Making the Money Work

There are many reasons why homeowners decide to develop ADUs and DADUs:

  • They want a multi-generational household with parents, grandparents, or adult children
  • They want space for occasional houseguests
  • They want to run a B&B or have a vacation rental*
  • They want to enjoy the benefits of a long-term rental

* It is important to note that not all areas will allow for short-term rentals and HB 1337 does not indicate that cities and areas must adopt ordinances to allow for these.

Creating an ADU/DADU for a long-term rental can be lucrative in the monthly rent received now, the rate of rental appreciation in the future, and the value an ADU/DADU adds to your property.

For example, let’s say you had a spot in your backyard that would be perfect for a one-bedroom DADU that was about 500 square feet. It cost $150,000 to build this DADU and you took out a fixed-rate loan at 6% to do that over 15 years. Your monthly principal and interest payment to do that would be $1,266 per month.

Now here is where it gets interesting! You want the unit to be providing monthly cash flow, right? Depending on where your property is located, amenities, etc, you might get $1500 in rent at the beginning.

Wait? Why would I take that risk to only earn less than $250 per month? Stay with me! There is more to consider!

You might not be breaking the bank that first few years. And if you are building an ADU to house someone, you probably just didn’t do it for the money. But this article IS about money, so let’s stay focused on that.

It is not unusual to increase rent annually. How much you want to increase rent will depend on your goals and what the market will bear. For the purposes of this example, let’s assume you were going to increase rent by 4% per year. Let’s see what this does over 20 years:

Rent Year 1Rent Year 5Rent Year 10Rent Year 15Rent Year 20

Between year 10 and 15, you are receiving more than double what you are paying out for the additional mortgage on the property. And remember, at year 15, you are done paying for the DADU so your expenses will be reduced even further.

And remember! The new state ordinances will allow for TWO ADU/DADUs on a property and since you are doing the prep work anyway, it might not cost twice as much for the second one but depending on what you build, your rent could double…and then some!

Now, this is a very simple approach – I haven’t included additional considerations such as homeowners insurance and how the increased assessed valuation will affect property taxes.

But let’s take a look at that increased valuation for just a second. Let’s assume that in this case, adding the DADU increased the value of the property by $100,000 (yes, currently the renovation will be valued less than it actually cost much like remodeling a kitchen or a bathroom). How does just that addition play out over 20 years in terms of increased value assuming average appreciation of 5% per year (which is actually conservative for Whatcom County – our 2017-2022 year average change in median sales price was 12.2% per year):

Value Year 1Value Year 5Value Year 10Value Year 15Value Year 20

As our example shows, you aren’t just building an ADU/DADU for cash flow – you are also making an investment in your property that should continue to increase in value over time. AND you are housing people! It is a win-win-win! 

Want To Learn More?

Intrigued? Want to think about what the next step might look like? I would be happy to schedule a free one-on-one consultation with you, listen to your goals, and provide you with options for the next step.