Key points

  • Second homes, formally called accessory dwelling units (ADUs), are cropping up in back and side yards across America, acting as either rental units or additional space for aging parents and still-nested adult children.
  • Growth in the sector has been fueled by changes to local and state zoning rules. Some municipalities are struggling with a lack of affordable housing and see these additional units as one remedy.
  • “Our focus is basically to expand the market and really drive the number of ADU installations across the Bay Area and California up dramatically, “said Steve Vallejos, CEO of Prefab ADU.

Home owners adding extra houses on their property

They’re not just she-sheds or he-sheds or granny pods or tiny homes. The latest housing trend in the backyard is now front and center for a new breed of homebuilder and landlord.

Second homes, formally called accessory dwelling units (ADUs), are cropping up in back and side yards across America, acting as either rental units or additional space for aging parents and still-nested adult children.

Growth in the sector has been fueled by changes to local and state zoning rules. Some municipalities are struggling with a lack of affordable housing and see these additional units as one remedy.

In 2010 Portland, Oregon, waived impact fees for ADUs, making them significantly less expensive. As a result, the number of ADU permits jumped from 86 in 2010 to 660 in 2018, according to a count by accessorydwellings.org.

In California, when a 2017 state law forced cities to relax ADU regulations, permits jumped even more dramatically.

And that all translates into big growth for ADU builders, like Prefab ADU, based in the California Bay Area. It built and installed about 100 ADUs this year but expects to expand that to at least 1,500 next year.

“Our focus is basically to expand the market and really drive the number of ADU installations across the Bay Area and California up dramatically, “said Steve Vallejos, CEO of Prefab ADU, who admits that the market is really just starting to find its way, especially when it comes to financing.

“ADU is still really for the most part an affluent homeowner product, meaning you have to have cash on hand to take this on,” he added, noting that financing is a concern for the larger homeowner universe.

Vallejos said inquiries from potential clients are evenly split between those looking to address housing for family members and those seeking rental income. Pricing at Prefab depends on the size of the unit, of course, but the most popular model, a 288-square-foot home, will run about $105,000 installed.

Rental income was the impetus for Lisa and Chris Puchalla. They built a charming ADU in the side yard of their Washington, D.C., home and are now renting it on a monthly basis.

Retirement plan

“We’re looking for a professional, someone that’s coming to and from D.C., perhaps, to rent short term,” said Chris. “And you know, that also helps, because if they’re a person that’s commuting to D.C. for work, they’re not here all the time, so that’s kind of a side benefit.”

The Puchallas also have their eye on an even bigger financial return in retirement.

“We lived in it for 10 months while we renovated our main house, and we loved it,” said Lisa, an interior designer with Lily Mae Design. “I definitely can see us hanging out there, retiring and traveling, and then renting the main house.”

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