can be constructed on your property, either attached or detached from your main home. It can be a great investment opportunity right in your backyard and a relatively inexpensive (cheaper than buying another property) and effective way to boost your income.
Related content:
- The Ultimate Guide to an ADU Accessory Dwelling Unit for a Single-Family Property
- A Guide to Building an Accessory Dwelling Unit ADU in Multifamily Properties
- Your Guide to Building a Junior Accessory Dwelling Unit (JADU) in Los Angeles
ADUs, also known as granny flats or in-law suites are becoming increasingly popular because they offer a range of benefits for homeowners. Firstly, they provide an opportunity for multi-generational living or housing elderly parents and adult children (and their families) while still giving them their independence.
Secondly, ADUs can be rented out to generate additional income. By renting out this second home, you can make a significant profit, especially in high-demand rental markets.
Thirdly, you can rent out your ADU to yourself as a separate home office and legitimate business expense or home office tax deduction. The possibilities are endless.
So, how can you make money with an ADU?
Rent it Out – Long Term Rental
This option is the most straightforward. If you have extra space on your property, you can build and rent out the ADU to tenants. Renting out an ADU can be especially lucrative in areas where housing is in high demand and rental rates are high.
The income from the rental can help offset your mortgage payments or even become a primary source of income. It can also help you pay down your mortgage faster, supplement your retirement income, fund your travels, or reinvest in more real estate. It provides consistent income, especially with year long leases.
Do check about rental rules and regulations because every city varies.
Vacation Rental – Short Term Rental
Another option to consider is using your ADU as a vacation rental. Platforms like Airbnb and Vrbo have made it easier than ever for homeowners to rent out their properties to short-term guests.
By transforming your ADU into a cozy guesthouse, you can attract tourists and offer them a unique experience. Decorating it with a personal touch and providing amenities such as a fully-equipped kitchen can further enhance the appeal to potential guests.
By listing your ADU on these platforms, you can attract travelers and tourists, allowing you to charge higher rates. This can be an excellent way to generate income, particularly if your property is in a sought-after location.
Again, check in with your local municipalities because ADUs aren’t allowed for short-term rentals.
In my case, some of my ADU’s serve as short-term rentals. I always make sure that my city allows it and I obtain any tax or business license if needed. I bring in 2x more (sometimes even 3x more) than if I were to rent them long term.
My goal with the short term rental is to pay down my debt that I accrued building these ADUs faster. Short-term rentals include a lot of work, turnover, management and maintenance. It is a whole other business. As soon as my debt is paid off, I’m planning to turn my Airbnb’s into long-term rentals.
Mid-Term Rentals – Best of Both Worlds
MId-Term Rentals are month-to-month rentals for a specified amount of time. Guests usually stay at least a month, sometimes longer. These are the guests/tenants that I usually house in my mid-term rentals:
- Traveling professionals (often times nurses)
- Work-from-home individuals who want to experience living in another city
- People relocating to another city or state
- People waiting on their long-term rental place to be available
- Families visiting relatives in the area to spend the holidays with
- Families waiting for their home to close escrow
- Families who are doing repairs and renovations to their home in the area
- Parents visiting their children at a nearby college
I’ve been leaning more towards mid-term rentals on sites like Airbnb and Furnished Finders (for travel nurses) because I like the certainty of money coming in every month. With short-term rentals, the season might not be right or slow, and it means loss of income.
I give great discounts for weekly and monthly stays on the Airbnb platform to attract mid-term rentals. I prefer to keep everything on Airbnb in case there is a dispute and I can have a third party reviewing the issue. It’s worked out great so far and far less managing, stocking products, cleaning and wear and tear on the ADU.
House Extended Family
This option is extremely popular with my clients. Families are looking to house their relatives all the time, and a great way to do it is with an Accessory Dwelling Unit (ADU). It’s sometimes parents wanting to house their adult children or people wanting to house their aging parents. I’ve had clients build ADUs to rent to their extended family.
In this way, you rent out your ADU to people you know and want to help them out.
Make Money with Home Office or Film/Photo Set
Finally, if you have your own business, you can convert your ADU into a private studio or office space. You can pay yourself rent and deduct it as a business expense.
You can also rent it to artists, freelancers, or small business owners. With the growing trend of remote work, there is a demand for flexible and inspiring workspaces. By creating a serene environment with ample natural light, you can attract tenants seeking a dedicated space outside their homes to focus and be productive.
Lastly, you can rent it out as a film or photography space in places such as Location Works and Peerspace. It is like Airbnb for filming or photo shooting. People pay you a fee for using your ADU for certain hours and they leave for the day.
Depending on your location and if you have a nice and interesting place, you can attract creatives, charge money for it and even be featured in a magazine or movie!
Sell Your House with an ADU
An ADU can substantially increase the overall value of a property. Having an additional living space offers homeowners greater flexibility when it comes to future selling prospects. Potential buyers may see an ADU as an attractive feature, providing the opportunity to generate rental income or accommodate extended family members from the get go.
Check out my post on how ADU’s are the new American Dream.
I’ve worked with investors and developers in adding an Accessory Dwelling Unit to their home flips. I’ve seen first hand that properties with ADUs tend to sell faster and at higher prices than those without and are extremely popular!
Make Money with your ADU by Leveraging Tax Benefits
I am not an accountant so please check with yours, this works for me thus far.
One of the key benefits of owning an ADU is the ability to deduct certain expenses associated with it, such as property taxes, mortgage interest, and maintenance costs. If it’s an investment property, you can deduct the cost to build it.
By property documenting these expenses, you can significantly reduce your taxable income and save money on your annual tax bill. This includes documenting rental payments, repair costs, and any other financial transactions related to the ADU.
Depreciation Deductions
Another tax advantage of having an ADU is the potential for depreciation deductions. When you own a rental property like an ADU, you can claim depreciation expenses over a span of several years. This can further decrease your taxable income, providing you with even more financial benefits. However, it’s important to consult with a tax professional to ensure you are following the proper guidelines and taking advantage of all available deductions.
In conclusion, leveraging the tax benefits of an ADU is a smart way to maximize your income and financial security. By taking advantage of deductions and depreciation expenses, you can reduce your taxable income and save money on your annual tax bill. However, it’s essential to consult with a tax professional and keep meticulous records to ensure you are following all guidelines and capturing all available benefits. So, if you’re looking to make money with an ADU, don’t overlook the potential tax advantages that could significantly boost your income.
Conclusion: Make Money with an ADU
In conclusion, an ADU is a smart investment that can provide financial benefits for homeowners. Whether you choose to rent it out as a long-term rental or as a vacation rental, an ADU can be a consistent source of passive income. So, if you’re looking to make the most of your property and generate some extra cash, consider building an ADU and start reaping the financial rewards today.
