Renting your ADU
A Comprehensive Guide on Renting your ADU
Exploring the idea of adding an accessory dwelling unit (ADU) for extra rental income? You’re in good company. Many homeowners, just like you, are discovering the potential of their property by incorporating an ADU. Whether you’re aiming for immediate rental income or planning for future use when the family home becomes quieter, turning your ADU into a profitable rental is an exciting and rewarding journey. From understanding the fundamentals to navigating the pros and cons of short-term versus long-term rentals, this guide is your go-to resource for maximizing your ADU investment with Alto ADU.
What is involved in Renting your ADU?
ADU rental involves leasing your accessory dwelling unit to tenants, providing an additional income stream. ADUs can be standalone units, attached to the main house, or converted spaces like garages or basements. Renting out an ADU is a smart way to maximize your property’s value while efficiently utilizing available space.
Why Rent Out an ADU in Los Angeles?
ADUs have gained significant popularity in Los Angeles due to various factors:
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High Demand for Housing: Los Angeles has a competitive housing market with high demand for affordable living options. ADUs offer tenants a more cost-effective solution compared to traditional housing.
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Flexible Living Arrangements: ADUs provide flexibility for multigenerational families, young professionals, or students. This versatility attracts a broad range of renters.
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Supplemental Income: Renting out your ADU can substantially increase your income, helping to offset mortgage payments, cover property taxes, or fund other home improvements.
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Increased Property Value: ADUs can boost your property’s overall value. Buyers may see the unit as an attractive feature, whether for generating rental income or as extra living space.
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Community Benefits: ADUs help increase housing availability without the need for large-scale developments, contributing to more housing options in tight markets like Los Angeles.
Whether you’re looking for immediate rental income or planning for future use, turning your ADU into a profitable rental space is both exciting and rewarding. From understanding the basics to deciding between short-term and long-term rentals, this guide is your resource for maximizing your ADU investment with Alto ADU.
Understanding ADU Rental Options in Los Angeles
Renting out an ADU is similar to managing an apartment—right in your backyard. ADU rentals offer flexibility, allowing you to tailor your rental strategy based on your lifestyle and financial goals. The flexibility, governed by your preferences and local laws, opens opportunities for both short-term and long-term rentals.
Can I Rent Out My ADU? Can I Build an ADU on a Rental Property?
Yes, you can rent your ADU, and you can also build an ADU on a rental property to generate additional income. California state law previously enforced owner occupancy requirements for ADUs. However, as of October 2023, these requirements have been permanently eliminated, allowing property owners to add ADUs to rental properties without needing to live on-site.
Whether you're aiming to diversify your income or provide more housing options, ADU rentals in Los Angeles offer a lucrative and flexible opportunity.
Can I rent out my ADU as a short-term rental?
In California, ADUs can typically be rented out for periods of 30 days or more. This regulation is designed to promote long-term housing solutions rather than vacation rentals. However, some cities, including Los Angeles, have waived this requirement, allowing for shorter rental periods. Before building permits are issued for your ADU, you may be required to agree to rental limitations through a covenant. Platforms like Airbnb and VRBO allow you to set minimum rental periods, helping you comply with local laws.
A growing trend is to lease ADUs to corporate housing companies. These companies offer 30+ day rentals to professionals in fields like healthcare, the military, and business, who are relocating for work. Typically, the corporate housing company manages the rental, making it a hands-off approach for the homeowner, and leases are often arranged even before the ADU construction is complete.
You also have the option of renting your ADU on a long-term basis with a traditional lease (e.g., one or two years) or hiring a property management company to handle the rental for you. In most cities, including Los Angeles, you may even move into the ADU and rent out your primary residence as a short-term rental.
Can you Airbnb an ADU in Los Angeles?
Yes, in Los Angeles, ADUs can be listed as short-term rentals on platforms like Airbnb, provided they meet local short-term rental regulations. Unlike some cities like San Diego, where ADUs are restricted from being short-term rentals, Los Angeles allows ADU owners to take advantage of the vacation rental market. However, it’s important to review Los Angeles’ Short-Term Rental Ordinance for specific rules and to ensure compliance.
Long-Term ADU Rentals in Los Angeles
Pros of Long-Term ADU Rentals
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Stable Income: Long-term rentals provide reliable income, helping homeowners manage finances more predictably.
