Renting out second building on property?

Question

We've been looking at some properties for some time now, and I've noticed occasionally that a house will have a second "apartment" on the property that's included with the sale. Often times these are fully furnished with bathroom/bedroom/kitchen, etc, but do not have a second address. I'm curious if properties like these can be rented out similar to a multi-family property, or if there are certain requirements that have to be met. Are there certain state guidelines regarding this scenario?

Travis Lucy · Answer

I second @Bruce Lynn 's input and would add that it's a good idea to also review the CCRs for the plat of the property (if applicable).  These will frequently include provisions that explicitly prohibit a 2nd dwelling unit on a lot.  Here in Austin, the city doesn't review deed restrictions during permitting, but it's becoming increasingly common to see grumpy neighbors pursuing legal action to remove 2nd dwellings, based on deed restrictions.  Some of these restrictions are more easily enforced than others, and you might want to consult with an attorney specializing in land use issues to gauge the risk.

Jonathan Pflueger · Answer

@Wayne Bolen

We just qualified for a HELOC on our primary residence and we were able to use our leased legal ADU we have on our property as qualifying income. When we eventually move from our primary residence we will be able to use rent from the main house and the ADU to offset our DTI and qualify for another home. The key to all of this is having a legally permitted ADU - if the unit is not permitted lenders will not count it when applying income (definitely speak to your lender regarding all of this).

Like others have said before me check to make sure the unit is permitted - this is key. And if you want to use it as a short stay vacation rental (via AirBnB etc..) make sure your state/county allows that.

Bruce Lynn · Answer

ADU is Auxiliary Dwelling Unit.   Lots of cities like Austin are debating rules and regs for ADUs.  Hot topic in lots of cities.  Probably less so in Burnet, but you never know.  I have a property in a small Texas town and the city foo foos are very active in wanting to police their city.  That's central Texas.  Also just had some experiences in a north Texas city that is tiny and a few of the foo foos there have really started cracking down on commercial buildings.   Both cities don't have a lot of money.   Places like Austin don't have enough housing, so some people like the idea of ADUs to provide more housing options.   Neighbors typically don't like it because there can be more cars, more traffic, different types of neighbors.  Some people want to buy in a single family neighborhood not filled with renters in ADUs or AirBnB traffic changing every day in them.

Bruce Lynn · Answer

You need to check zoning.  This surprises me in Leander.   If you are in the country, then possible.  If in the city limits you would want to check with planning and zoning to see if they allow ADU or multifamily zoning.

Dan H. · Answer

>ADU is probably the best way to make profit now.

I strongly disagree for hands off ADU additions, at least in my San Diego market.   The ADUs are typically being valued by both appraisers and buyers significantly less than the hands off construction costs.  This implies the initial cash flow goes to recover this negative position.  Add to this the financing associated with ADU additions is not typically the best results in ADUs producing a worst return than most other RE investment options.

Note my remark applies only if you are doing a hands off ACU addition.  If you are a developer, contractor, or can do significant work yourself, then my comment is not applicable.

A decent BRRRR will produce a much better return than most hands off ADU additions.

Sharon Wu · Answer

In California, ADU is probably the best way to make profit now.  In most cities, you can rent the 2nd unit out. If that's a junior ADU (the 3rd unit) you will need to owner occupy one of them.

Bruce Runn · Answer

I had two duplexes on 1 PID/property.  I rented all the units out with Minneapolis city rental licenses, just had to have a commercial loan to buy it since it was nonconforming to a Fannie/Freddie loan.

Jordan Moorhead · Answer

@Wayne Bolen I've done it!

Wayne Bolen · Answer

Thanks Bruce. I like the idea of the ADU to increase the overall rent for a property, similar to MFH, but we'll have to do our due diligence prior to purchasing something. At this point I'm back in research mode. We did a flip in RR in 2018, but lost some money (and learned a LOT) during the process. We're looking into areas just outside of Austin area as the influence continues to expand in to more rural area (hence looking into places like Burnet, Marble Falls, etc).

Wayne Bolen · Answer

@Bruce Lynn thanks. This is actually in Burnet, not Leander. I’m new to the ADU term so I’ll do some research.

Renting out second building on property?

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