The U.S. is dealing with a staggering shortage of nearly four million homes, leaving many Americans struggling to find affordable housing. As this shortfall persists, the cost of housing continues to soar, pushing homeownership and certain rental opportunities further out of reach. In response, accessory dwelling units (ADUs) have become a creative solution to help address housing availability and affordability. In this blog, we review the advantages of an ADU while also exploring some common challenges and controversies, along with the growing legislative support influencing their development.
WHAT IS AN ADU?
Often referred to as an in-law suite, granny flat or guest house, an ADU is a secondary, self-contained living space located on the same lot as a primary home. It can be a standalone structure or a converted basement or garage.
ADUs typically include a kitchen, bathroom and sleeping area, and may include their own entrance, making them fully independent from the primary home. ADUs provide affordable living solutions for renters, offer a comfortable space for aging parents and support young adults struggling to leave the nest.
ADU ADVANTAGES
ADUs are gaining attention as an efficient and cost-effective way to increase housing supply without requiring large-scale development. Whether built as an extension of the existing home, a conversion or a standalone structure, these self-contained living spaces offer some substantial advantages, such as:
• Affordability: ADUs provide a lower-cost alternative to buying a home or renting in high-cost metropolitan areas. Given their small size and integration with existing structures, ADUs typically require reduced land and construction expenses, and fewer permitting fees. In the first quarter of 2025, the average home sales price was $503,800. By contrast, the average cost of building an ADU during the same period was around $180,000, with most homeowners spending between $60,000 and $285,000 with costs varying on size, type and location. Modular or prefabricated ADUs, which are pre-built in a factory and then transported to the site for installation, can also help save 10-20% of the costs.
• Multigenerational housing: ADUs allow families to stay connected while maintaining privacy, making them an ideal option for aging parents and adult children.
• Rental income potential: Homeowners can generate passive income by renting out an ADU, offsetting their own expenses. The national average rent for an ADU currently ranges from $1,900 to $2,600 per month for a 600-750 square foot, long-term rental. However, factors such as location or rental strategy can impact rental potential. For instance, if the ADU is in a popular metropolitan area and is a short-term rental, it could bring in between $3,500 to over $5,000 per month.
CHALLENGES AND CONTROVERSIES
While ADUs offer innovative housing solutions, they also come with some challenges and controversies, including, but not limited to:
• Zoning laws and other regulations: ADU zoning laws and regulations are often both state-based and city-based, and vary widely, making the regulatory landscape complex and often limiting where or how an ADU can be built.
• Infrastructure strain: Allocation of ADUs can lead to increased neighborhood density, which may lead to increased traffic and fewer parking options, placing additional strain on public transportation and creating challenges for emergency responders – especially in areas already impacted by an aging infrastructure and limited parking.
• Financing: Traditional mortgage options do not always apply, so securing financing may be difficult, due to varying lender requirements. Homeowners often seek alternative funding options from a qualified lender, such as a home equity line of credit (HELOC), or a construction or renovation loan.
• Neighborhood opposition: Some communities resist ADU expansion for various reasons. Common concerns include potential changes to neighborhood character, increased foot traffic and less privacy, and nuisances from construction and increased population.
• Equity concerns: ADUs can have the potential to price out long-time residents as property values rise. Conversely, some potential buyers may see an ADU as a maintenance burden or unwanted feature that affects resale value.
LEGISLATIVE SUPPORT
ADU permissibility varies significantly – some states have enacted laws that promote ADU development, while others have strict regulations or even prohibit them entirely. However, legislative support is expanding in various ways:
• Zoning and permit reforms: Several states are making efforts to loosen up on restrictive measures such as ADU size, height and setback limitations, permitting challenges, owner-occupancy requirements and parking obstacles. The six most supportive states currently include:
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- California
- Connecticut
- Maine
- New York
- Oregon
- Washington
• Funding programs: Grants and financial assistance, such the California ADU Grant Program, and the Vermont Housing Improvement Program 2.0, help homeowners cover predevelopment costs. Select states and cities also offer rebates and financial aid for ADU construction.
• Non-profit organizations: Organizations that focus on affordable housing development, such as the nonprofit and educational program, American Planning Association (APA), and congressionally charted nonprofit housing and community development organization, NeighborWorks® America.
OUTLOOK AND TITLE INSURANCE CONSIDERATIONS
As the housing shortage and affordability crisis continues, ADUs are emerging as an important part of the solution. While challenges and controversies remain, the growing popularity and legislative support for ADUs suggests they will play a crucial role in shaping a more adaptable and flexible housing strategy across the nation.
If you’re considering purchasing a home that has an existing ADU, it’s essential to conduct thorough research to establish compliance with local laws and regulations to avoid unexpected challenges down the road. Unforeseen structural or legal violations could possibly surface long after closing.
To safeguard against hidden issues, consider purchasing an ALTA Homeowner’s Title Insurance Policy. It offers additional coverage over a standard ALTA Owner’s Title Insurance Policy, including instances where you’re required to remove or remedy a pre-existing violation from the time you purchased your home—provided the issue meets the conditions outlined in the policy. For more information about how title insurance can help safeguard your investment, visit oldrepublictitle.com. When you’re ready to close, Old Republic Title is here to help facilitate a smooth transaction.