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Lower Turnover Costs: Fewer turnovers mean lower expenses for cleaning, repairs, and marketing between tenants.
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Stronger Tenant Relationships: Long-term leases allow for stronger tenant relationships, leading to better communication and fewer potential issues.
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Predictable Occupancy: You’ll experience more predictable occupancy rates, reducing the stress of frequent tenant changes.
Cons of Long-Term ADU Rentals
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Less Flexibility: Long-term leases may limit your ability to use the ADU for personal or short-term rental purposes.
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Potential for Difficult Tenants: Addressing issues with difficult tenants can be more challenging than with short-term renters.
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Maintenance and Wear: Long-term tenants may cause more wear and tear on the property, requiring more regular maintenance.
Legal Rules and Regulations for Long-Term ADU Rentals
When renting out your ADU in Los Angeles, it’s important to comply with specific legal rules and regulations:
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Rental Agreements: Always use a written rental agreement that clearly outlines the terms of the tenancy, including rent amount, lease duration, and tenant responsibilities.
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Tenant Rights: Familiarize yourself with California’s tenant rights laws, including security deposit regulations, eviction procedures, and habitability standards.
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Rent Control Ordinances: Certain areas in Los Angeles have rent control ordinances that limit rent increases, so check whether your ADU falls under these regulations.
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Building Codes: Ensure your ADU complies with local building codes and safety standards, including requirements for smoke detectors, carbon monoxide detectors, and proper egress.
Renting out an ADU in Los Angeles offers various benefits, whether you opt for short-term or long-term tenants. It’s important to navigate these options carefully to maximize your property’s potential while adhering to local regulations.
Things to Consider Before Renting Your ADU in Los Angeles
Before creating an ADU rental space, there are several important factors to keep in mind:
Adding an ADU will increase your property’s value, which in turn will affect your property taxes. Your property will be subject to a “blended assessment”—meaning your home’s current assessed value remains the same, but the ADU’s assessed value will be added to the overall property. Expect a tax increase in the range of 1-2%. However, renting out the ADU can help offset these additional expenses by generating extra income. For more details, it’s a good idea to consult a tax professional to understand the specific implications for your situation.
Evaluating Insurance Needs
Assess your insurance requirements carefully before renting out your ADU. You may need additional coverage to protect against potential risks related to rental properties. Here are a few key insurance options to consider:
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Landlord Insurance: Covers property damage, liability claims, and loss of rental income. This protects you from financial loss due to tenant-related issues, such as property damage.
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Liability Coverage: Protects you from legal claims if a tenant or visitor is injured on the property. This coverage is essential for handling medical expenses or legal fees in case of an incident.
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Loss of Income Insurance: Reimburses lost rental income if your ADU becomes uninhabitable due to covered damages (e.g., fire, severe weather).
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Contents Insurance: If renting the ADU furnished, consider this coverage to protect furniture and appliances in the event of damage or theft.
Consult an insurance agent who specializes in rental properties to ensure you have comprehensive coverage tailored to your needs.
Optimizing Your ADU for Rental
If you’re building your ADU with the intention of renting it out, it’s important to share this information with your contractor. The design and layout should reflect its intended use as a rental space, maximizing its appeal to potential tenants. Contractors often have ready-to-build floor plans designed specifically for ADUs, and their experience can help ensure that the layout is optimized for functionality and rental value. From efficient use of space to adding desirable features, an expert contractor can guide you toward a build that offers the most return on investment.
By carefully planning these factors, you can create a rental-ready ADU that not only enhances your property but also generates steady income.
Things to Consider Before Renting Your ADU in Los Angeles
Use Space-Efficient Features
Incorporating space-efficient features is key to making your ADU both livable and appealing to tenants. Consider open floor plans, eat-in kitchen islands, standard-sized bathrooms, and ample storage to maximize usability. These elements help create a comfortable living environment while keeping the design efficient and tenant-friendly.
Be Aware of Important Size Breakpoints
Certain size thresholds can significantly impact your budget and the design options for your ADU. For example, 500 sqft, 750 sqft, and 1,000 sqft are critical breakpoints to keep in mind:
A 750 sqft unit can comfortably accommodate 2 bedrooms and 2 bathrooms, providing a highly desirable layout for renters.
Staying under 750 sqft can save you thousands of dollars by avoiding impact fees, as per California state regulations. Make sure to explore ADU floor plans that meet these specifications while maximizing space.
