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In my conversations with over 60 ADU homeowners for the ADU Case Studies Project, “increased housing flexibility” is a key reason given for why they’ve created their ADUs. “Potential rental income” was right alongside it. ADU owners appreciate that having two dwelling units on their property provides a lot of options. In places where there are not owner occupancy requirements – such as Portland, OR – ADU owners can use their properties in any of the following ways:
Own Two, Rent Neither
The Own Two, Rent Neither model is often employed by Multigenerational Families. Watch for the upcoming post How ADUs Work for Multigenerational Families for examples of how ADUs are being used by multiple generations.
On the other hand, the Own Two, Use Both model might also be used by households who do a lot of entertaining and want one of the spaces – usually the ADU – to be available as a guest house for visiting friends and family. Sheila Butler’s ADU: From Shack to Guesthouse is a great example of how an ADU can be used by a family as their primary residence or a guest house as housing needs shift. Steve Snyder & Jackie Ellenz’s ADU: An Energy-Efficient Guest House is another example of an ADU being used as a guest house for visiting friends and family. Their ADU is also used as an art studio, which brings up another option. Some ADU owners use their ADUs as an office space or as a space to get away from the hustle and bustle of the main house. Isabel Johnson & Brad Creel’s ADU: A Backyard Guest Room and Cheryl & Jim Levie: Recreating a Period Piece are examples of these uses as well.
Of course, as family situations change, having an ADU allows for the flexibility to convert one or both of the units over to a rental.
Own Two, Rent One
The Own Two, Rent One model is very common since ADUs provide a great way to bring in additional income through rentals. The biggest distinction in the Own Two, Rent One model is the difference between long-term and short-term rentals. In Portland, where ADUs can be used as short-term rentals, many people have chosen this option.
Examples of ADUs as short-term rentals include:
Some new ADUs as short-term rentals will be added to the mix this year, so be sure to watch for:
Of course, many ADUs are used as long-term rentals, providing stable – and often affordable – housing to their tenants. Providing affordable housing to friends was a key driver in the decisions to create Tom Hudson’s ADU: The Newest House on the Block and Sylvia Allen & Martha Shelley’s ADU: A Home for A Friend. Many others, including Regan Gray & George Okulitch, Susan Eliot, Rambo Halpern, and Lisa Lonstron have appreciated the steady income and the on-going connection of having long-term tenants.
Own Two, Rent Both
In places without an owner-occupancy requirement – like Portland, OR – it’s also possible to own a house with an ADU and rent out both units. (Check out How Portland Became ADU-Friendly (And How Your City Can, Too) for more on that!)
When an out-of-state job opportunity came up, this provision allowed Blake Clark & Sabina Chen to pour sweat equity into a home they hope to come back to someday, rather than being forced to sell. They were able to rent both units to great tenants and they keep tabs on the place from afar. Rex Burkholder & Lydia Rich also used this option so that they could rent out both the house they used to occupy and the ADU they built when they moved to another house across town. Similarly, Victor and Kendra Duong purchased a home with ADU potential so that they could rent out both units as an investment in a neighborhood that they like.
In this round of the ADU Case Studies Project, I discovered a new ADU use pattern: the “landlord suite.” With this option, homeowners are either traveling or live in multiple places and use their ADU as their home base when they are in town. They often rent it to someone else when they are away. I realized in retrospect that this is the model used for Stephanie & Sam Dyer’s ADU: A Guest Cottage Off Mississippi Ave. They rent out their parents’ landlord suite as a short-term rental when the folks are not in town. Similarly, Satish and his partner Jeff split their time between Portland and San Franciso, so they rent out their primary dwelling long-term and use their ADU as a short-term rental when they’re not living in it themselves. They love Portland and look forward to one day returning to their main house. (Then again, they have fallen in love with their ADU. Good thing they have the option to live in either unit, right?!) Hammer and Hand has also built an interesting landlord suite which you can view in the Hammer & Hand ADU Profiles.
ADU Rental Decisions
As they’re running the numbers on an ADU, many people face a decision about which unit to rent out and how to rent it. The great thing about an ADU is that any of them could be the right choice for you at any given time. Here are the considerations:
Should you rent out the primary dwelling or the ADU?
The advantage of owning two and renting one is that you can live in either unit and rent out the other as it suits your life situation. You might, for instance, look to James Michelinie & Kyra Routon’s ADU: A Starter Home as an example. They were renting a house on a corner lot which they were able to purchase. They then built the ADU in the backyard and moved into it so they could rent the primary dwelling. They plan to move back into the main house and rent out the ADU when they are ready to start their family. Similarly, Lisa Lonstron lived in her primary dwelling for years before she converted her basement into an ADU. She’s established more financial security for herself by living in her ADU and renting out the main house.
Should you rent short-term or long-term?
Renting short-term is a nice option if you want to retain access to the ADU as a work space or a guest house for friends and family. ADU owners often choose the short-term rental option if they are eager to pay down their investment quickly. Many people have found that they can bring in considerably more income renting their ADU as a short-term rental – particularly if it has a high-level of finish and a desirable location. John & Stephani Hayden, Joan Grimm & Rita Haberman, Barbara Gundle, and Marenda Chamberlin & Heidi Lohman are all going this route, at least to start.
However, there is a great deal of work required to maintain a short-term rental. Furthermore, a short-term rental doesn’t provide the level of stability that a long-term rental provides. Your short-term renter won’t watch your cat and collect your mail while you’re out of town or keep an eye on your kids while you run to the grocery store. That sense of community and those on-going relationships are only possible with a long-term tenant in the ADU.
“We will probably go to long-term since Airbnb is a lot of work. Having the ADU is an added expense. We get revenue from Airbnb and we enjoy meeting people, but there are also things to maintain. There’s an additional responsibility. It’s like having a side business.” –Marenda Chamberlin
Should you rent short-term and switch to long-term?
What some ADU owners have chosen to do is use their ADU as a short-term rental at first to help pay down their construction loan or home equity line of credit (HELOC) so they can more quickly realize their return on investment. They’ll then switch over to a long-term rental to bring in steady income while enjoying the benefits of having a consistent renter. They always have the option of moving into the ADU themselves, too.
As Barbara Gundle put it:
“It became pretty clear right away that Airbnb was the right way to go. I have to pay back the loan and that’s the fastest way to do it. Airbnb can bring in twice as much as a long-term rental. Of course, that depends on occupancy rates, but I think my location will be good. Once it’s paid off I will reevaluate and I may live in it.” – Barbara Gundle
So which is right for you? Tell us in the comments how you’ve used your ADU and/or how you plan to in the future.