Accessory dwelling units (ADUs) have become popular rental alternatives in urban areas across the U.S. over recent years. Many cities, including Portland, Los Angeles, San Francisco and Washington, D.C., have already embraced the concept of offering these unconventional homes to offset the rising costs of housing within city limits. Now, more cities are evaluating current regulations to allow ADU options.

Chicago has recently introduced the repeal of an ADU ban and announced ordinances to permit the use of ADUs within city limits. The demand for flexible housing is expected to rise as the population ages and younger would-be homeowners are priced out of traditional houses. These alternative accommodations provide affordable housing in cities where the average rent can well be over $3,500 a month. An added advantage is that an ADU can boost a property’s value, depending on certain factors that appraisers consider.

What are Accessory dwelling units?

There are several different names for ADUs, including in-law units, granny flats, second dwelling units and coach houses. Generally, these apartments are built above a garage, in the basement or as a separate abode in the backyard of a primary residence. Common characteristics of these dwellings include:

• Single-family, one bedroom or studio units, with the basic requirements for living, sleeping, eating and sanitation.
• A smaller footprint than the primary home at 900 square feet or less.
• Sharing utilities, like water and electricity, with the primary residence.

These second dwelling units offer homeowners functionality and versatility to the property. With the additional home space included, homeowners can rent out these secondary units, whether traditionally or for short-term rental income.

Ultimately, the use of ADUs are limited by zoning regulations within townships, cities and states. You should review local laws before adding and building an ADU to a property.

The Effect on the Housing Market

The rising popularity of ADUs is mainly the result of demographic and economic changes. As lifestyles change, older people and empty-nesters have the option to downsize to an ADU to stay in their current neighborhoods, renting out their primary residences for additional income. For the younger population and first-time homeowners, it may be easier to afford a mortgage using revenue generated from renting out an ADU or even renting on the property directly. As a result, this allows people of all ages to buy into pricier neighborhoods that they otherwise could not afford through the use of potential rental income earned. 

More Affordable Housing

With the desire for city-living increasing, and young and single individuals moving into more urban areas, adding ADUs to the real estate market expands housing options. These flexible dwelling options can be built within existing city zones reducing the need to expand outside metropolitan areas. The National Association of Home Builders reported that during the first quarter of 2019 across the U.S., 20% of home renovation projects included converting an existing space to an ADU.

With the increase of rental units available, the demand to live in certain neighborhoods and cities can be better met. As a result, lower rental prices can make housing more affordable in the high cost of living cities, such as Los Angeles and San Francisco. Since ADUs are smaller homes that take up less space and require less maintenance than traditional rental units, they are ideal rental alternatives than two-unit or single-family properties.

Added Property Value

An ADU is viewed as a long-term investment, considered to be part of the property and cannot be sold separately from the primary residence. The added value of the property can vary by city and state location and the type of ADU.

Whether an attached or detached ADU, the added property value is determined using several valuation factors. However, lifestyle appeal and the potential to generate income are two central influences.

An ADU adds value for those looking for a home that fits their current or future life needs, which may include multi-generational living, welcoming home their college-aged student or aging-parents. Having an ADU offers options to meet family life transitions and provides privacy to all parties. If personal or familial use of the ADU is not needed, homeowners can rent out the unit for additional income. The potential to rent out the apartment can add value to the overall property.

The flexibility of use to the homeowner increases the value of the property as the ADU provides additional living space to either use within the family or for potential rental income.

Valuations

The added value of ADUs to an existing property is evaluated by appraisers using these common factors:

• Permits
  The appraiser will review whether the ADU is appropriately permitted. Local zoning regulations must be met before building or converting interior space for an ADU. This is particularly relevant with older ADUs constructed before permits were required. Also, if the ADU is used to generate rental income, having the appropriate permits and meeting the necessary regulations allows you to guarantee safety and compliance with local laws.
• Cost
  The cost to construct or convert an ADU is not necessarily determinative of value. However, the cost can reflect the quality of materials used and similar issues, which can influence the overall value of the accessory unit. 
• Rental Income
  Appraisers consider the potential rental income the unit could generate in the neighborhood. The unit’s rental history is evaluated with regards to occupancy and prior rents. Market comparison to other ADUs in the area could also be included in the appraisal, comparing rental prices, size of units and income-producing capacity.

The Future of Accessory dwelling units in Chicago

Currently, many cities and states are beginning to loosen laws and regulations concerning zoning for ADUs. At present, the neighboring town of Evanston has already approved ADUs, specifically for coach houses. New legislation was introduced in the Illinois House of Representatives this past February. The bill would prohibit cities and municipalities from outlawing ADUs and preventing functional bans from being imposed and unreasonable regulations applied.

Chicago is one of the most recent cities to reconsider its existing ban on ADUs within city limits. Under current city ordinance, ADUs are illegal and were outlawed in 1957. Chicago legislation was introduced this past May to re-evaluate its current ban. The first hearing was held on July 10, 2020, and the second hearing is scheduled for July 21. The Chicago City Council will be voting on zoning and building regulations for new and previously existing ADUs this month and is expected to take effect on August 1, 2020.

Under the new ordinance, both coach houses and conversion units, including additions and renovations, for homes 20 years or older are permitted in Chicago. With Chicago becoming a potential market, the rising demand for affordable housing will drive the development of ADUs within the city. A main effect of the ADU approval would be the elimination of single-family only zoning across the city for the homes 20 years or older.

At present, there are over 2,400 coach houses in existence in Chicago, grandfathered in after the ban, according to Chicago Cityscape. The proposed ordinance would increase that number and allow these older homes to build one or more conversion units or a coach house on the land. Previous single-family zones would be allowed to construct one conversion unit, while other residential properties can add 33% of existing units to the property. For reference, a 2-unit building would add .66 of a unit, which you would round to one new apartment.

According to Loop North, another real estate development resource, under the new zoning regulations, an estimated 100,000 garden apartments for rent could be added to the Chicago market, providing more affordable housing to meet the growing demand. As Chicago progresses through hearings and legislation for the case to allow ADUs, it will be interesting to see how the zoning changes will affect the city’s real estate market and will need to be re-evaluated in the future once more data is available.

For more information, contact Sarah Zambrano at 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.