An ADU as an investment opportunity on HGTV’s Flip or Flop

Last night’s new episode of Flip or Flop, Season 9 Episode 7, featured a home with an ADU (accessory dwelling unit). And this unique feature of the home offers a chance to make more money:

After Tarek and Christina realize the garage in the backyard is now a living space, Tarek lays out the argument: this is not just a studio space or a he/she-shed. It is possibly a rentable unit. This may make this property even more enticing.

This got me thinking. ADUs are supposed to help provide more housing units in more expensive markets like Portland and Los Angeles. Instead of building denser, taller housing in single-family home neighborhoods, ADUs take advantage of existing yard space, garages, or other buildings on residential properties.

But, while the ADUs might provide more housing, they may not necessarily provide housing that is that much cheaper. Take the example from Flip or Flop: with a home valued at over $1 million in North Hollywood, they estimated they could rent the studio ADU with a full bathroom and kitchen for $2,000 a month. How many people could afford this?

Further, such units could become a tool for residents and developers to generate more revenue. In such competitive markets, adding any kind of residential unit presents an opportunity. The ADU could enable a homeowner to generate money from their property. An investor interested in a single home or one with multiple homes could generate even more money with ADUs.

To truly provide housing that is more plentiful and at a reasonable price, it seems like a lot of ADUs are needed. They cannot provide as many units as large multifamily developments might. Yes, they do not disturb the existing character of a neighborhood much. But, if the ultimate goal is to broadly expand housing options, the occasional ADU in an expensive area might not be enough.

ADUs and granny flats more popular in some parts of the country and not others

Cities like Portland and Los Angeles may be interested in promoting accessory dwelling units (ADUs) but there is less interest in other parts of the United States:

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 of Columbia, it’s common to find ADUs in the form of finished basements under older townhouses. Suburbs such as Montgomery County, Maryland, 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.

The first factor for ADUs seems to be the price of housing. In areas where prices are relatively high, much of the West Coast, ADUs are viewed as good ways to promote cheaper housing.

The second factor seems to be density of properties. Smaller lots mean less space for ADUs as well as ADUs likely being closer to other housing.

A third factor is regulation. How easy is it for a homeowner or landowner to create an ADU on their property?

I wonder if there are some other possible factors at play that could help explain regional differences. Are all people everywhere willing to have others live on their property (or does financial need overrule this)? Could suburbanites view ADUs as a threat to property values? Are there certain architectural styles that lend themselves to ADUs? Does the presence of alleys help or hinder the development of ADUs? Do some places have a longer history of ADU use (such as through multiple generations living on a property or the presence of servants)?