An accessory dwelling unit (ADU) is a term used to describe a secondary house or apartment located on the same plot of land as a larger, primary place of residence. This has become an industry for its own sake, with the potential to become the next trillion-dollar industry.
Understanding ADUs in real estate
Depending on where one is located, accessory dwelling units are known by several other names.
Some call them mother-in-law suites, secondary dwelling units, laneway houses, or carriage houses, while others call them granny flats.
In the United States, the majority of residential areas were rezoned in response to the housing boom that occurred post-World War II.
In essence, limits were set on population density and both the size and separation of single-family homes.Â
In the modern area where pandemic-induced quantitative easing has exacerbated the unaffordability of homes, zoning laws in some (but not all) areas now permit ADUs so that people can share their living spaces and save money.
What constitutes an ADU?
There is no universal definition of an ADU, with each state defining it according to particular criteria.
However, as we noted earlier, ADUs are smaller, separate dwellings on the same plot of land as the primary place of residence.
They may be a separate structure or attached to the primary home or some other structure on the property.
As one of the key players in the space – Samara – explains:
An accessory dwelling unit (ADU) is a legal and regulatory term for a secondary house or apartment that shares the building lot of a larger, primary home. ADUs are designated as occupiable living spaces, each fully equipped with a kitchen and bathroom. Sometimes they’re described as ‘granny flats’, in-law units, or backyard homes.terms for They are typically the quickest and lowest impact way of adding housing and maximizing value of existing properties for California homeowners. There are many terms used to describe ADUs such as Granny Flats, In-law units, or backyard homes
Accessory dwelling units can comprise the basement of the primary home or, in some cases, may be built on top of the garage.
Increasingly, ADUs are tiny homes with concrete foundations that are set up in the backyard.
Here are some other characteristics of an ADU:
No separate postal address.
Cannot be lawfully sold on its own. Instead, ADUs can only be placed on the market when the primary residence is up for sale.
Features complete and independent living facilities. This means permanent places where tenants can live, sleep, eat, cook, and wash.
Pros of ADUs
Affordability
If the owners of a principal dwelling cannot meet their mortgage repayments, they may choose to take in a permanent lodger in the ADU.
Others may consider listing the structure on Airbnb, for example.
Property value
Properties with an included ADU are likely to fetch a higher asking price than one that does not.
However, one should always consider the cost of building an ADU to avoid overcapitalization.Â
Support
Informal or familial support is another advantage of this type of living arrangement.
Grandparents may move into an ADU to be closer to children who can provide extra care.
In return, these elderly members of the family can supervise grandchildren while their parents are at work.
Cons of ADUs
Restrictive laws
In some states or jurisdictions, ADUs are only permitted for owner-occupied properties. The laws can also be confusing for those with little or no previous experience in accessory dwelling units.
Property taxes
Whenever an ADU is built, property taxes increase.
Less usable space
ADUs decrease the amount of usable outdoor living space which may be seen as a con for some homeowners or buyers.
Key takeaways
An accessory dwelling unit (ADU) is a term used to describe a secondary house or apartment located on the same plot of land as a larger, primary place of residence.
There is no universal definition of an ADU, with each state defining it according to particular criteria. However, in general, they can be attached or unattached to the primary place of residence, cannot be sold separately and must contain complete and independent living facilities.
ADUs are an ideal way to reduce mortgage costs and increase the amount of familial or informal support around the home. However, some will find the laws confusing or restrictive and there is also the issue of increased taxes and less usable outdoor space.
Airbnb arbitrage is a business model where the renter of a house or apartment sub-lets the property to Airbnb users. This is a model where the Airbnb arbitrageur can transform a long-term rental, with the main property owner, into a short-term rental, with higher rates and margins.
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. For instance, on a $100 booking per night set by a host, Airbnb might make as much as $15, split between host and guest fees.
In Q3 2022, Airbnb recorded its most profitable quarter ever. With revenues of $2.89 billion in Q3 2022, Airbnb posted a record of $1.21 in net income. The first nine months of 2022 posted revenues of $6.5 billion and a net income of $1.64 billion. Thus Airbnb will be profitable in 2022.
Airbnb’s take rates, also called fees, that the platform charges to hosts range between 15-20%. In Q3 2022, Airbnb’s take rate was around 18.5%, compared to 18.8% in 2021 on almost a hundred million nights booked over the platform. Airbnb’s gross booking value per night was $156.44 in Q3 2022, and the total gross booking value was $15.6 billion.
In 2021, Airbnb generated enabled $46.9 Billion in Gross Booking Value, and it generated $6 Billion in service fee revenues. On 2021, there were $300.6 Million Nights and Experiences Booked, ad an average service fee of 12.78%, at an Average Value per Booking, $155.94.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
