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Secondary suites generate income

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Do you feel like your house always empties your wallet? Maybe it’s time to earn him an income instead of burning him down with a secondary suite.




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Homeowners across the country are building ADUs. And aging homeowners are incorporating ADUs into their retirement income planning. They can even leave the main house and move into their ADU to earn more income and age in place.

In addition, cities with housing shortages encourage the construction of ADUs. In California, the state legislature authorized the construction of ADUs. ADUs in many cities are helping to boost affordable housing.


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“Our city is allowing ADUs at a pretty rapid rate,” Rosie Dyste said. She is a project planner with the Department of Community Development for the City of Santa Barbara, California. Setback rules — how far a structure must be from land lines — have been reduced for new ADUs and wavered for ADU conversions (like garages), Dyste says.

“For the most part, if you can adapt it, you can build it,” she said.

Retirement planning: building a secondary suite

As of 2017, Santa Barbara owners have built (or are currently building) 215 ADUs. This is according to the city’s ADU sitemap. But this is only the beginning. The site says 371 ADU plans have been approved and 288 plans are pending approval as of July 1, 2022.

“ADUs are accepted by municipalities across the country,” said Sheri Koones, author of nine books on tiny homes and sustainable construction. “It’s a growing trend.”

(Iriana Shiyan – stock.adobe.com)

Koones says ADUs were first adopted in Vancouver, Canada. But as city living has become more expensive, ADUs have become popular in the United States as a way to alleviate “the huge housing shortage”, she said.

ADU permits issued across California rose from nearly 9,000 in 2018 to 12,392 in 2020, according to data collected by the California Department of Housing and Community Development.

California cities actively promoting ADUs include San Francisco, Santa Cruz, Del Mar and many others. Del Mar even offers sample ADU plans on its website.

ADUs are not tiny houses, Koones explains. They may be small structures, but ADUs are not on wheels. And unlike Tiny Homes, they are fully up to code.

Dyste says many homeowners in Santa Barbara are building 500 to 600 square foot units. Structural costs typically range from $150,000 to $200,000 for permits, site preparation, and construction. However, California allows ADUs up to 1,200 square feet. And conversions can be any size (think barn or other outbuilding).

Or, an owner may choose to build an ADU or JADU junior. They are created within the structure of an existing single-family home. These Golden State ADUs are limited to less than 500 square feet.

Cities in other states have their own rules. Research the rules in your area, possible sources of financing (a home equity loan or a line of credit), and possible ADU grants for certain projects.

Californian construction

Be sure to check with your municipality about owner occupancy and short-term rental (STR) rules. Many communities restrict short-term rentals of ADUs and other properties. And some municipalities require a homeowner to live in either the main house or the ADU.

DIY An ADU?

David Marchetti, a real estate agent with Sotheby’s International Realty in Santa Barbara, demolished a carport to build his recently completed 500 square foot ADU. He says he had help with the design, foundation and other “heavy lifting”. However, he did “most of the finishing work myself”.

His plan for the short-term unit is to rent it out to a professional — teacher, firefighter, or traveling nurse — who needs affordable housing. He and his wife are considering retirement, so they built the unit to “create passive income.”

When they retire, the ADU will give them flexibility. “It gives us the ability to put our stuff in the ADU and use it as a home base if we want to travel,” Marchetti said. “We can go out and see part of the world.”

“The rent from my main house, which is very close to the beach, would pay the rent from anywhere in the world,” he said.

Does an ADU increase the value of the house? The taxman is coming

ADUs will increase the value of a property. How many? It depends on the features and location of the property. In Santa Barbara, a small ADU “would likely increase the value of the property far more than the cost of building it,” said Bob Walsmith Jr., a realtor and 2022 president of the Santa Barbara Association of Realtors.

Walsmith says a small unit, say 600 square feet, can fetch $2,000 a month or more in rent today. “We’re at about 99% occupancy for apartments in this area,” Walsmith said.

However, Uncle Sam still gets his share. Building an ADU will increase the assessed value of a property and therefore the property tax bill.

In addition, you will need to report all rental income on your tax returns. And since you’re installing a rental unit on your property, you’ll want to research the possible tax ramifications at the time of sale.

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