ADUs Offer Promise as a Viable Affordable Housing Supply Solution
How can a detached garage help address the shortage of affordable housing? Look to better awareness and understanding of accessory dwelling units (ADUs) among homeowners and future borrowers for part of the answer.
The lack of affordable homes is top of mind for the housing industry and potential homebuyers. Exacerbating an already-tight housing market, the COVID-19 pandemic has had a chilling effect on new construction, which has priced out many potential moderate- and lower-income homebuyers and shut out of the opportunity to build wealth through responsible, sustainable homeownership.
The housing industry is working collaboratively on solutions to address affordability and housing supply challenges. ADUs also have a growing role to play.
What Are ADUs?
Known colloquially as “granny flats,” “in-law apartments,” “carriage houses,” and “secondary suites,” among other names, an ADU is a smaller, independent residential structure on the same lot as a single-family home, according to the American Planning Association. Typically, ADUs must have their own separate entrances. They may be part of the main home, such as a converted basement space or an addition; or they may be detached structures, such as a standalone cottage or “tiny house” built on the main home’s lot.
The study revealed that ADU construction is on the rise, growing an average of 8.6% per year over the past decade. Close to 70,000 properties sold in 2019 had ADUs (4.2% of all homes sold), compared to 8,000 in 2000. However, there is no need to build new housing on properties with existing basement units or detached garages or structures that can be converted.
Flexibility and Benefits
ADUs can instantly create density where structures exist and can help encourage infill development. The number of potential dwelling units immediately increases when these are legally permissible uses along with rental licensing.
ADUs are perhaps best explained in terms of the flexibility and benefits they provide to homeowners, renters, and the communities around them:
- Homeowners: ADUs can create an income stream for existing homeowners. With the price of larger homes out of reach for many homeowners, investing in and improving one’s own property with an ADU presents a viable solution. For example:
- Homeowners aged 55 and up who wish to age in place can use an ADU to downsize their own living space or to generate rental income – from either the ADU or the main house – to offset expenses and maintain homeownership.
- ADUs can assist younger demographics who might not otherwise have the total cashflow needed for the debt-to-income (DTI) ratio.
- Secondary dwellings can also be used to accommodate the increasing trend toward multigenerational living.
- The homeowner may realize an increase in the property’s value.
- Renters: ADUs can also help renters by, theoretically, increasing supply and lowering prices. When offered for rent, ADUs often provide comparatively less expensive, high-quality housing in desirable neighborhoods. For example:
- ADUs provide an opportunity to maximize a growing community’s existing residential footprint, rather than sacrificing precious open space that contributes to a neighborhood’s quality of life.
- ADUs can provide sustainability advantages in terms of the emissions associated their construction and energy usage – smaller size, smaller environmental impact.
It is important to note that the impact of ADUs on a community depends on where these units are used as well as their quality. For example, high quality ADUs can have mixed effects in higher-income neighborhoods by outpricing moderate- and lower-income renters. They also require cooperation of local zoning authorities to make them permissible land uses and, when necessary, authorize rental licenses. There may also be challenges with compatible zoning, lighting and parking, among other considerations.
Innovative Mortgage Solutions
Helping to drive ADUs’ growth are innovative mortgage options. For those with existing basements or detached garages or structures, renovation mortgage financing solutions can provide the capital homeowners need to add an ADU on their property. The project doesn’t need to be an improvement or addition to the existing structure, it simply needs to be built on the same lot.
Also, homeowners with detached units that include their own kitchens, bathrooms, bedrooms and entrances can qualify for factory-built home mortgage solutions.
For lenders, a better awareness around ADU mortgage options can help distinguish themselves from their peers and competitors. Using mortgage offerings can also help address Community Reinvestment Act (CRA) or environmental, social and governance (ESG) goals as ADUs can further support wealth building for individuals with low- and moderate-income as well as support affordable rental solutions.
Building Awareness and Acceptance
While the advantages of ADUs for homeowners, renters and communities alike suggest great promise as a contributing remedy to the ongoing affordable housing shortage, awareness and acceptance are lagging.
Educating homeowners is also essential. Builders, real estate and mortgage professionals and lenders all have roles to play in making homeowners aware of ADUs and the flexibilities and opportunities they offer. Learn more about ADUs here.