Profitable Home

What to consider before carving out an apartment or mother-in-law suite from an existing home.

February 1, 2010

When Byron Stookey and his wife were looking at houses several years ago in Brattleboro, Vt., they found a place they loved. But the price was high and there was space on the second floor they didn’t really need.

Their solution was to spend a little more up front to convert that space into a separate unit and use the rental income to help cover their real estate taxes and utility costs. 

"It was a way to generate income and also have someone around to help take care of things while we’re away," says Stookey, who’s since become an advocate of these income-producing units, called accessory dwelling units, a collective name for mother-in-law suites; guest cottages; carriage houses; or garage, barn, or basement apartments, depending on where on the property those units are located.

ADUs have long enabled home owners to add live-in services like babysitting or elderly care, but today they’re attracting the attention of owners as a way to increase how much house they can buy. And municipalities are taking renewed interest in them as a way to curb foreclosures or add to their stock of affordable housing.

"If they’re done right, they’re a way for people to help cover their mortgage in a hard market," says Patrick Hare, an ADU consultant in Cornwall, Conn.

Stookey, who helped design an ADU program for Brattleboro Area Affordable Housing, a nonprofit organization, says the group is fielding an increasing number of inquiries from municipalities that see the apartments as an inexpensive and mostly politically benign way to meet affordable housing needs. 

"The apartments are easier politically than having a developer come in with plans for an affordable housing development. Accessory apartments don’t change the character of the neighborhood," he says.

For real estate professionals, the units provide an opportunity to step in with services to clients by helping them decide whether ADUs are right for them and how much demand there is for the units.

If you’re working with customers interested in buying a house and converting part of it into an apartment, you want them to consider three questions about the conversion:  

  • Is it legal?
  • Is it practical?
  • And is it desirable?

Is it Legal?

Although municipalities approach accessory dwelling units differently, zoning rules always come into play, so your clients need to check with the appropriate local authority to see whether ADUs are allowed and, if they are, what restrictions are in place.

Some communities ban ADUs outright while others allow them for relatives or live-in help. But many do allow the units for rental purposes, says consultant Patrick Hare. Indeed, some states—California, Oregon, and Washington, among them—have laws requiring communities to allow ADUs by default and are putting the burden on municipalities to enact ordinances with additional restrictions.

To be on the safe side, owners should first check with their zoning board or an attorney experienced in these issues. Even when the units are allowed, owners typically still need to file a formal application. "A town might have requirements beyond what the state requires," says Hare, "like no outside stairs or no additional parking in front of the house."

"Many buyers either forget to get the zoning approvals in writing or they think their one little house doesn’t have to be governed by zoning rules," says Brae Hanson, a broker with Hunter’s Fairway Sotheby’s International Realty in North Barrington, Ill.

Indeed, ignoring zoning can completely negate the financial benefits that owners seek. "Illegal apartments can be far costlier than the income they’ll generate," says Jeff Cronrod, a board member of the American Apartment Owners Association.

And don’t forget homeowners’ associations. Even if the municipality allows ADUs, if the house is in a community with an HOA—which isn’t uncommon for many newer homes—you must be sure the HOA allows them. Many have covenants prohibiting them.

Is it Practical?

The Brattleboro Area Affordable Housing group figures that if gross rent will recover the out-of-pocket costs in less than five years, an apartment is worth considering, especially if the owners can apply the rent to property taxes and insurance rather than repaying money borrowed for the work.

Stookey says the lion’s share of conversions the Brattleboro nonprofit has been involved in have cost between $15,000 and $45,000. When you start getting to around $60,000—typical for creating an apartment in an attic that doesn’t already have utilities—then the economics probably won’t work out. 

In these cases, you would add the unit not to make money but to bring in your aging parent or a live-in caregiver.

Hare says ranch houses with walk-out basements tend to be well-suited for ADUs because they lend themselves to an easy, inexpensive division between the main house and the unit and come with a separate entrance. They also tend to have a bathroom in place; that, along with the pipes for the washer and dryer, make it easier to add a kitchenette.

Small, two-story houses tend to be harder to convert for two reasons: the cost of adding a kitchen on the upper floor, and the need to add a separate entrance.

Is it Desirable?

Assuming the zoning and economics work out, what other considerations affect your client’s decision? Consider these issues:

Are the owners willing to give up the privacy? No matter how clean the separation between the main house and the apartment, they’re inviting others to live on their property. In some cases, "there will be some level of access to your home, whether it’s the laundry room or a shared stairway," says Linda Todd of Associated Brokers & Consultants Inc., in Grand Junction, Colo.

Are the owners willing to be landlords? Even though they’re not viewed the same as commercial rental units, ADUs are generally subject to the same landlord-tenant rules as commercial rentals, so owners have to make sure the units have, for example, working smoke alarms. And although owner-occupied properties of four units or less are exempt from the federal Fair Housing Act, discrimination on the basis of race is never permissible under other U.S. civil rights laws. So, if owners aren’t prepared to follow landlord-tenant laws applicable in their geographic area, then ADUs might not be right for them.

Are owners prepared to accept a tenancy that goes awry? To do it right, owners must thoroughly vet tenant applicants, as any good property manager would, or hire someone who will. The alternative is to risk getting a tenant who won’t pay the rent, who trashes the place, or upsets the neighbors. Not to review a prospective tenant thoroughly is to "roll the dice and hope you come up with a seven," says Todd.

Is there a market for the unit? If there’s a surplus of rental units in the area, an ADU may not make sense. College towns are an obvious market, given the transient student population and the proximity of many universities to single-family neighborhoods. But owners should be aware that they might have to discount their units heavily to attract tenants.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.


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