For Megan Klepp, the small, two-bedroom unit she and her husband built in their back yard behind their 2,000-square-foot cottage-style house in Portland, Ore., represents a much-needed source of income now — and financial security well into the future.
They currently rent out the 800-square-foot unit to a friend to live in, with a long-term goal of occupying it themselves and renting out their main house to help finance their retirement.
In doing so, Klepp is taking advantage of efforts by states and municipalities across the nation to ease long-standing restrictions on so-called accessory dwelling units, or ADUs, allowing homeowners to earn extra cash and renters to find housing in communities where the shortage of affordable apartments has reached crisis levels.
“It’s expensive to rent around here,” said Klepp, 43, who lives in Portland’s historic Piedmont neighborhood. “Through the ADU, we’re able to generate some extra income and keep the rent more affordable for our friend.”
ADUs, commonly called “granny flats” or “mother-in-law suites,” date to antiquity. But there has been renewed interest, as housing costs soar across the United States, especially in high-demand, relatively low-density cities along the West Coast.
In Southern California, for example, the median sales price for homes is now above $510,000, according to real estate data firm CoreLogic. The figure was below $300,000 as recently as 2012. Higher housing costs and accompanying property taxes have pushed homeownership out of reach for many millennials, and have made retirement math more complex for low- and middle-income seniors.
Because most U.S. cities are developed around single-family homes designed for automobile owners, it’s difficult to increase density and provide housing relief through new construction. One potential solution to the problem is the relatively simple concept of ADUs, either a new structure built adjacent to an existing home or added to it in what’s known as an attached or “junior” ADU.
Size and amenities vary, but the homes are typically on the small side — between 700 and 1,000 square feet, with 1.5 baths, on average. These homes tend to blend in with their surroundings rather than drastically alter a neighborhood, quietly adding density and new options for renters.
“People have always added on to their houses and put structures into their back yard,” said Karen Chapple, a professor of city and regional planning at the University of California, Berkeley, who has written and researched extensively about ADUs. She built one in her own back yard in 2011. “We’re at the point in the U.S., with the economy growing and housing prices going though the roof, where many young adults and seniors aren’t able to find a place to live. All across the country, we’re going to have to densify our suburbs,” she said.
The West Coast has become a leader in both high housing costs and in ADU construction, with California and Oregon mandating that most cities must allow ADUs, leaving only limited power at the municipal level to legislate how the structures look and to whom they can be leased.
Fear of regulation is thought to be one of the biggest deterrents to ADU construction, both through permitting costs and government inspections.
“Homeowners need to be reassured that if an inspector comes to look at their second unit, they won’t go looking for code violations on the main dwelling,” Chapple said.
Easing regulation seems to be having an effect. San Francisco, for example, has more than 1,000 ADUs in the development pipeline, with officials looking to increase that number. Portland, Ore., issued fewer than 100 ADU permits as recently as 2010. In 2016, the number surged past 600 permits in a single year and could soon surpass the number of new homes under construction.
Like other housing solutions, ADUs have run up against a host of opponents whose concerns include parking and traffic, changes to neighborhood character, and fears that the units will be rented to unruly college students or Airbnb tourists.
But the high demand and low density of U.S. cities feeling the housing crunch underwrites the financial feasibility of ADUs. According to UC-Berkeley research, average accessory dwelling construction costs are $156,000, whereas even a modest three-bedroom, two-bathroom home can sell for more than $1 million in the San Francisco Bay Area.
The same research found that 58 percent of ADUs are rented at or below market rates, in part because they are often leased to friends or family members, and that average construction time is 18 months.
There appears to be plenty of room for accessory dwellings in America’s back yards. In Portland, for example, 43 percent of all developable land is dedicated to single-family homes, according to the city’s Bureau of Planning and Sustainability. Just 15 percent is dedicated to multifamily dwellings. Overall, 60 percent of all housing consists of detached single-family homes.
The concept is gaining traction elsewhere, too, in expensive cities such as Boston and Washington, and even in smaller communities, such as Albany, N.Y.
Several organizations are championing the concept. In Los Angeles, an organization called LA Más is establishing an ADU Section 8 program to provide homeowners with incentives to build ADUs specifically for Section 8 voucher holders.
Although ADUs tend to be grass-roots by nature, many local and state governments are also working to remove roadblocks to their construction, such as restrictive zoning and code enforcement ordinances that scare away potential builders.
