Detached accessory dwellings units (ADUs) are starting to make a minor impact in the core of many cities across North America.
These are sometimes referred to as garden suites, granny flats, coach houses or backyard cottages. Sometimes they are called laneway houses when they are beside.....well...a laneway. Essentially they are detached secondary suites that are not part of the main structure but still reside on the property.
They contain all the amenities required for daily living including a kitchen and bathroom, and are located within the property of an existing single family home. Ideally they house 1 or 2 people year round.
These structures typically “piggy back” off the main property to get access to utility requirements such as electricity, plumbing, drains and possibly gas.
Think tiny houses in the backyard, without the wheels.
Why Are They Getting Popular?
We are starting to see these structures pop up in many cities, including Vancouver, Seattle, and Portland. Two main reasons for their popularity include the high cost of real estate, and the ability for people to live close to family members.
As the cost of owning a single family home becomes out of reach for many young people, solutions like this might makes sense.
In Vancouver, there have been many instances where a detached ADU was built in the backyard belonging to retirees, who then move into it and sell their house to their adult children. This resulted in saving money from not having to live in a retirement home, while maintaining proximity to their kids and grand kids.
Less Disruptive To Neighborhood Character
Economic and demographic trends indicate that the popularity of detached ADUs will continue. Here in Ontario, the policies around urban density and intensification suggest that they may become a viable option. We are already seeing many municipalities change their by-laws to allow them.
From a zoning perspective, detached ADUs may be more appealing to residents of a particular neighborhood that don't want to see intensification, compared with rezoning to allow triplexes or 4-plexes for example. That’s because they don’t change the character of the neighborhood that much.
Investors Should Not Do These Now
If you're an investor, I don’t think you should run out and buy a property and build one of these right now with the intention to rent it out. Most cities still don’t allow them. However, some do. For example, the city of St. Catharines do allow detached ADUs up to 1100 SF.
More recently, the city of Ottawa is getting ready to introduce legislation to allow detached ADUs as well, and will be the first high-density major city in Ontario to do so (1).
However, other than the by-laws for individual cities, even if they are allowed, I don’t think it’s a good idea at this time for various other reasons as investments.
First, they are not cheap to build. Given that they are smaller structures containing the same amenities of a house, their cost per square foot could be well over $300 per SF. A 500 SF home can cost $150,000 and up to build.
Secondly, they are still a very new thing, and not ripe for the market yet. We don’t know what the value impact will be on the property, because there is not enough of it to compare.
Thirdly, even cities that do allow detached ADUs as a type of secondary suite, they would typically only allow one additional secondary suite. Therefore adding in a detached ADU will take away your ability to do a basement apartment, which is arguably a better option. A $50,000 basement apartment conversion is a considerably better investment than a $150,000 suite.
Makes Sense For Families And Potential Airbnbs
For now, this is something that makes sense for families. It works perfectly for the example we described above with the retirees, or other family members that want to be close.
It also makes sense for folks who want to invest in a property that can be rented out via short term rentals such as Airbnb, but don’t necessarily want to give up their basement space.
Again using the $150,000 example, someone who is able to "Airbnb" their property at $100 per night, half of the time, will be able to recoup their costs in just over 8 years.
After 8 years, the annual additional income of $18,000 goes straight into their pockets (subject to taxes of course). And this is surely to increase the overall value of their property.
Potential Opportunity For Investors
So where does it make sense for real estate investors? At this point in time, these types of structures are something to be aware of, rather than acted on.
From an investment standpoint, if you’re buying a property and holding it for the long term, my suggestion would be to buy a property that has the potential for a detached ADU in the future. This means a detached or semi-detached single family home with a deeper and wider lot.
In the meantime, make sure that the property allows secondary suites in the basement, and do that one first, since it’s going to be the most cost effective option.
As affordability continues to erode across cities, I suspect that cities will potentially allow for additional secondary suites within a single property. At that time, if your property is close to being worth half a million or a full million, it might be logical to build a $150,000 detached ADU which collects $1500 in rent a month.
Another option can be for properties containing a well-built larger detached garage, which can be convertible to a detached ADU, or at least have one built on top. This would be a much cheaper option.
So if you're an investor, sit tight! This can potentially be a big opportunity later on. When that happens, you'll hear it first from me.