Among the best investments, a homeowner can make is adding to or enhancing their property. After a home is paid off, it is legally yours and can be used as a powerful financial asset. By maintaining its upkeep, you can keep abreast of inflation and economic changes. In addition, a paid-off property can be inherited indefinitely, keeping your family secure for generations.
One way of adding to the value and practicality of your home is by enhancing it with an Accessory Dwelling Unit (ADU). What is an ADU? To put it simply, these secondary units, frequently referred to as in-law units or cottages, are subordinate structures that can be built on your property or added to an existing home. Based on the ADU Los Angeles regulations, there are currently 4 types of ADUs that can legally be built:
- Interior Conversion – ADUs built using existing housing structures, such as basements or attics.
- Attached Unit – ADUs that are structurally added to or built atop homes.
- Detached Unit – ADUs built separately from the main house such as small backyard cottages.
- Garage Conversion – ADUs built by converting garages.
In Los Angeles, these structures are one property along with your house. After building these structures, they can be used as housing for family or rented out. However, this latter point begs the question of how much money can legally be charged when renting out an ADU.
The typical amount a landlord charges for rent is roughly 0.8-1.1% of their home’s value. This value is determined by the market value of the home and subject to some degree of personal preference. For example, charging a high 1% for renting a home worth $100,000 is not unreasonable. On the other hand, charging 1% for a home valued above $350,000 might turn most renters off.
So, is ADU rent calculated based on total property value? Read on to find out the answer to these questions and more.
Renting Out an ADU in Los Angeles
According to planning.lacity.org, Los Angeles ADU permit requests have increased dramatically since 2017. This increase reflects the need for more affordable housing in the state as well as the recognition of ADUs as financial assets. This surge in ADU permit application is due largely to the passage of new State Laws effective since January 1, 2019.
These laws enhanced regulation and clarified several issues plaguing homeowners and renters alike. The changes are as follows:
- The new laws permit one ADU per single-family home.
- Established a ministerial process to make getting an ADU permit easier.
- Added rules regarding utility fees in relation to ADU size and reduced fees for ADUs built inside main structures.
- The new laws waived parking requirements for ADUs located within a half-mile radius of a transit stop or within a block of a car-share. These apply for ADUs built inside primary houses and those built-in historic districts.
- Require no more than one parking space for ADUs.
- Waived the requirement for “passageway” construction (ten-foot-wide open walkways from the sidewalk to ADU)
- Allowed no setbacks for existing garages converted ADUs and 5ft side and rear setbacks for ADUs above garages.
- Capped ADU floorspace:
- 1,200 sq ft for detached ADUs (backyard cottages)
- 1,200 sq ft or 50% of house size for attached ADUs that involve addition.
- No size limit for ADUs built entirely inside existing houses.
Despite the update, there has been no clarification about whether ADUs are regulated. Current Rent Stabilization Ordinances limits impose a 4% maximum yearly rent increase on properties built on or before October 1, 1978. This extends to apartments, condos, townhomes, duplexes, and other residential units. However, there are several structures that are exempt from these regulatory ordinances. These include:
- Buildings or units for which an occupancy certificate was issued after June 13, 1979.
- Units in hotels, motels, inns, and townhouses that have not been occupied by the same tenant for more than 32 continuous days.
- Dwelling units in non-profit cooperatives owned and occupied by residents.
- Dwelling used solely for non-profit public benefit.
- Housing accommodations in hospitals, monasteries, retirement homes, and other such buildings.
- Dorm accommodations in schools and universities.
- Dwellings under rent control by other government agencies.
- Dwelling units over 50 years old that have undergone substantial remodeling after July 13, 1979.
- Dwelling units removed from rental housing.
- Live/work units with properly issues Certificates of Occupancy.
- Commercial spaces with infrequent residential use.
- Residential units are now used for commercial purposes.
The above State Law update was received in full without amendment by the city. Los Angeles has been trying to reform ADU policies since the 1980s, but has had little luck creating proper regulations. When California enacted its original ADU laws and the most recent updates, cities were given a limited period to comply. Los Angeles was slow to action and therefore forced to adopt the laws of the state without conforming them to the city’s standards.
ADU Law Standards
Gov. Gavin Newsom’s stance on statewide renter protection, it can be expected that ADU laws favoring tenants are soon forthcoming. As the former mayor of San Francisco, Newsom’s cabinet has set somewhat of a precedent for ADUs through the San Francisco Accessory Dwelling Unit Program.
