Adding a rentable accessory dwelling unit (ADU) to your home or property can be a lucrative way to get a few extra bucks every month. And it can really help you afford your home or move into a dream neighborhood. But building a rental unit and becoming a landlord isn’t just about collecting rent at the beginning of each month. A lot more goes into it.
To help you prepare, we have a few tips for when you build your unit as well as for becoming a landlord.
Building Your Unit
Not unlike building a mother-in-law unit, building a rentle unit has a few rules and nuances you should be aware of.
1. Check Building Codes
Each municipality has its own codes and regulations, so check yours before you think about building a rental unit. They will also affect what kind of addition you can make since some counties don’t allow ADUs.
Location will be key. Where you choose to build your ADU will affect your privacy, ease of build and more. Do you want it to be freestanding or connected? A separate entrance? Will it easily reach current power lines and sewage pipes? You should have an idea of all of these.
3. Separate Power
Additionally you should decide if your ADU will have its own power, water and sewer lines. While more to construct, in the long run it will save you many headaches as well as money. By having a separate bill for utilities for your tenant, there’s no question how much they owe each month.
4. DIY or Pro?
Now that you know what you’re allowed to build, you need to decide if you can build it. Getting the help of a pro means you’re sure to cover all of your bases. Plus ADU’s require plumbing, electricity and more, so if you’re not skilled in these areas, we can help you find a pro.
5. Get Your Permits
You’ve got a plan! Now it’s time to get it approved. You’ll have to submit your plans to the city and apply to the appropriate permits in order to start building. If you skip this step, you may end up with a hefty fine or unresellable house.
Will you be furnishing the ADU or the tenant? If you’re doing it yourself (and can therefore charge higher rent, but will also incur a higher tenant turnover rate) consider going for neutral decor since you won’t know what your tenant’s preferences are.
7. Compare Rents
When decided how much to charge for rent, scope out other, comparable rental units in your area or city so that yours will be competitive. Also consider luxuries the tenant will have access to like a pool, parking or onsite laundry.
Becoming a Landlord
So you’re set to build an ADU and looking forward to that extra income! But with the extra cash flow come some extra responsibilities.
1. It’s a Full Time Job
Being a landlord is a full time job, so know what you’re in for. Tenants will have issues you’re responsible for fixing in a timely manner. And getting a good tenant is hard to find, and keep! You can’t just evict someone because you don’t like them, and every time there is a turnover, you’re expected to update and upkeep the unit. If this sounds like too much for you, consider hiring a property manager when you build a rental unit.
2. Diminished Privacy
Make sure that the income is worth the loss of privacy to you. Your home is no longer just yours. There will be someone coming and going from the rental, hosting their own friends and hanging out in your backyard or porch when you’re trying to have a BBQ of your own.
3. Sign a Proper Lease
When you’re the property owner, you don’t have the luxury of using landlords’ favorite, “the owner said so” excuse. You are the owner. So signing a proper lease will settle a lot for you. Lay everything out in the lease: rules, office hours, late rent policies, penalties, expectations, length of term, etc. This way, you can have your tenant refer to the lease to settle disputes and manage expectations.
4. No Exceptions
Similarly, you need to follow the rules in your own lease. Especially when renting to friends or family. Don’t let a late rent payment slide, because then your tenant will know they can take advantage of you. It sounds harsh, but it actually makes both your life and your tenant’s easier during the rental period.
5. Don’t Set Rent Too Low
It may seem like a good idea—you’ll rent it out faster. However, think of the kind of person looking for these low rent deals. They’ll be the first to vacate if they find something lower since they’re only looking at dollar amounts, not the quality of the rental. Which means they might not respect your space either. Setting a competitive rent rate will attract more responsible and respectful renters.
6. Know the Legislation
There are tenant-landlord legislation that vary by municipal bylaws. Look up the ones in your area and know your rights before building a rental unit.
7. Tell Your Insurance Company
This step is often overlooked, but when you start renting, you need to tell your home insurance company. Your policy will reflect this change so that if something should happen, you’ll be covered instead of having the policy voided.
8. Know Tax Repercussions
Similarly, you will have to claim the rental on tax returns and report the portion of the rent as capital gain.
9. Be Handy
Being a little handy is helpful when you’re a landlord. You can fix things yourself instead of footing the bill to outsource it. However, know your limits and when to call in a professional to avoid causing more damage.
10. Set Office Hours
Once again, being a landlord is full-time job. But that means you can set your own hours, too. You can use a voicemail provider that will only ring during office hours and forward calls to your cell phone. Tenants can leave a voicemail if it’s truly important. However, it’s still a good idea to provide them with your cell phone number in case of emergencies. It’s important to adhere to your set hours, too, for your own peace of mind. After all, you don’t want to be fixing toilets at 2 AM.