Choose Durable yet Cost-Effective Finishes
Selecting durable materials that are also cost-effective will help you maintain quality while staying on budget. Some popular choices include luxury vinyl plank flooring, quartz countertops, and shower inserts. These materials offer a modern aesthetic, are easy to clean, and are less expensive than other high-end options, making them ideal for rental units.
By optimizing your ADU’s design and materials, you can create an efficient, attractive, and cost-effective rental space that appeals to tenants and maximizes your return on investment.
What Are Renters Looking for in ADU Rentals?
In addition to optimizing your ADU’s design and floor plan, there are specific features that many renters prioritize when considering an ADU rental.
Privacy from the Primary Residence
Privacy is often one of the most critical factors for potential ADU renters, even more so than cost, according to a study from the City of Carlsbad. Renters value their independence, and privacy can be enhanced by adding features such as a physical barrier like a wall or hedge between the ADU and the main house. You could also include subtler features like dedicated storage space that is completely separate from the primary residence. These elements can provide renters with the independence they desire, making your ADU more appealing.
Access to the Unit
Consider how easily your tenants can access the ADU. Ideally, there should be a clear and direct path or walkway leading to the entrance of the unit. Additionally, think about how tenants will park and access the ADU from their vehicle. A well-thought-out entrance and pathway can greatly enhance the appeal of your rental.
Full Kitchen & Laundry
A full kitchen and on-site laundry were among the top desired features in the Carlsbad ADU survey. Offering a private, fully equipped kitchen and in-unit laundry facilities makes life more convenient for tenants and can significantly increase the rent you’re able to charge. These are essential features to incorporate when designing your ADU for long-term tenant satisfaction.
Attractive Finishes
Renters are often willing to pay more for units with attractive finishes. Stylish cabinets, countertops, and modern fixtures not only create a high-end look but also appeal to tenants seeking a comfortable, aesthetically pleasing living space. Materials like quartz countertops and luxury vinyl plank flooring are excellent options, as they offer both durability and visual appeal.
Outdoor Space
An outdoor area can significantly enhance the livability of your ADU. Adding features like a patio, terrace, or small yard creates a welcoming and relaxing atmosphere, giving tenants their own outdoor space to enjoy. This is an attractive feature for many renters, and it can make your ADU stand out. Consider adding a well-designed outdoor area to boost both tenant satisfaction and rental value.
By incorporating these renter-friendly features, you’ll increase the appeal of your ADU and create a space that commands higher rent and long-term tenant satisfaction.
Incorporating luxury touches into your ADU can elevate it to a premium rental, attracting tenants willing to pay more for high-end features. Consider these enhancements to boost the appeal of your ADU:
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High-Quality Appliances: Installing upgraded, energy-efficient appliances, smart home systems, and other modern conveniences not only improves the aesthetic appeal but also offers long-term savings and ease of use.
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Premium Finishes: Features like tiled showers and high-end plumbing and electrical fixtures can make your ADU stand out, increasing its desirability.
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Modern Amenities: Adding built-in USB ports, high-speed internet access, and entertainment systems can appeal to tech-savvy renters.
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Outdoor Living Spaces: A well-designed patio, garden, or terrace adds to the livable space and offers a sense of luxury.
Adding these upscale elements can be especially valuable if your ADU is in a high-demand area. It attracts tenants who seek more than just a living space—they’re looking for a premium lifestyle.
Preparing and Marketing Your ADU in Los Angeles
Renting out your ADU in Los Angeles can be a rewarding endeavor, but it requires careful preparation and strategic marketing. Here’s a guide to help you get started:
Preparation
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Maintenance and Repairs: Ensure your ADU is in excellent condition by addressing any necessary repairs or maintenance issues. This includes checking plumbing, electrical systems, and ensuring all appliances are in working order.
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Insurance: Make sure you have appropriate insurance for your ADU before renting it out. Standard homeowners insurance may not cover rental activities, so you will likely need additional coverage, such as landlord insurance.
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Safety Checks: Install smoke detectors, carbon monoxide detectors, and ensure all safety features comply with local building codes. These measures not only protect tenants but also reduce liability for you as the owner.
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Furnishing: Decide whether to rent your ADU furnished or unfurnished based on market demand and your target tenant demographic. Furnished units may attract higher rents and short-term tenants, while unfurnished units often appeal to long-term renters.
