During retirement, sources of retirement income typically come from Social Security and a retiree's own savings. But seniors around the country are finding that adding a second, independent living space to their homes can provide welcome extra income as rentals. Called accessory dwelling units, or ADUs, these in-law units or cabins can also serve as private living quarters for aging parents or an adult child in transition.
Michael Litchfield, a certified green building professional and author of "In-Laws, Outlaws, and Granny Flats," a primer on planning and building ADUs, calls them an intelligent solution to the problems of urban sprawl.
"America's economic realities are changing," he says. "There's a shift toward multigenerational living."
Accessory dwelling units come in many shapes and sizes, often determined by the configuration of the site itself, says Litchfield, who has been renovating houses for 30 years. The simplest, called carve-outs, involve converting a few rooms into an independent living unit. Attic, basement or garage conversions -- with separate entrances guaranteeing privacy -- are solutions for smaller lots. For larger spaces, homeowners can build a "bump-out," or addition to the main house. Converting an outbuilding or maintaining a free-standing cabin are also possibilities.
Nancy Thompson, a spokeswoman for AARP, says companies such as Seattle's FabCab and Inspired In-Law in Oakland, Calif., sell prefabricated, or prefab, ADUs that are preapproved by some municipalities.
Retirees hoping to take on such a project should consider zoning regulations at the beginning of the planning process, says Litchfield. ("Outlaws" in his title refers to units built illegally or used in a way that flouts local regulations.)
"Give your local planning department a call," he says, "and find out how favorably they look upon these things." For example, some zoning restrictions may only allow relatives to live in an ADU. If you plan to build a separate apartment for your mother-in-law with an eye to renting it out later, he says, make sure both uses are legal in your area.
Zoning that's friendly to ADUs is becoming more popular. "It's a trend national in scope; perhaps in part because many municipalities are now charged with providing more affordable housing. They are cash-strapped and only too happy to let individuals do it for them," says Litchfield.
AARP is a strong advocate of zoning that allows ADUs, Thompson says. The organization's Public Policy Institute's publication, "Accessory Dwelling Units: Model State Act and Local Ordinance," cites ADUs as a cost-effective solution to the nation's changing housing needs.
Financing options for ADUs
For someone living on retirement income, financing can be tricky. The cost of adding an accessory dwelling unit will vary widely, depending on the location and how much renovation needs to be done. Broadly speaking, Litchfield says, the least-expensive option -- the carve-out -- could start at "$10,000 or thereabouts, assuming you have appropriated a bathroom."
Prefab cottages are listed from about $50,000 to $60,000 -- before installation.
Financial experts say it's tough to qualify for traditional borrowing options these days.
"If enough equity is present, the simplest solution is a home equity line," says Frank P. Donnelly, a vice president at SunTrust Mortgage in Washington, D.C. Current market value would dictate the appraisal and wouldn't include any planned improvements. The benefits to this type of financing are low transaction costs and simplicity.
"Using a construction-to-permanent loan is another available option," Donnelly says. "But to finance a substantial addition or detached residence in today's market is more complex than it has been in the past."
Ana Cela Harris, founder and president of Cela Advisors in Miami, says both options pose problems, because banks have been locking and freezing home equity lines of credit.
"And now, with the drop in home values," she says, "you don't have the equity that you used to have, so it's a double whammy. A construction loan is even harder to get when the equity is not there."
Litchfield advises shopping around for alternatives. For example, he says, some city or county agencies have affordable housing programs that may include low-interest loan programs that include ADU financing.
Another option is to find ADU contractors who offer financing. New Avenue Homes, based in Berkeley, Calif., offers a turnkey solution for rental ADUs, says founder Kevin Casey. The company takes care of all zoning and permitting, arranges financing, and gets the home designed and built with no upfront cost to the homeowner, servicing the debt with a portion of the rent.
"You just need to have a tenant lined up who can afford to pay the rent," he says.