The program presents two types of ADUs, “Waiver” and “No-Waiver.” These classifications depend on whether your ADU needs waivers from the San Francisco Planning Code or not during construction. According to the program fact sheet, new “Waiver” ADUs may be subject to rent control, whereas “No-Waiver” ADUs are likely to only be subject to certain Rent Ordinance eviction controls.
This specification of ADU policies is exactly what is needed in Los Angeles. Current estimates for 500 sq ft ADU rental rates run around $2,250, which is a far cry from providing affordable housing. For the sake of both market viability and personal success, it is recommended that landowners charge reasonable ADU rent to their tenants.
By providing proper housing to those looking for affordable spaces, you can maximize your profit in the long run. That being said, your rent calculation should also take the construction costs of your ADU into account.
ADU Construction Costs vs Rent
Based on industry standards and market demand, the average cost of constructing an ADU in Los Angeles is $70,000 per month. This figure takes both material and permits costs into account. This is a small fee to pay based on the average rent potential of the unit being estimated at $1,700.
After monthly expenses including utility fees and upkeep costs, you can expect to make an average of $863 of income per month from your ADU alone. This comes out to an annual return of roughly $11,000 not accounting for the increase in property value that building an ADU can provide. Those constructing ADUs for property cost appreciation can expect an increase in property value of up to 51% in some cases.
In order to reap the full rewards of constructing your ADU, you must take all the factors of renting into account. This includes tenant screening, placing ads, and considering utility cost-sharing.
When Renting Out an ADU
After constructing your ADU you must consider finding competent tenants. Here are some ways of catching the interest of potential renters:
- List your ADU rental on real estate websites.
- Advertise your ADU in the newspaper.
- Contact a property management company for help.
- Post notices in public locations.
- Don’t forget about word-of-mouth!
When you find a tenant, you must work with them to construct a rental agreement. These can be broken down into two types:
This type of tenancy automatically renews unless either you or your tenant give written notice to end it. Under California law, the tenancy cannot be terminated in the middle of any month unless you agree to end it. If you (as the landlord) want to end the tenancy, you must do so only at the end of the month and only after giving 20 days’ written notice. Though this type of agreement can be oral, a written contract is recommended to avoid any kind of misunderstanding. If you have trouble writing a standard agreement, you can acquire it from a real estate agent or have one prepared by a legal advisor.
This type of tenancy is made for a specific period of time such as one year. This agreement must be written, signed, and notarized if the duration of the tenancy exceeds one year. Based on this type of agreement, the tenancy terminates automatically on the agreed upon date. As with the previous agreement type, you can write it yourself, contact a real estate agent, or speak to your legal advisor.
When creating rental agreements, you must take shared matters into account. These include odds and ends such as:
- Utility Bills – Some locations do not allow ADUs to have their own sewer or water connections. Discussing usage and payment with your tenant is a must for determining how to balance potential fees.
- Laundry Services – You can provide laundry and dryer hookups depending on your location. If doing so is not allowed, you should determine a schedule with your tenant.
- Outside Space – You should consider what spaces you want to make accessible to your tenant. This includes extra storage in a garden shed, or backyard pool use.
- Parking – ADUs are now required to have parking spaces unless located within a half-mile radius of a transit stop or within a block of a car-share.
- Telephone and Cable – You should consider whether you want to share landline and/or cable services with your tenant, as well as how to split the bill.
Besides these, you must also abide by the Federal Fair Housing Act and comply with any and all state and local laws governing ADUs. In the future, these may or may not include rent control regulations, therefore it is important to be prepared for anything.
ADUs: The Bottom Line
The increase of ADU construction in California is unprecedented and very helpful to both landlords and renters. These dwelling units not only provide affordable housing to those in need, but they also present lucrative investment opportunities. While the laws governing ADU construction in Los Angeles are yet to be form-fitted, California has made great strides in regulating this emerging market.
When considering ADU construction, it is important to take potential costs and other issues into consideration. Based on the San Francisco model, you can expect some rent regulation. Once these laws become clearer, you may have to reassess your ADU needs or restructure your plans.
However, regardless of rent regulations, ADU construction can significantly add to the value of your home. If renting out your ADU, you can expect a dramatic increase in your income. This is especially true if you live in an affluent neighborhood with high property value.
When you decide to take the final step toward improving your financial stability, don’t forget the odds and ends of renting your ADU. Take your time to find the right tenant and be sure to present them with a written agreement stating the leasing terms.
If you’re interested in constructing an Accessory Dwelling Unit, consider Oran Remodeling. We have over 25 years of experience serving the wonderful residents of Los Angeles with their construction and remodeling needs. Contact us today by filling out our contact form or calling (818) 514-4386.