What is an ADU in Real Estate? A Comprehensive Guide

Posted by Excelsior Realty Team on June 6, 2023

Are you aware of what is an ADU in real estate? An Accessory Dwelling Unit (ADU) is an independent residential dwelling unit located on a property with a single-family home.

In recent years, the demand for ADUs has increased enormously because they create affordable housing options and add value to a property. Many cities in the United States have updated their zoning regulations to encourage homeowners to build ADUs, as it may increase the supply of affordable housing and generate passive income for rental units.

In this comprehensive guide, we will discuss everything that you need to know about building an ADU on your property. So whether it's converting an existing space or constructing a new unit from scratch within 30 days, let's explore how beneficial owning an accessory dwelling unit could be for your family's future!



What is an ADU?

An ADU is an acronym for Accessory Dwelling Unit, as you know. It refers to a self-contained living unit that's on the same lot as a single-family residence but separate from the primary home. The purpose of an ADU in real estate is to increase property value, provide affordable housing options, and generate rental income.

The importance of building accessory dwelling units cannot be overemphasized because it creates additional living spaces on existing properties without having to acquire new land or demolish structures.

Research shows that listing properties with ADUs for sale attracts higher offers compared to those without. This often results from the potential passive income that renting out these units brings to homeowners.

Many cities and counties around Minnesota have ordinances regulating what type of ADU can be constructed and how they're set up. Therefore, it's critical for interested parties or property owners looking at adding an ADU to know their local zoning requirements beforehand.


Types of ADUs

There are several types of ADUs, including attached ADUs, detached ADUs, garage conversions, and interior conversions. Homeowners can select the type that they'll prefer based on zoning regulations and how much value it adds to their property. Let's discuss each one in detail below.

  • Detached ADUs

Detached ADUs are standalone living units that sit separately from the primary residence and have complete utility connections. These structures can be either prefabricated or custom-built while adhering to local zoning requirements.

This type of unit is an excellent option for property owners who would like to build a second home or supplement their rental income. Because they offer more privacy compared to attached ADUs.

Detached ADUs may also increase the value of your Minnesota properties, especially if well-designed and constructed. In fact, various studies show that adding detached accessory dwelling units often leads to increased property values of 25% on average in some areas throughout the US!

  • Attached ADUs

Attached ADUs, as the name implies, are additional living spaces attached to an existing home. This type of accessory dwelling unit shares a wall with the primary residence and usually has its own private entrance.

Attached ADUs can be built either as an extension to the original structure or on top of an existing garage. They're typically less expensive than detached units because they share certain elements (such as walls) with the main house, which helps reduce construction costs too.

  • Garage Conversions

Garage conversions refer to transforming the existing garage into a separate living space. These conversions involve repurposing and modifying sections of an existing attached or detached garage according to local zoning regulations. But it must include a separate entrance.

This approach is perfect for homeowners who want more living space on their property without having to build structures from scratch. Additionally, converting your garage into an ADU may add significant value (and passive rental income opportunities) if you ever decide to sell your home in the future.

  • Interior Conversions

Interior conversions involve transforming interior space within an existing home, such as a basement or attic, into a separate living quarter. This type of unit is cost-effective and often requires fewer permits compared to building new structures.

While it may save homeowners money in the short term, this option has downsides that include limited privacy and potential interruptions from other occupants of the main house. However, it's perfect if your property features ample indoor space for accessible conversion without taking up valuable outdoor spaces.


Pros and Cons of ADUs

Before deciding to build an ADU on your property, it is essential to weigh the pros and cons.

  • Benefits of ADUs

There are several significant benefits to having an ADU on your property. Here are a few:

Additional Income: Building and renting out an ADU can generate rental income for the homeowner, supplementing their primary income.

Affordable Housing: The creation of additional living space can improve affordable housing options in some neighborhoods where finding safe and quality low-cost rentals is challenging.

Increase Property Value: Many areas around Minnesota allow homeowners to permit adding an ADU. It can increase the value of the property by providing another complete unit that meets local zoning requirements.

Extended Family Living Arrangements: Dependent family members or elderly parents live close but independently, offering them care in proximity without sacrificing privacy.