“The big shift for Portland came not after several rounds of relaxing the requirements, though that certainly helped, but when we began waiving our systems development charges, which can increase the cost of a building permit by $10,000 to $15,000 for an ADU,” said Morgan Tracy, a project manager with the Portland Bureau of Planning and Sustainability.
Financial issues on the part of homeowners can also impede ADU instruction, although if successfully rented, the units can pay for themselves in as little as four or five years. Another issue is reluctance on the part of some homeowners to have strangers living on their property, even within a detached structure. This concern helps explain why they are so often rented to friends, children and parents.
A Portland State University study released this year found that 42 percent of ADU owners built them for long-term rental housing and that 35 percent planned to rent to family members or friends. When asked to provide two reasons why they chose to live in an ADU, renters listed cost of living at a rate of 50 percent, and “neighborhood” at a rate of 41 percent.
Portland has now developed substantial momentum in its push to encourage ADU construction, Tracy said. Homeowners see their neighbors building them and become interested, which helps bring more people into the fold.
Los Angeles Mayor Eric Garcetti (D) has set a goal of seeing 10,000 more backyard units built there by 2021, and the city went from issuing 142 ADU permits in 2016 to nearly 2,000 last year. Portland is considering a measure to double down on its already popular ADUs by allowing two per home — one attached and one detached — and by allowing ADUs on the same lot as duplexes for the first time.
The future for ADUs on the East Coast and in the Sun Belt is less clear. In older cities such as Boston and New York, much of the housing stock was built before World War II and is more dense than postwar suburban neighborhoods. Sun Belt cities such as Atlanta, Dallas and Phoenix were developed more recently, but housing prices, for the most part, have not reached the peaks seen on the West Coast.
“If you grew up in New York City or Boston, you have a different acceptance for density, rather than in the West, where open space has always been prized,” Chapple said. “It has been really hard to retrofit these cities that were built at a later time.”
In the District, it’s common to find ADUs in the form of finished basements underneath older townhouses. Suburbs such as Montgomery County, Md., offer a better opportunity for detached accessory dwellings. Before 2013, Montgomery homeowners had to endure a complex process of reviews that took several months. Five years ago, the rules were relaxed to allow for licensing in about 90 to 110 days. The measure drew controversy because of concerns about parking, trash and crowding of neighborhood schools.
Dan Reed, an urban planner and Montgomery resident since 1991, said that the measure has proved popular and that the county might be primed to ease regulation further.
“This is a crucial opportunity to grow our housing stock and give homeowners the chance to supplement their income, while helping to cover what are very high housing costs,” Reed said. “For renters, this gives them another legal housing option.”
Reed added that illegal or unpermitted ADUs remain common because the approval process is still “pretty daunting.” With the U.S. Census Bureau estimating that Montgomery County will grow by another 200,000 residents by 2040, ADUs are likely to play a growing role over time.
“Housing in Silver Spring and Bethesda is becoming a real challenge,” Reed said. “How do we give people the ability to live affordably in this county?”
The growing popularity of ADUs is leading to new opportunities for professionals in the real estate industry, as well. Andrei Pogany, a Los Angeles-based architect, began designing ADUs several years ago and said that half his business now consists of accessory dwellings. Most of his customers are 30-somethings with young children, often planning to rent out the units or house in-laws who will help with child care.
He said there can be sticker shock when it comes to construction costs.
“They tend to think, ‘Oh, this is a little house so it won’t cost that much,’ ” Pogany said. “ADUs still require all of the same infrastructure of a new home, with a similar cost per square foot.”
Pogany’s clients tend to spend from $200,000 to $350,000 on accessory dwellings, although that figure is much lower than the average cost of a home in the city.
For Portland resident Klepp, the process of building an ADU in her historic neighborhood was both a financial decision and a labor of love. As a stay-at-home mother who works part time, she was able to do some of the work herself — installing the insulation and scouring Craigslist for appliances — to save cash along the way.
She took out a home equity line of credit to finance construction costs, and she plans to pay off the debt through rental income. Klepp says she is happy with the decision, especially because the added revenue will one day help her live more comfortably in retirement.
“For us, our life has not changed at all,” she said. “Maybe our yard is a little smaller, but for the most part, it has worked out very well. And for our tenant, we provide a lower rent than she could get anywhere else.”