What is an accessory dwelling unit?
Accessory Dwelling Units (ADUs) have been known by many names: granny flats, in-law units, backyard cottages, secondary units, garage units, and more. They are accessories to a primary residence and provide complete independent living accommodations for one or more people. It is important to note that an ADU is not the same as a tiny house, which generally does not have sewage or water and is more like a mobile home.
We have recently been hearing more about this type of property in response to the significant lack of housing inventory and rising home prices in South Carolina. Many Americans can now benefit from loosening regulations on building these types of dwellings.
The segments of our population who can benefit from the use of these units include homeowners who may be able to generate an income stream from building an ADU, Gen Z family members struggling to find affordable housing, and older family members who need to downsize or may need a little help with day-to-day living but still want to maintain their independence. The use cases are endless.
“The top two uses of an ADU nationwide are 1) to house parents of the owner living there (61% cite this as a common use in their market) or 2) to support adult children who need temporary housing for financial reasons (35%).”
-HomeLight Agent Insights
Here are some of the main benefits:
- Affordable to construct because they do not require paying for land, major new infrastructure, structured parking, or elevators.
- Can provide a source of income for homeowners.
- Some homeowners have constructed these units and lived in them while renting out their primary residences.
- Are built cost-effectively and are significantly less costly than other types of home construction.
- Allow extended families to be near one another while maintaining privacy.
- Can provide as much living space as many newly built apartments and condominiums, and they’re well-suited for couples, small families, friends, young people, and seniors.
- Give homeowners the flexibility to share independent living areas with family members and others, allowing seniors to age in place as they require more care.
Financing options
Making your project a reality requires financing unless you have a bunch of cash lying around! There are many ways to get the money you need. You can use a conventional Fannie Mae Homestyle Renovation loan, which may offer lower rates than other financing options, or a Fannie Mae Construction to Permanent loan, which allows for incorporating an ADU in the initial construction project. On October 16, 2023, the Federal Housing Administration expanded access to mortgage financing for homes that have or will include accessory dwelling units. The policy allows borrowers to use up to 75% of the estimated ADU rental income to qualify for an FHA loan on a property with an existing unit and 50% of the estimated rental income from a new accessory dwelling unit to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Program. The policy also added ADUs to the types of improvements that can be financed under FHA’s mortgages for new construction.
Home Equity Loans or Lines of Credit allow you to borrow against the value of your existing home, and the funds can be used to finance an accessory dwelling unit. Homeowners can do a cash-out refinance by refinancing their current mortgage and taking out additional funds to cover the construction costs. The important thing to know is that you do have financing options, and working with an experienced mortgage loan officer will help you choose the right program for your project.
How will a secondary unit impact your property value?
Constructing an in-law apartment or granny flat typically raises the overall value of your South Carolina home. When appraising your property, an appraiser considers the value of other homes in your community with ADUs. Properties featuring them often sell for a premium because they offer an income-producing unit and additional living space.
How much the resale value will be impacted depends on the region in which you live. Nationally, these smaller units show a 38% boost in property value, according to a report by HomeLight.com. In the Midwest, homes with them see an average increase of 54% in resale value. The Pacific region returns an average of 36%. And finally, The Northeast and South-Central US returned 43% and 40%, respectively. Remember that local regulations and specific definitions matter when evaluating your decision to construct one of these small properties. Whether you’re buying a property with an existing unit or planning to build one, understanding these nuances is crucial. Our construction and renovation team is well-versed in all the regulations and procedures, so you will be in good hands working with MEP.
“Accessory dwelling units are a great opportunity for many homeowners, with states working to make the process easier and faster to help make more affordable housing available. Each county or town could have special requirements, so make sure to do some early research at that level. We here at Mortgage Equity Partners have prepared several programs to help finance these opportunities and a dedicated team to work with clients through the project and finance process.”
–Kevin Brennan, Construction and Renovation Manager at Mortgage Equity Partners
The final word
The popularity of ADUs has grown over the past few years as states and local ordinances have become more lenient due to the increasing need for affordable housing. Whether you are a homeowner looking for an additional income stream, have adult children returning home, or have aging parents who need a helping hand, ADUs could meet everyone’s needs. How a homeowner can use them varies depending on local zoning regulations, so before you jump on the bandwagon, contact your city or town website for zoning rules and regulations. Our construction and renovation team can help you with this process and determine the best financing option.
Sources:
Homelight
Fannie Mae ADU guidelines
Better Homes and Gardens
FHA ADU Guidelines
