Accessory Dwelling Units (ADUs) have quickly become a hot commodity among homeowners in California — and they’re just warming up.

Because of the state’s chronically low inventory, ADUs are the new starter home. California’s infamously restrictive zoning and high building costs mean new affordable housing is scarce. But thanks to recent pro-ADU legislation, more homeowners are asking about these getaway cabins, picturesque cottages, and cozy casitas.

Some California cities are responding to the scarcity by expanding the definition of an ADU — to include tiny homes.

ADUs are typically permanent dwellings, secondary to the main residence on a single-family residential lot. In contrast, the structures commonly referred to as tiny homes differ in that they:

  • include mobilehomes;
  • may stand on their own lot; and
  • are typically under 400 square feet.

Because the definition of “tiny homes” shifts across jurisdictions, many are left out of California’s ADU club. As tiny homes vary in characterization and requirements, DIYers risk creating noncompliant residential structures.

But as the tiny home phenomenon grows, so do the laws regulating them.

Tiny homes as ADUs

For instance, local ordinances now allow tiny homes on wheels (THOWs) to be classified as permanent dwellings (and ADUs) in:

  • Fresno;
  • San Luis Obispo;
  • California City;
  • Los Angeles;
  • Richmond;
  • San Diego;
  • San Jose;
  • Placer County;
  • Humboldt County; and
  • Santa Clara County, according to Tiny Fest.

Since ADUs need to be permanent dwellings, only some jurisdictions are allowing THOWs to join the ADU party. Despite the limited selection, this is still a big win for California residents.

Nearly 51% of new ADUs in California generate income, according to UC Berkeley Center for Community Innovation. The income potential alone has encouraged many Californians out of the contemplation stage and into the permitting stage.

In fact, In the same period, the number of completed ADUs rose 51%, according to UC Berkeley Center for Community Innovation. Clearly, Californians are excited about following through with extra additions to their property.

Related article:

Client Q&A: What is an ADU and how do I build one?

With more homeowners creating ADUs across the state, it’s hard to resist the tiny home temptation. But is the temptation worth it for most Californians?

The realities of a tiny home

Tiny homes aren’t just extra cash and coziness — homeowners have much to consider before building an ADU.

The major issues homeowners looking to build ADUs may face include:

To get started, homeowners need to first navigate the permitting process. ADU zoning and building permits may range anywhere from $25 to $15,000, as stated by Backyard Unlimited.

Once homeowners have hurdled the permitting gauntlet, another task to consider is construction costs. Typical ADUs may cost into the hundreds of thousands. In 2020, the median construction cost for an ADU was:

Despite their small footprint, ADUs can range from simple to luxurious — adding to the final cost. To finance a build, homeowners with equity in their main residence can refinance to cover the cost, or consider a renovation loan.

But while mortgage rates continue to skyrocket, your clients may find their traditional financing options unpalatable. As the Federal Reserve doubles down on fighting inflation with rate hikes, expect lending to continue tightening heading into 2023.

When the homeowner is still set on building a tiny home ADU and has the means, they can take advantage of the additional space — for guests, or family aging in place — and later use it as income producing property. With rental demand high for the foreseeable future, now is an opportune time to expand housing on existing property.

For clients set on making passive income, pinning down an acceptable cap rate is key. Agents can use an annual property operating data sheet (APOD) to gather income and expense information on the operation of an income producing property, to analyze its suitability for investment [See RPI Form 352].

Related article:

Form-of-the-Week: The Annual Property Operating Data Sheet (APOD) and Tenant’s Operating Expense Profile – Forms 352 and 562

Whether the tiny home is meant to keep the in-laws close — but not too close — or renting out to Millennials or Gen Z searching for some temporary zen, drawing a long-term plan for the property is where agents can shine in their homeowner clients’ lives.

Playing the long game in real estate

As listings in the multiple listing service (MLS) dry up, real estate licensees are digging deep to cultivate relationships with prospective clients. These relationships are crucial when it comes to playing the long game in the lean times ahead.

By becoming an expert during the ADU boom, agents will have the advantage of guiding homeowners through their growing pains. Facilitating multigenerational housing is just one strategy to ushering your clients (and yourself) through the undeclared recession.

Agents can point clients to the California Department of Housing and Community Development ADU Handbook for frequently-asked questions, like “Can I still be charged water and sewer connection fees?” or “Can setbacks be required for ADUs?”

ADUs, tiny or not, pack a big punch in California’s fight against its chronic housing shortage.

To follow the fight, subscribe to firsttuesday’s Quilix newsletter and receive weekly updates on California’s housing market — including legislative updates on ADUs in your service area.