3 Hurdles to Building Accessory Dwelling Units
Whether they’re called granny flats, backyard bungalows, or guest cottages, accessory dwelling units (ADUs) are a growing trend in the residential sector and aim to help ease the nation’s housing shortage and affordability issues.
As of August, 18 states have passed laws that broadly allow home owners to build and rent out accessory dwelling units (ADUs), with 11 of the states adopting laws in just the past four years, according to a policy brief from the Mercatus Center at George Mason University.
Legislation is important because most of the land in the U.S. that’s zoned for residential use limits construction to a detached single unit. Rezoning allows policymakers to increase the stock of affordable housing, which the brief calls the “lowest-hanging fruit politically.” Despite the growing interest in ADUs, the Mercatus policy brief noted three “poison pill” regulations that may present a hurdle to construction, even in states where ADUs are legal.
- Owner-occupancy requirements. A home might be difficult to sell because it must be the owner’s primary residence; only the ADU could be rented, so anyone looking to purchase an investment property with two rentals would be excluded. The Federal Housing Administration (FHA) allows mortgage borrowers to qualify in part based on income generated by renting out an ADU but only if it can be rented without restriction. The policy brief noted that the repeal of owner-occupancy requirements In Los Angeles and Seattle led to a large increase in ADU construction.
- Parking requirements. Many existing houses have yards that can fit either a backyard ADU within setback limits or an additional parking spot — but not both. The policy brief notes this requirement is a particular hindrance when a garage is converted to an ADU and replacement parking is required for both the primary residence and the new ADU.
- Discretionary permit review. Home owners may be discouraged from building an ADU because applying for a conditional use permit can be time-consuming and require a public hearing, payment of a nonrefundable fee, and the presentation of expensive site-plan drawings. Homeowners could be reluctant to spend thousands of dollars to go through a process where they may not be allowed a permit.
Rental Income Boosts Borrowing Power
Freddie Mac allows the financing of properties with accessory dwelling units through all of its mortgage offerings noting that accessory dwelling units can help address many modern housing concerns.
What’s more, borrowers are allowed to use rental income from ADUs to help them qualify for an FHA-insured mortgage. The Federal Housing Administration policy states that borrowers seeking financing for properties with an existing ADU can use up to 75% of the estimated rental income to qualify for an FHA-insured mortgage. For existing properties on which borrowers plan to add an ADU, they can use up to 50% of the estimated rental income to qualify for a mortgage under FHA’s Standard 203(k) Rehabilitation Mortgage Insurance Program.
- Only one ADU per property is allowed, and it must comply with zoning and land-use requirements in its jurisdiction. However, an ADU on a one-unit property that does not comply with the zoning and land-use requirements may be eligible under certain conditions.
- ADUs that are manufactured homes are allowed under certain conditions.
- An appraisal report is required.
- At least one qualifying borrower must participate in landlord education for purchase transactions unless the borrower has at least one year of investment property management experience.
This article originally appeared in the September/October 2025 issue of Pro Remodeler. NAHB members receive unlimited access to Endeavor Business Media, LLC’s online content and print publications focusing on key industry trends. In addition to Pro Remodeler and Pro Builder, Endeavor Business Media also produces publications on custom building and multifamily development.
Visit nahb.org for more information on ADUs and the “missing middle of housing.”