What is a DADU in Real Estate?

by | Jan 25, 2024 | Property Types and Niches

Introduction

Are you hearing the term “DADU” more frequently in real estate circles? These small but powerful backyard homes, also known as Detached Accessory Dwelling Units, are gaining traction across the country. Let’s explore what DADUs are, the benefits of building a DADU, and how to get started on your own DADU project.

DADU Basics

What is a DADU?

Detached Accessory Dwelling Units (DADUs) are smaller, independent homes located on the same lot as a single-family residence. Think of them as a cozy backyard cottage, offering a separate kitchen, bathroom, living space, and sleeping area.  Also known as backyard homes, in-law suites, or granny flats, DADUs are gaining popularity for their flexibility and potential.

How do They Differ?

Vs. In-Law Suites: Unlike DADUs, in-law suites are usually part of or attached to the primary residence. Think of them as transformed basements or a section of the house with its own mini-kitchen and bathroom, but not a standalone structure.

Vs. Tiny Homes on Wheels: Here’s a key difference – mobility. Tiny homes on wheels are, as the name suggests, mobile and not fixed to a permanent foundation like DADUs. They’re more akin to a nomadic lifestyle choice, whereas DADUs are firmly planted on your property.

Exploring Types of DADU’s

DADUs come in different shapes and sizes, catering to diverse needs and property layouts:

Garage Conversions: A creative twist on existing space, turning garages into livable units. It’s a popular choice for those looking to repurpose their unused garages.

New Construction: Tailor-made from the ground up. This option is for those who want full control over the design and features of their DADU.

Pre-Fabricated Units: Think of them as plug-and-play homes. They are built off-site and then installed on your property, often being a more budget-friendly and quicker option.

The Rising Popularity of DADU’s

So, why are DADUs becoming so popular? Here are some key reasons:

Affordability: DADUs offer a more affordable path to homeownership or rental income in areas with high housing costs.
Multigenerational Living: Looking for a way to house aging parents or adult children? DADUs provide privacy and proximity.
Flexibility: Want a rental unit, home office, guest house, or creative space? DADUs are incredibly versatile.
Urban Density: As cities grow, DADUs add housing options without needing major new construction.
Changing Regulations: Many cities are updating zoning laws to make building a DADU easier.

 

Benefits of DADU’s

How DADU’s Benefit Investors

Additional Rental Income: Build a DADU to generate a new revenue stream on your existing property, maximizing your earning potential.
High ROI Potential: DADUs often have lower upfront costs and strong rental demand, leading to a higher return on investment compared to traditional single-family homes.
Portfolio Diversification: Add a DADU to diversify your holdings, reducing risk and appealing to a wider range of renters (young professionals, retirees, etc.).

How DADU’s Benefit Communities

Increasing Housing Density: Need more housing options without major construction? DADUs add density within existing neighborhoods.
Expanding Affordable Housing: DADUs can offer lower-cost rental options, helping address the housing affordability crisis in cities.
Sustainability and Smart Growth: DADUs promote responsible land use, often with a smaller environmental impact than large developments.

Is a DADU Right For You?

Is a Detached Accessory Dwelling Unit (DADU) the right choice for you? This decision involves understanding zoning laws, financial implications, and the impact on your lifestyle. Let’s break down these aspects to help you make an informed decision.

Zoning 101: Understanding the Legal Framework

Before you get too far into planning a DADU, it’s essential to understand the zoning regulations in your area. Here’s how to start:

Start with Your Zoning Department: Contact your city/county’s planning department to learn if DADUs are allowed, along with size limits, setbacks, and other key rules.
Go Digital: Search your local government website for terms like “ADU ordinance,” “accessory dwelling unit regulations,” or “zoning code.”
Get Expert Help (if needed): Feeling overwhelmed? Architects, DADU-experienced builders, or land-use attorneys can decipher complex zoning codes and guide you through the requirements.

Financial Considerations: Weighing Costs and Benefits

The financial aspect of building and maintaining a DADU is a critical factor:
Construction Costs: Budget for a wide range. $100,000 – $300,000+ is typical depending on size, finishes, and your location. Don’t forget permits, utility hookups, and site work costs.
Rental Income Potential: Analyze your local market – what do similar-sized rentals go for? In high-demand areas, your DADU could generate significant income.
Financing Options: Consider these:
Traditional Mortgages
Home Equity Loans
Hard Money Loans (fast, good for investors with a clear rental strategy)

Financing Your DADU

Understanding the differences between hard money and traditional loans, knowing what lenders look for, and having a solid exit strategy are all crucial components. Let’s delve into these topics to provide clarity for anyone considering a DADU project.

Hard Money Vs. Traditional Loans: Choosing the Right Path

When it comes to financing a DADU, there are two primary options: hard money loans and traditional loans.

But why might hard money be a better fit for construction projects?

Fast Funding: Get your DADU project started quickly! Hard money lenders are known for their streamlined approval processes compared to traditional banks.
Property-Focused: Your DADU’s potential value matters more than your credit score. This opens up options if you have less-than-perfect credit.
Flexible for Unique Projects: Hard money lenders are open to creative financing solutions and can adapt to your specific DADU plans.

However, it’s important to note that hard money loans usually come with higher interest rates and shorter repayment periods than traditional loans.

What Lenders Look For in DADU Projects

Whether you opt for a hard money loan or a traditional loan, lenders will assess certain key factors:

Project Feasibility: Lenders want to see that your DADU project is well-planned and viable. This includes having detailed plans, a realistic budget, and a clear timeline.
Borrower Experience or Support: If you’re new to construction projects, having a strong contractor team can be a significant plus. Lenders look for signs that the project will be managed effectively and efficiently.

DADU Hard Money Scenarios

Scenario 1: The Long-Term Rental

Borrower: Emily, an experienced real estate investor with a small portfolio of single-family rentals.
Property: A house on a larger lot in a desirable Seattle suburb with favorable zoning for DADUs.
Project: Construct a new, detached 1-bedroom DADU for long-term rental income.
Hard Money Rationale: Quick access to funds lets Emily move fast on the property before competition heats up. She can focus on maximizing rent and finding quality long-term tenants after completion.
Exit Strategy: Refinance with a traditional lender once the DADU is built and has a rental history, unlocking equity for her next investment.

Scenario 2: The Multi-generational Flip

Borrower: A local contractor specializing in renovations. He sees an opportunity with a dated but structurally sound property on a lot large enough for a DADU.
Project: Renovate the main house and build a 2-bedroom DADU
Hard Money Rationale: The rehab and construction happen simultaneously – hard money’s speed is key.
Exit Strategy: Sell BOTH the upgraded main house and the brand-new DADU as separate units, aiming to attract two buyers and maximizing his ROI.

Scenario 3: The AirBnb Opportunity

Borrower: Sarah, who lives elsewhere but owns a vacation rental property in a popular tourist town. The lot allows for a DADU.
Project: Build a studio-style DADU designed specifically for short-term rentals.
Hard Money Rationale: Construction timelines need to work around the high season of her existing rental; hard money allows for that flexibility.
Exit Strategy: While refinancing might be tricky due to short-term rental income, Sarah’s focus is on cash flow. The DADU significantly boosts her revenue potential.

Don’t Miss These!

New Investors

“I have not used a hard money loan before.”

Experienced Investors

“I have used a hard money loan before.”

Fix & Flip
BRRRR
Passive Income Investing
AirBnb
Buy & Hold
1031 Exchange
Reverse 1031 Exchange
Commercial Real Estate
DSCR Loan
Gator Method
DADU