Maximizing Income with an ADU: Rental Tips and Tricks

How to Turn Your ADU Space into a Money-Maker

An ADU, or accessory dwelling unit, serves as a natural segway for many people as they look for ways to start collecting rental income. Commonly referred to as a “granny flat” or “in-law suite,” this type of smaller guest house on a larger property naturally lends itself to both short- and long-term rental opportunities. 

With that said, the process is not as simple as putting a “for rent” sign in the window and collecting a steady flow of rent by month’s end. Keep reading as we explore all of the in’s and out’s associated with maximizing incoming for an ADU in the Bay Area.

Know Local Rules and Regulations

It is vital to know all pertinent rules and regulations pertaining to the rental of your ADU. For example, many ADUs are well-positioned to serve as AirBnbs and other types of short-term vacation rentals. 

While these are typically allowed in the Bay Area, there is a fairly extensive list of fine print that can limit how ADUs are used for this purpose. You will likely have to obtain a Business Registration Certificate and Short-Term Rental Certificate. There are also some areas (The Presidio, Fort Mason, Treasure Island) that do not allow short-term rentals. 

Incorporate Energy Efficiency Features

The Bay Area is one of the most environmentally conscious regions of the United States. It is also one of the most expensive places to live. This adds up to energy efficiency being one of the top priorities to help make rental properties attractive. Incorporate as many energy-saving features into your ADU as possible. 

Use comprehensive insulation to increase R-value and limit heating and cooling costs. Consider ceiling and wall mounted fans to reduce reliance on A/C during exceptionally hot days. Put EnergyStar appliances in the kitchen and low flow fixtures on the faucets. 

Have a Sufficient Maintenance Fund

Many inexperienced landlords fantasize about the “passive income” that their ADU can provide. However, being a landlord is about more than just collecting rent. It takes active management to guarantee that the unit is in top condition and ready to attract top-quality tenants. 

You also have to be prepared for the call that the garbage disposal went kaput or the hot water heater isn’t working. As a rule of thumb, aim to have about 4% of the unit's appraised value saved up in a maintenance fund before renting it out. This will prevent you from having to take out high-interest debt to keep the property functional for your tenants. 

Invest in Soundproofing 

Having a tenant living in an ADU is as close to having a roommate as it gets. Therefore, maximize comfort and privacy for both you and your tenant by investing in some noise mitigation features. Acoustic wall art adds soundproofing mass that helps keep noise local to its origin. A sound proof door can help keep sound from transferring between the guest house and main residence. Sealing window joints not only improves energy efficiency, but it limits noise pollution in the process. 

Weigh the Pros and Cons of Hiring a Property Manager

Many inexperienced landlords balk at the idea of paying roughly 10% of their rental income to a property manager. This is especially true if they feel like they have a first-rate listing that will essentially “sell itself.” However, property managers begin to look much more attractive if a unit sits unoccupied for a couple of months. 

Having access to their marketing, website, databases, and other networking features can help guarantee higher occupancy rates. Property managers will also handle all of the time-consuming leg work in terms of drawing up leases and vetting applicants. 

Improve the Unit’s Durability

Maintenance and management costs are just a fact of life when serving as a landlord. Even with the highest attention to detail and the most conscientious tenants, some costs will pop up from time to time. 

Help limit these incidents by renovating your ADU with the most durable materials possible. Polished concrete floors are gaining traction in residential rentals thanks to their diverse aesthetics and virtual indestructibility. Look into fire and impact resistant shingles for the roof. Consider nonporous quartz countertops in the kitchen and bathroom to limit time spent on cleaning and sealing between tenants. 

Understand Tax Implications

Although the income stream from renting an ADU is nice, understand that it will have an impact come tax season. The IRS treats rental income as standard income, so it will be added on to your taxable bill. This could significantly cut into your profits if you are in a higher bracket. To help offset your tax liability, be sure to keep meticulous records of any costs associated with renting the unit. This could include any repair, standard maintenance, marketing, or property management fees. 

Be Well-Prepared and Maximize Rental Income for Your ADU

An ADU is a great way for property owners to start collecting some rental income. However, it takes meticulous attention to detail to keep the unit from becoming a money pit. From understanding the local regulations to a firm grasp of how it will affect your taxable income, consider any of the tips listed above to maximize income for your ADU. For more of the latest trends shaping the Bay Area real estate landscape, explore the resources at Legacy Real Estate for the leading market insights!

Author’s Bio:

Max Shafer is a freelance writer that loves sharing his knowledge and expertise on real estate. He lives in Land O’ Lakes, Florida where he enjoys spending time with his wife and researching real estate trends in his free time. Max’s work as a freelance writer can be found on Building Product Advisor, a construction industry resource site.