(guest post by Caitlin Bigelow, CEO & Co-Founder, Maxable)
With restrictions loosening nationwide, the construction of accessory dwelling units (ADUs, often referred to as “in-law suites” or “granny flats”) is booming. In fact, a recent national study revealed that 4.2% of homes sold in 2019 had an ADU – versus just 1.1% in 2000.
Newer, friendlier ADU regulations have been a boon for both homeowners and affordable housing advocates, enabling single-family homeowners to construct a second rentable unit more easily than ever before. For those who opt to rent them out, the return on investment is excellent. And for owners who plan to use an ADU to house a family member, the costs of a monthly loan payment are typically much lower than average rent prices.
While building an ADU can be cheaper than constructing a single-family home, it is still a pricey undertaking – with some hidden expenses that may come as a big surprise. Often starting at least $90,000 to build, ADUs can range from a small backyard cottage to a garage or basement apartment. Construction costs can vary greatly and hinge on whether you are starting from scratch or refurbishing an existing structure.
With all of this in mind, here are several hidden costs to watch out for as you plan and budget for your new granny flat.
1. Site Work
Preparing your property for ADU construction is a cost many homeowners don’t consider. Depending on the property’s configuration, you may need to do a significant amount of site work, such as tree removal, excavation and land grading. As an example, if leveling a sloped back yard is necessary, the price will increase significantly.
2. Fees, Fees and More Fees
While building permit fees are inevitable, there may be additional fees associated with your ADU project, ranging from environmental to architectural. For instance, architectural fees can range up to 15% of the project’s cost. A construction manager or general contractor will also charge a fee for project supervision.
These projects are also often subjected to development and impact fees, which help support public improvements, services and facilities. Almost every new structure has had to pay them at some point! In California, for example, these can be avoided by keeping your ADU under 750 square feet. That’s a critical number to remember, because while the state says anyone with a single-family residence can build an 800 square foot ADU, that extra 50 square feet could raise your ADU costs by thousands of dollars in development and impact fees.
By working with an experienced ADU designer, you can minimize many of these costs.
3. Interior Finishes
There is a great deal of price variability associated with the interior finishes – from millwork to flooring and kitchen appliances. Are you partial to top-of-the-line appliances and custom tile? Or will your ADU be appointed with less costly options from big-box stores like IKEA or The Home Depot?
When it comes to deciding on interior design costs, carefully consider how the ADU will be used. If you are building it for yourself, you might want to spend more on higher end finishes that you love, as opposed to a rental in which you might want to consider more durable finishes.
4. Direction Matters
If you are considering a garage conversion but want to expand the structure’s existing footprint, remember this: Expanding from the side of your garage is more expensive than expanding from the front or back.
This is often because most garages have a simple pitched roof, making the side walls load bearing. To extend through a side wall, you must reinforce that wall significantly to sustain its strength. By expanding to the front of the garage – where the main door is – you circumvent that problem. You’ll also save money because a large opening already exists, eliminating demolition costs. Similarly, expanding out the back of the structure is also easier because while you will have to demo part of the wall, it is usually not load bearing.
If you opt to expand to the side, you’ll also need to replace part of the garage’s existing roof with a gable addition. This is costlier in both materials and labor than simply extending the pitched roof in the same direction.
5. Utility Meters
If you plan to rent out your ADU, you’ll probably want to have the utilities on separate meters so the tenant’s bills are separate from yours. This is especially true if you plan to rent out both the main house and the ADU someday. Keep in mind that installing separate utility meters can add several thousand dollars to ADU costs. A separate electric meter alone can cost between $2,000–$5,000 or more.
You could, of course, simply estimate the average extra cost of the ADU’s utilities and roll that into your tenant’s monthly rent. But this alternative can be risky. When the COVID-19 pandemic mandated stay at home orders last year, landlords who rented out ADUs with utilities included saw their utility bills skyrocket – and usually had to cover the increase out of their own pocket.
To avoid that problem, another option is to install an aftermarket sub-meter that uses an app to show precisely how much water, power or gas the ADU tenant is using. While the tenant won’t get a separate utility bill, you can show them the data and accordingly add the appropriate cost to their monthly rent.
6. Going Solar
Many ADUs are garage conversions, which are not required to have solar panels. But in some states like California, new-build ADUs must have solar panels.
The good news: There is a 26% federal tax credit being offered through 2022 for solar panels, so even if you’re not required to install solar, it might be good time to capitalize on that credit.
Costs related to installing and maintaining a solar system – including such as roof repair, storage batteries, and electrical panel upgrades – may also qualify for the rebate. An energy efficient option, solar will shrink your ADU’s utility bills, especially if you install a mini-split heating and cooling system.
7. Fluctuating Material Costs
The price of things like lumber, cement and steel fluctuates every year. While there is no way to control the price of materials, consult your contractor about timing and bids. If your financing is in place and you have completed construction drawings, you’ll be in an optimal position to negotiate with different contractors and get a fair bid for labor and materials.
8. The 10% Rule
This is more of a bonus tip than a “hidden cost,” but we always recommend adding an extra 10% to your construction budget as a contingency. This offers a crucial safety net should something unexpected crop up during the construction process, or if you want to do a last-minute upgrade.
It is important not to let these costs deter you from building an ADU, but rather learn about them up front so there are no surprises. ADUs are a wonderful investment in the long run – both in terms of increased property values and the potential for passive income.
By collaborating with an experienced team who can identify the hidden costs and help maximize your budget, designing and building your own ADU can be a rewarding experience!
Exterior and Interior
Editor's Note: All photos appear courtesy of Caitlin Bigelow, CEO & co-founder of Maxable, an educational platform firm that connects homeowners with the resources and tools they need to construct accessory dwelling units (ADU) from start to finish.