How ADUs are Changing the Landscape of Housing in CA

By Michelle Clardie on 06/15/2023.
Reviewed by Dan Gatsby .
Accessory Dwelling Units (ADUs) have exploded in popularity over the past decade, providing numerous benefits for residents and transforming the housing landscape in California. ADUs are secondary housing units, located on the same lot as the primary residence. These units can be attached to the main house, converted from existing structures such as garages or basements, or built as standalone structures in the backyard. 

Also known as guest houses, granny flats, in-law suites, or casitas, these innovative dwellings are helping to ease the housing shortage in CA while creating environmentally friendly, affordable housing. Additionally, with the state of California easing regulations and streamlining the approval process, ADUs have become a viable financial opportunity for homeowners and investors.

Adding Units to California’s Low Inventory

The well-documented California housing crisis prompted lawmakers to implement various policies with the intent of reducing barriers to constructing new units. In the late 2010s and into the 2020s, the state passed several laws that simplified ADU regulations, including reducing parking requirements, streamlining the approval process, and reducing minimum lot sizes. The state even created grants and other financial incentives to help owners fund construction. 

These new units can be used to house Californians in multiple living situations. Here is a look at the demographics most likely to benefit from living in ADUs:

  • Students,
  • Young professionals,
  • Downsizers, and
  • Multi-generational households looking for separate living spaces.

And, by increasing the available inventory of units for rent, we are also stabilizing the rate of rental growth that had become untenable in recent years. In Los Angeles, for example, US Census Data shows an increase of 15.9% in the median rental rate from 2019 to 2022. While these additional units will likely not be enough to trigger any decrease in California’s high rents, they may be enough to bring the growth rate back to sustainable levels.   

Promoting Sustainable Living

ADUs also provide environmental benefits. By utilizing existing infrastructure and avoiding the need for large planned community developments (complete with new roadways, electricity lines, and sewer connections), ADUs reduce carbon footprints and promote sustainable living. 

Additionally, by concentrating residents in existing neighborhoods, we can build more walkable neighborhoods around a more dense populous, rather than continuing the development of sprawling suburbs. This reduces reliance on private vehicles and encourages public transportation infrastructure. Consider LA’s new Metro expansion as an example. With enough residents living centrally, more people are willing and able to use public transport, prompting investment in new rail lines.

Providing Opportunities for Homeowners and Investors

And, finally, ADUs are changing the landscape of housing in CA by allowing homeowners and investors to quickly add value to their properties.

As home values have skyrocketed, enterprising homeowners have used ADUs as a house-hacking strategy to generate income from their property. This can be used to help offset mortgage expenses and make homeownership more affordable. Or, as is the case with many “free and clear” homeowners, the passive rental income from an ADU can be used to help cover living expenses in retirement.    

Investors are also finding impressive returns through ADUs as a value-add project. Take house flippers, for example. In a traditional flip, the investor would purchase a distressed property, renovate it, and resell it, hoping to make a profit. Today’s house flippers can build an ADU in addition to renovating the primary structure, thereby adding the value of a second unit without the expense of buying two separate properties. This is exactly how one group of investors earned over 19% on a 13-month project in Los Angeles.

The Bottom Line   

As California continues to tackle its housing crisis, ADUs have emerged as a practical solution to increase the housing supply, create sustainable communities, and provide unique opportunities for homeowners and investors. 

Whether you’re a renter, homeowner, or real estate investor, you will see ADUs change the landscape of housing in California over the coming decades. 

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