In 2010, data engineer Victor Chin knew he couldn’t afford to buy a home in the San Francisco Bay Area, where the median sales price was $520,958 (it’s since shot up to $930,000). Still, he kept dreaming of a place of his own—and came up with a plan.
It took four long years of saving and planning. But finally he was able to purchase land in suburban San Carlos, design a 2,200-square-foot home, and then have it built. The key to making it all work financially: installing an attached 800-square-foot, two-bedroom, two-bath unit where he and his wife have lived since 2015 while renting out the main house to pay off the mortgage.
Add-on residences like this, known officially as accessory dwelling units, or ADUs, have been catching on all over the country as a way to combat the housing shortage and steadily rising home prices—and give potential home buyers a much-needed break.
An ADU could be a guesthouse or a basement apartment with a separate entrance, or a converted garage. Also known as granny flats or in-law units because they’re often used to house elderly family members, they can also be rented out for additional income.
This “was really the only way I could do it,” explains Chin, now 37, although he admits that he wishes they had known they had a baby on the way before their renters signed another two-year lease.
“I couldn’t save up enough to get a down payment in this area based on the cost of appreciation,” he says.
ADUs are becoming particularly popular in the pricey and overcrowded cities of the West Coast, where local governments are removing barriers and taking steps to encourage building. Last year, California made it easier for first-time buyers to qualify for a mortgage by using the anticipated rental income from ADUs on their properties or separate apartments in their homes.
Previously, it was harder for many would-be landlords to get a mortgage if they didn’t live in a more traditional revenue-generating property such as a duplex or multiunit building.
ADUs “are not a silver bullet that is going to solve the problem overnight. But we really see it as a huge puzzle piece,” says Rachele Trigueros, senior policy manager for the Bay Area Council, a business-sponsored advocacy group. It’s “a gentle way to add infill housing in people’s backyards and garages to help ease the pressure of our severe supply shortage.”
The lending change follows the passage of the 2016 ADU law in California, which removed many local restrictions (e.g., how far back on the property these units had to be built and additional parking requirements). In addition, new laws were passed in California and Portland, OR, to do away with exorbitant fees associated with putting in ADUs—costs that were simply too high for many homeowners to swallow.
As a result of cutting through the red tape, 4,352 ADUs went up last year in California, according to real estate information firm ATTOM Data Solutions. That’s nearly as many as the next four states in the top five—Washington, Oregon, Florida, and Maryland—combined. Los Angeles, in particular, grew from under 100 ADUs to nearly 2,000 last year, according to the Terner Center for Housing Innovation at the University of California, Berkeley.
The need is clear. California has been building just 80,000 new homes a year for the past decade. That’s well below the 180,000 a year that are needed to meet state population growth, according to the California Department of Housing and Community Development.
Even as American families have gotten smaller, the houses have gotten bigger. The median size of a house has grown by 63% since 1973—from 1,525 square feet to a record-high 2,491 in 2014, according to U.S. Census Bureau data. The number of square feet per person has increased from 506.6 to 980.7 in that time.
That’s a lot of space that could be rented out—and a lot of money that homeowners could be pocketing. By subdividing a home into separate apartments or building an ADU, folks can do so without losing their privacy. Or they can capitalize on their backyards, like Chin did.
“Almost two-thirds of the land in California is single-family residential land. And for the most part, no building happens there,” says David Garcia, policy director at the Terner Center for Housing Innovation.
Even if just a small percentage of tens of thousands of homeowners put up ADUs in their yards, he says, “the sheer number of ADUs is quite impressive.”
Some companies are trying to get in on the action. Dweller.com builds, installs, and maintains ADUs on behalf of the homeowner for an upfront cost plus 70% of the rental income. In Seattle, CityBldr started a service to streamline ADU design and permitting, and recently opened an office in Los Angeles with plans to expand. And thanks to the changes in fees and laws, Valley Home Developers in Fairfield, CA, is opening its own manufacturing plant to produce prefab ADUs.
“On all fronts, ADUs make a ton of sense,” says Garcia. He added the government doesn’t have to dole out subsidies to increase the number of these more inexpensive housing options. “It’s such a big opportunity, given the amount of space we have, to build these kinds of units.”
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