Here’s Why Adding a ‘Granny Flat’ Behind Your House Can Pay Off

A in-law-suite sits on a piece of property.
Getty Images

Some people call them backyard cottages. Others call them in-law suites or even “granny flats.” They’re accessory dwelling units, also called ADUs, and they’re rapidly growing in popularity everywhere they’re allowed.

They’re also being allowed in more places these days as local governments are taking steps to solve their local housing crisis.

An ADU is basically a little self-contained house located behind a larger house. AARP is in favor of them because some people build them to house older family members close by. Others build ADUs for extra space or to rent them out — either on a monthly basis or as Airbnbs.

What to Know About Accessory Dwelling Units, or ADUs

Here’s everything you need to know about ADUs:

What’s in an ADU?

It’s a lot more than just a shed. A typical accessory dwelling unit contains a living space, a kitchenette and a bathroom. It has electricity, plumbing, heating and air conditioning. Depending on their size — ADUs max out at about 1,000 square feet — some have a separate bedroom. Smaller ones have a foldout bed in the living room.

Where Are ADUs Allowed?

The biggest hot spot is California, which has basically legalized ADUs statewide. Otherwise, ADUs are being built in various cities and states that have passed laws allowing them — including the Pacific Northwest; Georgia and North Carolina; housing-starved cities like Denver and Boulder, Colorado; Nashville, Tennessee; and the Washington, D.C., metropolitan area. All of these places report increasing numbers of ADUs being built.

“It’s very regional. It goes hand in hand with these communities where they’re under a lot of housing pressure,” said Jeremy Nova, founder of Studio Shed, one of a handful of companies that manufactures prefabricated ADU kits. “They’ve realized ADUs are a gentler way to add density than” duplexes or apartment complexes, he added.

However, many cities and neighborhoods still don’t allow ADUs, depending on how strict they are about parking requirements, setbacks and other zoning laws.

How Much Do ADUs Cost?

Well, they’re not cheap. “To build an ADU is to build a small house,” Nova said.

A typical ADU might cost $120,000-$150,000, with another 30% of that paying for site work and utility hookups, he said.

Most buyers take out home equity lines of credit to build them. With the cost so high and loans getting more expensive due to rising interest rates, ADU builders emphasize the strong return on investment that homeowners typically get from adding an ADU to their property. It makes the whole property more valuable.

The cost of adding an ADU is typically $300 to $400 per square foot, but ADUs are often being installed in areas where real estate gets appraised at $600 to $800 per square foot, Nova said. In other words, the increase in the home’s resale value is more than what the ADU cost.

“One of the reasons ADUs are so popular is that they’re pretty much an immediate return on your investment,” he said.

Do People Really Rent Out ADUs?

Brian and Jackie Jump in Scottsdale, Arizona, got their first ADU because they needed the extra space.

“We didn’t have anywhere to work out. We didn’t have anywhere to host my husband’s parents when they visited,” Jackie Jump said. “For them to have their own little house on the same property was just amazing.”

To help pay off the loan for the ADU, they started renting it out as an Airbnb. “We figured if we got even a handful of bookings, that pays for the ADU right there.”

Picture a sleekly designed 20-foot-by-14-foot structure with a fold-out Murphy bed in the main room, a separate bathroom with a shower, and a small kitchenette with a two-burner cooktop and an under-counter fridge.

Now the Jumps rent out two homes that have ADUs. When their Airbnb listings showcase the ADUs, the bookings increase noticeably — performing better than photos of the swimming pools.

“When you’re renting the property, the house and the ADU come together,” Jackie Jump said. “It becomes a really alluring thing for families to rent and stay in.”

A granny flat is situated by a pool.
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How Do You Build an ADU?

The first step is to get financing, typically through a home equity line of credit.

“Financing the project is one of the major hurdles,” Nova said. “But it’s usually possible if you’re willing to jump through the hoops.”

Once you have engineering plans drafted for your ADU, you’ll need to get a permit from the city or county you live in. Depending on where you live, that can take one to nine months, he said.

You basically have two choices: You can either hire a local design-build firm, which will provide an architect and a general contractor; or you can buy a prefab structure online from a manufacturer that will ship sections of the building to you on a truck to be assembled on-site. Manufacturers often partner with local contractors to make that happen.

A prefabricated ADU is generally faster and cheaper but less customizable — although you can sometimes choose and customize your design via online tools.

People use their backyard cottages for all kinds of purposes. AARP is so in favor of them that it has a 24-page booklet, “The ABCs of ADUs,” that you can order.

“For some people, it’s just a dedicated rental unit. It’s a home improvement project that can generate cash for the homeowner as well,” Nova said. “Other people use it for guest space or to house their aging parents. It’s a great option that can keep families together.”

Are There Cheaper Options?

So an ADU is out of your price range, but you still want to make some money off that unused backyard, or at least get more out of it?

Ditch the Plumbing and Spend Less

If you’re willing to do without a bathroom or plumbing, these kinds of backyard structures get a lot cheaper.

For a cheaper structure, Studio Shed manufactures prefabricated backyard home offices that cost $30,000 to $40,000, including a foundation. Competitors like Summerwood Products have a wider price range, from about $15,000 to $40,000. Another competitor, Liberty Sheds, starts at $5,600 for a small 10-foot-by-16-foot shed with an electrical outlet, although you have to pay to hook the shed up to a power line and it doesn’t come with a foundation.

With no plumbing, these aren’t residences, though. Grandma can’t stay there. They’re simply offices or studios or workout spaces.

“For people whose houses are a little too small, they can move the home office outside,” Nova said. “It’s a much simpler process than a home addition because you’re not cutting into existing walls and trying to tie foundations together.”

Make Money by Renting Out Your Yard or Driveway

Instead of spending cash, how about using your yard to make some green? You can use Sniffspot and rent out your backyard to be used as a private dog park, by the hour per dog. The average booking is $9 to $15 an hour, and many homeowners earn up to $3,000 per month, according to Sniffspot.

Speaking of spots, parking spots are at a premium these days. Use your extra driveway space to make some extra money. There are multiple apps and websites available for renting out your driveway. You can find listings for as low as $25 per day up to $1,000 or more a month.

Make Over Your Outdoor Space

Want to make the most out of your outdoor space but don’t have tens of thousands of dollars for a granny flat — or maybe you just don’t want strangers in your backyard? No problem. You can extend your patio using gravel, design your own outdoor rug or even create a solar water fountain. Each of these creative projects to dress up your patio and yard will set you back only $100 or so.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.