As I keep getting more and more great questions about ADUs (Accessory Dwelling Units), I thought it’d be helpful to have an undeniable ADU expert weigh in on the subject.
Kol Peterson got his master’s degree from Harvard Graduate School of Design, teaches ADU classes through his company, Accessory Dwelling Strategies, LLC, and proudly lives in an ADU he completed in 2011.
I hope you enjoy this interview as much as I did. Please reach out to me if you have any questions or want to discuss how an ADU might be perfect for your present or future property!
Portland has risen to become the national Accessory Dwelling Unit (ADU) champion, with more of the units being built in our northwest corner of Oregon than anywhere else in the country. ADUs are increasingly creative ways to add rental and multi-use space to your home.
And as Portland continues to find ways to handle population density, ADUs are a practical solution to increase density while retaining our urban growth boundaries.
Nationally, the biggest challenge homeowners run into is underdeveloped, nonexistent or inhospitable regulations for ADU development. However, Portland leads the country in ADU regulation and development.
Here, homeowners’ two biggest challenges are part and parcel of the same issue: 1) funding and financing, and 2) finding a contractor for the job.
Because supply is low and demand is high, not only is it challenging to find a contractor with time to bid an ADU project, but costs to build have gone up both in terms of labor shortages and in terms of materials nationwide, making funding a larger burden. The entry point to getting a detached ADU is at at least $120,000, but more realistically, $160,000 – $200,000. Some builders even have a minimum $200,000 bid on detached ADUs.
Intrinsically, ADUs are housing products developed by people who have an economic need to do so, often seeking out rental income. Therefore the demographic tends to be middle-class, or long-time homeowners who have equity in their home to tap.
Financing hasn’t been really figured out. The only ways people are able to finance are cash savings, family loans, home equity loans or cash out refinances. There isn’t a designated loan product that works particularly well for ADUs, although there are some local products that can be applied to ADU development.
Umpqua Bank has a really good construction loan product, and some local credit unions have workable renovation loan products like Washington Federal and Unitus. But they’re cumbersome, so most people who develop ADUs tend to use home equity lines of credit.
You can go for a well-established building company with administrative staff who can do site visits, and pay more for those services, or you can work with new builders who haven’t built a lot yet, and, yes, take a bigger risk because they’re not as established. But you can potentially get in at a lower price point. That’s what I recommend to my clients and that’s what I did.
More people are initially motivated by short-term rental income potential, but whether they actually stick with short-term rental in the long run is debatable. There’s no solid evidence to back up claims that most ADUs are short-term rental, but nonetheless there’s a lot of speculation going on around that topic. I think that in the long run most ADU development settles into a long-term rental stock because there’s a really strong demand for long-term rental housing of this sort, and the short-term rental market – being a hotel owner I can speak to this authoritatively – is not a predictable market for most of the year. From June to September you can make great money and there’s not enough supply to meet all the tourism demand, but from October to May most hotels are at 50 percent occupancy.
So I always caution people not to bank on the short-term rental market. Bank on the long-term rental.
Yes, which is a lucrative thing to do right now. In this neighborhood – Hawthorne – you can probably rent a 400 sq ft detached ADU for $1,500 per month, and if you bump it up to 800 square feet and one bedroom, probably $2,000 per month. There is a huge demand for it.
I wouldn’t say untapped potential. If you ask people what they’re going to do with an ADU, often their response is this: “We want to use it for long-term rentals, but we might want to use it for short-term rental, and we also might want to use it for a family member who may move here or family and friends that are visiting, or maybe even just some flex space for us.”
It’s hard to quantify these ADUs, and they change use over the course of a year, which is part of the appeal of an ADU in the first place for many people (the flexibility one can provide). I don’t see any significant trend changes beyond perhaps that short-term rental market.
If a homeowner is thinking strategically from a financial sustainability perspective, and if they are a one or two-person household, the best thing they can do for themselves is imagine living in the ADU, now or down the road, and build that ADU to be their dream home. It’s not always possible, but if they can wrap their head around it, it works out really well. Even if they end up spending more on the ADU, then they can get more rental income off the main house and it will cover the mortgage and then some.
The one tip I’ll give is a technique that is fairly common, and has worked well every time I’ve seen it. It’s a great room on the first floor with a lofted bedroom over one half of the second floor. Whether that lofted bedroom is enclosed or not, whether the bathroom is up or down, and however the floorplan works on the first floor doesn’t matter; as long as the upper bedroom is taking up not much more than one half of the second story, it creates a really voluminous ADU.
One issue now is the growing number of small designers and builder companies who could be interested in scaling up their businesses if they had predictability around whether the ADU market was going to continue to flourish. However, they can’t make long-term decisions around their business in the absence of certainty around the SDC Waiver Extension.
From two surveys I conducted two consecutive years after my ADU tours, 75 percent of people responded that if there were a $17,000 SDC fee associated with their ADU development, they would no longer proceed with building an ADU. These SDCs add up to $17,000 to $20,000 for each ADU.
It’s impossible to know the impact of an SDC returning would be, but it’s fair to say that it would have a very substantial impact on the rate of development. Almost, perhaps, devastating or catastrophic for ADU development. Perhaps. We don’t know.
The three-year extensions have been great and this last extension was for two years, but I think at this point it makes sense for the city to consider doing some kind of permanent SDC fee, reduced SDC fee for ADUs, or perhaps, you know, I would advocate for potentially eliminating them permanently. I can understand why bureaus would feel the need to capture some fees, I just think that some thought needs to be given to what those fees should be and how they can be scaled to be in accordance with the relatively minimal impact that ADUs have on the infrastructure, and that creating a more predictable marketplace in the long-term would be a really good thing for businesses. I recommend that homeowners, builders, designers and all other stakeholders write the five city council members who vote on this waiver, including the mayor, about this issue.
Absolutely. This year the tour will be on Saturday, September 9th and Sunday, September 10th and we’re in the process of solidifying which ADUs will be on the tour. We will have roughly ten units in Northeast Portland on Saturday and roughly ten in Southeast Portland on Sunday.
As an event we have three goals: to help homeowners see the ‘fit & finish’ options of a variety of ADUs, to give people an opportunity to meet and talk with homeowners about their ADU build experience and to connect people with designers and builders of ADUs.
This is the single-best event for homeowners to attend if they’re interested in building an ADU – both for practical information as well as inspiration. This will be our fifth tour with Tiny House Caravan co-hosting the event, along with other local organizations.
This interview comes from the May issue of All Things Real Estate Magazine. My professional media team at M Realty creates and publishes the magazine monthly. To learn more, or to advertise, feel free to contact me!