💼 ADUseful

briefcase | invest smarter | Issue #131

^{Together with…}

Speaking of useful, we need to find helpful alternatives to the traditional home financing system in order to promote supply. This is why we are excited to partner with Home Construction Collective on this issue.

We know that millions of people want to buy homes that don't exist. A key reason for our housing shortage is that financing is difficult. To help solve this challenge, Home Construction Collective offers full financial transparency and professional management of hand-selected projects in fast-growing metros.

Through its platform, accredited and non-U.S. investors can buy fractional equity in home projects, earning an estimated 13-18% in 12-18 months when projects sell.

🏡 ADUs

Accessory dwelling units (ADUs) involve the light densification of existing housing units by adding accessory living units to the main building.

Think coach houses, tiny homes, basement apartments, in-law suites, and anything that can be added on to an existing single-family home at a low cost and lower impact on the neighborhood.

🏢 vs 🏘️ In communities outside of the urban core, would you rather have a 50-unit condo glass tower, or have 50 neighbors add an ADU on their lot? Both will achieve a similar supply outcome but have a dramatically different footprint on a community.

There’s an argument both ways, however, the ADU model can go a long way to solving our supply problem, which looks a bit like…

Interest in ADUs has been slowly increasing over the years, however, a recent survey found that 71% of homeowners didn’t even know anything about ADUs.

California leads the way in ADU development thanks to several legislative changes. There has been an 11x increase in ADU permits in California between 2016 and 2019 (1,269 permits issued in 2016, and 14,702 in 2019).

Nevertheless, more needs to be done to encourage this form of gentle densification across North America.

Here’s why.

🏘️ ADUseful: Entry-Level Homes

There just aren’t enough of them. For houses under $200,000, we went from this price point comprising 45% of new homes sold in 2010 to 0% in 2022.

Due to increasing costs of labor, materials, and regulations (which account for an astounding 40% of a builder’s costs), affordable starter homes are now non-existent. And, ADUs can help fill that unfortunate and damaging void.

ADUs provide an affordable stepping stone not only for those looking for affordable rentals, but for first-time homeowners who have to pay a high price and high-interest rate. These financially-stretched new homeowners can help offset those costs with supplemental income from an ADU.

🏘️ ADUseful: Low Cost

Instead of building more purpose-built rentals in the suburbs, the ADU model offers a low-cost strategy to add housing supply across North America.

ADUs cost much less than other forms of housing like new builds, modular, and other forms of real estate development. According to Angie’s List, the average cost of an ADU sits at around $180,000, although it can be done for as little as $60,000.

Further, many states and local jurisdictions are passing much more permissible legislation to allow for ADUs by legal right. This means a reduction in expensive rezoning, permitting, and development fees, which adds to the affordability component of ADUs.

🏘️ ADUseful: Low Impact

ADUs are the true chameleons of the housing world. They effortlessly adapt to various needs, serving as an office, studio, guesthouse, rental property, and more.

Because of ADUs’ compactness, they show us that size doesn't matter when it comes to creating functional spaces. They're like the Swiss Army knives of housing.

An existing basement or garage can be converted to an ADU, or added to a backyard in the form of a coach house.

ADUs reduce the requirement for new construction, which is infamously bad for the environment. By leveraging spaces we already occupy, we reduce the need to build out expensive and environmentally taxing new ones.

🏘️ ADUseful: Income Generation

In a recent Bankrate study, half of millennials and over half of Gen Zers said that they had a side hustle. Further, 39% of all U.S. adults earn supplemental income outside of their primary jobs. We’re hungry for diversified revenue streams, and it’s not hard to understand why.

High housing costs and mortgage rates make it almost mandatory for many homeowners to look for other ways to monetize their primary residence.

ADUs provide financial optionality to earn supplemental income by…

• 👩🏽‍💼 Having a home commercial/office space

• 🏠 Long-term rentals

• 🌴 Short-term rentals such as Airbnb

• 👵 Save money by having an aging parent (instead of a senior warehouse)

And the list goes on. ADUs give owners an enclosed footprint where they can run a home-based business, or rent it out for supplemental income.

The reality is that we need more ADUs! The Urban Institute estimates that doubling the share of American homes with ADUs (from 1.6% to 3%) would add roughly 1.2 million additional housing units.

Although this doesn’t completely solve the current affordability gap of 7.2 million homes, it certainly can be ADuseful in easing it.

So What? Residential real estate assets with ADUs, or the ability to add one, will garner a premium on pricing for the above reasons. Seek out ADUs, or build them, to add more value to the assets you already own.