Marketing
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Quality Photos: Take high-quality photos that highlight your ADU’s features. Proper lighting and staged, clean spaces can make a big difference in attracting potential renters.
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Detailed Listing: Create a detailed listing that highlights the benefits of living in your ADU. Include information about the location, amenities, nearby attractions, and unique features of the unit.
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Online Platforms: List your ADU on popular rental platforms like Zillow, Craigslist, and local real estate websites. Utilize social media and community boards to further increase visibility.
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Open Houses: Host open houses or virtual tours to allow potential tenants to view the property. This gives you a chance to showcase the ADU and answer questions in real time.
Screening Tenants
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Background Checks: Conduct thorough background checks, including credit history, employment verification, and references from previous landlords. This helps ensure that you select reliable and responsible tenants.
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Interviews: Meet with potential tenants to discuss the terms of the lease, and ensure they understand the expectations and rules for living in your ADU.
How to Draft a Rental Agreement for Your ADU in Los Angeles
Creating a comprehensive rental agreement is essential to protect both the landlord and tenant. A well-constructed agreement lays the foundation for a successful landlord-tenant relationship by ensuring clarity, fairness, and legal compliance.
Important Elements to Include in the Rental Agreement
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Names of All Tenants: Include the full names of all tenants occupying the ADU to ensure they are legally responsible for adhering to the terms of the lease.
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Rental Property Address: Clearly state the address of the ADU, including any unit numbers or designations.
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Lease Term: Specify the start and end dates of the lease. Clarify if the lease will automatically renew or convert to a month-to-month agreement.
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Rent Amount and Due Date: State the monthly rent, due date, acceptable payment methods, and any late fees or grace periods.
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Security Deposit: Specify the amount of the security deposit and the conditions under which it will be returned or used for damages.
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Maintenance and Repairs: Outline the responsibilities of both landlord and tenant regarding maintenance. Clarify who will handle routine upkeep and emergency repairs.
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Utilities and Services: Indicate which utilities (e.g., water, gas, electricity, internet) are included in rent and which are the tenant’s responsibility.
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Rules and Regulations: Include any specific rules about the use of the ADU, such as pet policies, smoking restrictions, noise levels, and use of shared spaces.
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Termination and Renewal: Define the conditions for lease termination by either party, including required notice periods, and outline the terms for renewal or extension.
Legal Considerations
Ensuring that your rental agreement complies with local laws is crucial for protecting both you and your tenants. Here are the key legal aspects to consider:
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Compliance with Local Laws: Ensure the rental agreement adheres to all local, state, and federal housing laws, including tenant rights, anti-discrimination laws, and specific ADU regulations in Los Angeles.
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Disclosure Requirements: Include all necessary legal disclosures, such as lead paint disclosures (for older properties) and mold notifications.
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Habitability Standards: The ADU must meet all local habitability standards, ensuring the unit is safe, clean, and fit for human habitation.
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Security Deposit Regulations: Follow California’s laws on security deposits, including limits on amounts, how they should be held, and conditions for returning the deposit.
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Fair Housing Laws: Ensure that your rental practices comply with fair housing laws, which prohibit discrimination based on race, color, religion, sex, national origin, familial status, disability, and other protected classes.
Before finalizing your rental agreement, consider consulting with a real estate attorney. Tenant protections are strong in California, and legal advice can ensure your rental agreement is compliant and fair for all parties involved.
How Much Can You Rent Out an ADU for in Los Angeles?
In Los Angeles, ADUs can typically be rented out for rates comparable to or even higher than similar apartments in the surrounding area. When determining the rental value of your ADU, consider factors such as square footage, bedroom and bathroom count, and additional features like a garage or in-unit laundry. The level of finishes—such as flooring, countertops, and appliances—can also significantly impact rent pricing.
Platforms like Zillow and Craigslist remain some of the best resources to find current rental listings. Use these sites to compare your ADU with other available units in your neighborhood to gauge market rates. By comparing your ADU to similarly sized and equipped properties, you can get a clearer picture of the potential rental income your unit could generate.
Our research below is based on a review of rental data from the past 12 months, focusing on units comparable to ADUs: 1-bedroom (750 sqft), 2-bedroom (1,000 sqft), and 3-bedroom (1,200 sqft) units.