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[This is part 4 of a 13-part series about ADU research and policy. For the series intro and table of contents see here.]
The first question that pops into the typical homeowner’s mind, when they consider creating an ADU on their property, is “How much will it cost?”
For perspective, consider some numbers for projects built in Portland over the past ten years or so.
The survey of Portland ADU owners asked the owners who had built their ADUs about the actual costs of their projects. Here are the results, presented separately for detached ADUs (such as backyard cottages) and attached ADUs (such as basement apartments).
First, practically all ADUs are major construction projects, with homeowners spending tens or even hundreds of thousands of dollars. The few cheap exceptions were probably buildings that were very easily adapted or jobs done by homeowners who already knew construction — in other words, just because somebody built an ADU for $10,000 doesn’t mean most people will be able to. For a discussion of why ADUs have such a wide range of costs, see here.
The scale of costs means that building an ADU is a serious venture that involves financial risk. While it can certainly have a good payoff, homeowners shouldn’t be flip about getting into such a project. Likewise, it is disingenuous for ADU advocates or local governments to promote ADUs without recognizing that the developers — in this case average homeowners — are taking on real risk.
Second, detached ADUs tended to be much more expensive than attached ADUs, with medians of $90,000 vs. $45,500. While the existence of a difference isn’t exactly a surprise, because attached ADUs do have a “head start” in the form of an existing structure, the size of the difference is quite large.
This difference in cost is even more interesting given the fact that, in Portland at this time, rents are similar for attached and detached units. I will go into this more in a future post, but if you want to read some details now you can see my recent report.
Finally, some projects were extraordinarily expensive — at least in one case, because extraordinary green features were involved.
A professional in the real estate industry might look at these numbers with curiosity. They might even say, “these people don’t seem to know what they are doing.” After all, why invest $90,000 in a detached unit when $45,500 for an attached unit will bring practically the same rent? The returns are far superior for the attached unit.
The answer is that people who build ADUs do not seem to be building them just to make a profit. Though income from rent is the most common single motivation for creating an ADU, that goal is mixed with the desire to house family, friends, or helpers, or have a smaller dwelling of their own in the future.
That means ADU developers aren’t “professional” in the way they do things. They don’t seek to simply optimize financial return. If they did, everyone would build an ADU in their basement, because (at least in Portland’s current rental climate) that’s where the profit would be.
Instead, Portland’s homeowner-developers seem to be building places that are nicer, and greener, than they need to be. Some ADUs are clearly creative works, labors of love, and some are clearly part of long-term life strategies. (See the case studies on this site for some examples.) Some may be good investments financially, some may be good investments only in a more subjective assessment of lifestyle. Some, frankly, may be failures all around. :)
In this sense the homeowners are like unsubsidized professional developers… They are taking on the risk of their project failing. But their time frame is different. Most ADU developers seem to be in it to stay. They do not plan to build and cash out.
And that may be one time nonprofessionalism is a good thing. :)
Next week: do ADUs help or hurt property values?