Determining whether installing accessory dwelling units bears positive fruit will depend on factors such as location and costs incurred.

  • Drawbacks of ADUs

While there are quite a few benefits to having an ADU, here are some potential drawbacks you should consider before going forward with adding one:

High Costs: Construction and design expenses can be prohibitive for some homeowners. Building regulations for ADUs differ by locality, but this undoubtedly affects the cost of building permits issued.

Maintenance and Management: The responsibility of managing residential property rentals comes with maintenance concerns over heating/cooling expenses, landscaping upkeep, and regular cleaning.

Increase Inhabitant Density: Though creating accessory dwelling units offers affordable housing options in certain areas, unsuitable growth could fuel urban crowding.

It's important to evaluate factors like zoning requirements carefully when considering constructing an Accessory Dwelling Unit.


Legal Considerations for ADUs

Before adding an ADU to your existing property, you'll need to consider legal and zoning regulations. A few places restrict where and how homeowners can build these accessory structures on their properties. This is why they should refer to local city or county zoning laws.

Permitting requirements also vary by municipality. Most require construction plans adhering to their building codes and a fire department review for safety concerns. Depending on where the homeowner wants to add the ADU, additional costs may accrue from this potentially lengthy permitting process.

It's essential that property owners consult professional real estate attorneys familiar with the laws regarding accessory dwelling units in Minnesota cities.


Financing and Cost Considerations

The cost of building an ADU largely depends on the type of unit and several other factors. like utility line extension, architectural planning, and permits required by local zoning or ordinance.

Detached ADUs tend to be more expensive than attached ones because they require standalone electrical and plumbing systems. A cost breakdown on average shows that a typical 500 square feet separate apartment can range from $100k-$500k.

Financing an ADU could be challenging. But some loan programs offer creative financing options that allow homeowners to build without affecting their credit scores significantly.

For example, MN Housing offers zero-interest deferred loans for up to $15K for compatible housing improvements in targeted residential areas with specific income thresholds. This is only payable when the owners sell or refinance properties years later.


Impact of ADUs on Real Estate Value

An ADU in real estate is an excellent investment for property owners looking to increase their home value. According to a study conducted by the Housing and Community Development Department of California, properties with accessory dwelling units add about $136,000 in value compared to those without.

Another benefit of constructing ADUs on your property is that it can generate rental income, which creates passive revenue streams. Some cities permit homeowners to rent out their ADUs for extra money or use them as guest houses or home offices.

Constructing an accessory dwelling unit can be costly. However, many local municipalities offer financial assistance programs to help offset these costs. Nonetheless, adding an ADU may still provide returns on investment over time through the increased resale value and potential rental income generated.


Design and Construction of ADUs

When it comes to designing and constructing ADUs, several architectural considerations must be considered. For instance, the type of ADU that can either be detached or attached will significantly influence the design and construction process. Most importantly, understanding your city's zoning requirements is critical to determining what types of structures are allowed.

Another key factor that has gained traction lately is the incorporation of sustainable and energy-efficient features into ADUs during construction. These include installing energy-efficient LED lighting systems or solar panels on rooftops as a source of renewable energy supply. Incorporating these green strategies into building an ADU also adds value to your property while positively impacting our environment!


Benefits of Choosing Excelsior Realty for ADU Transactions

You will find several reasons why choosing Excelsior Realty for ADU transactions can be beneficial to both buyers and sellers. With over a decade of experience and great success in the real estate industry, Excelsior Realty offers comprehensive guidance on constructing, financing, and maintaining accessory dwelling units.

As an expert team that prioritizes client satisfaction, we at Excelsior understand the importance of providing top-notch customer service tailored to individual needs. With our approachable stance toward delicate real estate issues coupled with years of proven expertise under our belts, working with us ensures you get fair property valuations when buying or selling your home.

So, we can tell that adding an ADU is a smart investment decision that'll pay off in many ways. Partnering with us at Excelsior will not only make the entire process seamless but also guarantee ultimate satisfaction while getting value for money. Don't hesitate to reach out to us today!