Does building a granny flat in backyard for a rental make sense?

[Aimee Lawrence]

We live in Fort Collins, CO and affordable housing is hard to find. We have a .34 acre lot and the way it's situated we could have a 500-800 square foot granny flat out back for a rental. We would still have our own yard and would have a fence to separate the properties. I'm pretty sure that we would be able to get about $1000 a month(it would have it's own little yard and patio). I'm just starting this process so I don't have hard numbers for what it might cost with permitting and sewer, etc. I would hope to do rooftop solar. But when I think about how hard it would be to get $1000 a month from any other investment, it seems like it would make sense. We would like to pay cash but even if we took a HELOC for say 40-50K, where else do you get that kind of cashflow with so little debt? We would share an outside entrance to the home via our side gate, but other than that I think we could keep things pretty separate.

Does anyone have experience or expertise to share? Thank you!!!!!

[Ian I Leinwand]

New construction costs in Fort Collins are around $200 a square foot. Material costs are also going up due to COVID and it can be hard to find a contractor to get a project like that done in a timely manner. I have a friend in FC who was going to build a garage with a ADU above and do a lot of work himself but the cost was still prohibitive.

If you could build it and then refinance your entire home, ADU, and lot after construction that would be the way to go since owner-occupied interest rates are low and you likely have equity in your home now.