Benefits, Risks and Things to Consider Before You Add an Accessory Dwelling Unit to Your Home

 

Have you ever rented the unit in someone’s basement? Maybe your spouse’s mother moved into your “Mother-In-Law Unit” above your garage? Or have you ever traveled and stayed in a pool house for your stay? Commonly referred to as “Mother-In-Law” units, homeowners use these as a way to fill the space in their home and gain residual income, either from vacationers or long-term tenants.

The official terms for these units are Additional Dwelling Units (ADU) or Detached Additional Dwelling Units (DADU’s), and are defined as extra spaces in homes and on properties where someone can live completely independent of the main house.

These units can be almost anywhere on the property, but they are usually located in the basement, in the backyard, or above the garage. They have their own bathroom and kitchen facilities, and sometimes they share laundry with the main house.

Thinking of adding a unit to your home? Here are some benefits and risks, as well as important aspects to consider before you build:

 

Benefits

Homeowners can maximize their investment by renting out the extra space to long-term tenants for short-term vacationers. These tenants can help pay off debt or create an extra stream of income to pay for other needs or wants.

Depending on several factors, including the size of the unit, the market in the area, and other factors, each homeowner should decide which option they are more comfortable with. These decisions should be made before they list the unit for rent to best market to the right audience.

 

Risks

An obvious risk is that when you open your space to a stranger, there’s a possibility that things might end poorly. Either the tenants could turn out to be untrustworthy, or unreliable, leading to a financial burden.

To minimize the risks, it’s a good idea to use an application process to check backgrounds and employment history as a tool to get to know the potential tenant. Make sure to adhere to the National Fair Housing Laws and your local regulations.

 

Things to Consider:

  • What are the shared spaces?
    • Would you be comfortable sharing those spaces, and potentially appliances, with a new person each weekend, or would you rather get to know the long-term tenant who would use those on a consistent basis?
    • Rooms like the kitchen can be great for those who want to get more interaction from their vacation renters. However, sharing one bathroom between the homeowners and the visitors can be uncomfortable and risky.
    • Would you be okay with a long-term renter using your laundry facilities? What kind of access would they need to the house in order to use those machines?

 

  • What is the size of the ADU/DADU?
    • Is it truly a space where someone could live, or would it be too tight to fit all the necessary appliances?
    • Does the unit adhere to your local housing codes as a livable space?

 

  • How close are the units and what noise level are you comfortable with?
    • As a long-term landlord, tenants have the right to quiet enjoyment without the landlord barging into their space or controlling their activities. If the unit is in the basement and the tenant has friends or family over, that noise could permeate into your unit in the late hours of the night. A way to prevent this is to be sure to layout quiet hours and expectations before they sign the lease or make an agreement so that you and the tenant are on the same page.
    • The same goes for the rules in the vacation rental listing. Managing expectations is the first way to create a relationship with the tenants, even those there for the weekend.

 

  • What improvements are required to make the unit livable?
    • Do you need to add a kitchen or a bathroom? What are the costs associated with those improvements and would the market-rate rental prices make up for those improvements? You might not get your money back within the year, but if you’re dedicated to making the space worth it to rent it out over the next few years, these improvements, and financial obligations are necessary.
    • If these initial investments aren’t viable for your situation, it might be a good idea to look at other options to earn rent from your home, including adding roommates with whom you’re willing to share all the common spaces.

 

Whatever you decide, it’s important to be familiar with the rental market and regulations in both your local region and your neighborhood.

 

Do you have an ADU or DADU on your property? How do you use it? Let us know in the comments.

Posted on September 27, 2019 at 8:00 am
Jon Holsten | Category: Housing Trends, Living, Northern Colorado Real Estate, Windermere Real Estate | Tagged , , , , , , , , , , , , , , , , , ,

The Risks, Rewards, and Benefits of Owning Rental Property

PiggyBankSavings

One area of the real estate market that is thriving right now is rental property. In the first quarter of this year, landlords and property managers across the country rented more apartments and homes than they have during the first quarters of the past ten years. And according to the Wall Street Journal, the amount that renters are willing to pay has also jumped to a nationwide average of $991 per month.

All indications suggest that the rental market will continue to improve because of the combination of low vacancy rates and rising rents. In fact, the demand for rentals is predicted to far exceed supply through 2015, with some 4.5 million new renters expected to enter the market in the next five years.

What to consider before buying a rental
Being a landlord has its challenges. The recession took a toll on rental prices for a few years and any future economic downturns could do the same. Once the job market returns to normal, there’s a strong possibility that more people will choose to move from rentals into homes of their own. And the demand for rental properties could become oversaturated at some point, resulting in an investment bubble of its own.

What’s more, while the income from a rental property can be significant, it can take at least five years before you’re making much more than what you need just to cover the mortgage and expenses. In other words, the return on your investment doesn’t happen overnight.

However, in the long run, if you select the right property, it could turn out to be one of your best investment decisions ever—especially since rental real estate provides more tax benefits than almost any other investment.

Tax deductions for the taking
One of the great things about owning rental properties is the fact that you’re able to deduct so many of the associated expenses—including a sizable portion of your monthly mortgage payment.

The commissions and fees paid to obtain your mortgage are not deductible, but the mortgage interest you pay each month is—including any money you pay into an escrow account to cover taxes and insurance. Whatever your mortgage company reports as interest on your 1098 form at the end of each year can likely be deducted.

For example, you may be eligible to deduct credit card interest “for goods and services used in a rental activity,” repairs made to the building, travel related to your rental, expenses related to a home office or workshop devoted to your rental, the wages of anyone you hire to work on the building, damages to your rental property, associated insurance premiums, and fees you pay for legal and professional services. However, as is the case with any transaction of this type, be sure to consult your attorney or accountant for detailed tax information.

What to look for
As with any real estate investment, the location of the property and its overall condition are both key. But with rental properties, there are some other factors you’ll also want to consider:

 Utilities: Look for a building with separate utilities (water, electric, and gas, etc.) for each rental unit. This will make it far easier to legally charge for the fair use of what can be a very costly monthly expense.

 Competition: If your property is one of the few rentals in the neighborhood, there will be less competition for interested renters.

 Transportation: Rentals that are near popular public transportation options and / or major freeways (without being so close that noise is an issue) are usually easier to rent—and demand more money.

 Landscaping: Properties with small yards and fewer plantings are far easier and less expensive to manage.

 Off-street parking: Not only is off-street parking a desirable feature (people with nice cars usually don’t like to park on the street), it’s also a requirement for rental properties in some communities.

How to start your search
Unlike homes, rental properties do not typically have a visible ‘for-sale’ sign standing out front (as landlords don’t want to irritate, bring attention to their current renters, or turn off any prospective renters). Therefore, if you are interested in a rental property, your best option is to schedule an appointment with your real estate agent/broker to discuss your investment goals and identify what opportunities currently exist in your market place.

Posted on June 4, 2019 at 8:00 am
Jon Holsten | Category: Buying, Fort Collins Real Estate, Housing Trends, Loveland Real Estate, Northern Colorado Real Estate, Timnath Real Estate, Wellington Real Estate, Windermere Real Estate, Windsor Real Estate | Tagged , , , , , , , , , ,