by Olesia Chikunova, ADU Specialist.
The housing market in the US is shaky again. With house prices out of reach for millions of potential homeowners in the country, it’s no surprise that many people are looking for better yet cheaper alternatives to live, while single families are looking for ways to supplement their incomes by investing in backyard housing.
Two demographics hit hard by these soaring prices are Millennials and Gen Z, young adults who don’t have much saved in their bank lockers and are thus forced to rent.
Ironically, older and younger adults suddenly compete for the same small houses. Young adults want starter homes, while older adults are looking for small homes to downsize to a more manageable house size.
One more trend – smaller households – particularly families with only one child, has also been influencing the demand for smaller square footage in homes.
Smaller households often prioritize efficiency and simplicity. With fewer family members, there is less need for extensive living spaces. People are looking for homes that meet their needs without paying for excess space requiring maintenance, heating, or cooling.
Financial considerations also play a role. Smaller homes generally come with a lower price tag, making them more affordable for single-child families. This can be especially important for younger couples or budget-conscious individuals.
Additionally, there’s a growing focus on sustainability and environmental awareness. Smaller homes come with environmental benefits and tend to have a smaller ecological footprint. They require fewer resources to build and maintain, contributing to a more sustainable lifestyle.
High home prices and soaring mortgage rates have locked many single-family homeowners in their current homes.
In 2022, the average size of a single-family home built for sale in the United States amounted to 2,522 square feet. Although in the past five years, American homes have been shrinking, since 1975, they have almost doubled in size. This trend towards larger homes seems illogical given that the average size of families has shrunk over the same period. The average family consisted of 3.13 persons in 2021, down from 3.7 in the 1960s.
This is reflected in the decrease of children in family households overall. In 1970, about 56 percent of all family households had children under 18 living in the household. This percentage declined to about 40 percent in 2020.
These recent trends make solutions like backyard housing look very attractive, especially in a state as varied in income as California with a high cost of living. The State of California has been looking into changes to single-family zoning – anything to promote housing development and increase affordable housing options.
Californians live on the second-smallest single-family home lots in the country on average.
One of the most critical side effects of California’s small residential lots is the increased cost per square foot. California’s $85.60 per square foot was among the nation’s highest, exceeded only by Hawaii’s $110.86 per square foot. In fact, the three cities with the highest cost per square foot were all located in California, the report said, with San Jose-Sunnyvale-Santa Clara at $235.13 per square foot, San Francisco-Oakland-Berkeley at $190.25 and Los Angeles-Long Beach-Anaheim at $156.46.
It would make sense to use the investment efficiently if you already own land.
In this article, we will look at the affordability of backyard homes in California and see if it’s worth investing your time, money, and energy into such alternatives.
Backyard housing has existed for centuries. Houses made behind the “main property” were in the past called alley apartments, laneway houses, carriage houses, granny flats, and more.
“Granny flat” might make you think of quaint cottages, but its history is relatively modern. The concept gained popularity in the 20th century, particularly in Australia, where it was initially called an “in-law apartment” or “mother-in-law flat.” The idea was to provide a separate living space on the same property, often in the backyard, to accommodate aging parents or other family members.
The exact origin is challenging to pinpoint, but in-law suites became more prevalent in the 1970s and 1980s. As societal structures changed and multigenerational living became less common, granny flats offered a solution to provide some independence to older family members while keeping them close.
Over time, the concept spread to other parts of the world, and the term “granny flat” became widely adopted. Today, it’s not just for grannies—many people use these structures as rental units, home offices, or guesthouses. The flexibility and functionality of granny flats have made them a popular and practical housing option in various cultures.
With the recent trend of living in smaller homes and downsizing, words like “tiny homes” and “ADUs” (Accessory Dwelling Units) are entering (or re-entering) our vocabulary.
This type of housing is a “missing middle” link between high-end estates and housing for low-income families. It can immensely aid with the housing crisis.
Backyard housing has become a notable trend for several reasons:
It’s worth noting that the trend can vary based on geographical location, local regulations, and cultural factors. In some areas, backyard housing is embraced and actively promoted. In contrast, it may face regulatory challenges or cultural resistance in others. Who has not heard of NIMBY and YIMBY?
Regulatory change forces communities to find compromises that add affordable housing stock while maintaining the neighborhood character that local residents appreciate.
Let’s first compare all three of these housing types for California. Whether you’re a first-time homebuyer or an existing homeowner, knowing their differences is essential.
A tiny home is a type of backyard housing less than 400 square feet. It may be built on a towable trailer axle (and considered mobile) or have a permanent foundation (regarded as real estate only in this case).
Advantages of A Tiny Home
They’re the cheapest residential option for a state like California and need the least construction time. They can be rented out by students and young couples at a more affordable rate than a traditional apartment.
Disadvantages of A Tiny Home
While tiny homes are pretty small and affordable, they have some legal issues. Mobile tiny homes are legally considered “recreational vehicles” and are subject to vehicle taxes instead of property taxes.
Due to zoning regulations, mobile tiny homes are prohibited in some areas. But if the house has a permanent foundation, it may be used as a permanent residence. That said, always check your zoning.
While building a tiny house, you’ll need as many building permits and inspections as you would have for a larger structure, thus adding another bureaucratic red tape.
Lastly, you’ll feel pretty cramped after a few days in these houses, especially if there is more than one person around. You’ll be forced to downsize many of your possessions, and yard sale outings must be kept to a minimum. No more weekend treasure hunts.
ADUs have recently become common parlance but have been around reasonably long. In the past, they were uncommon.
Starting in June 2020, the median price of an existing single-family home shot up from $626,170 to a peak of $900,170 in May 2022, according to data compiled by the California Association of Realtors. That’s an increase of 44% in less than two years.
Still, with house prices in California up, backyard housing, like ADUs, might be a good and affordable idea.
An ADU is an additional dwelling that’s separate from the main structure. It can be an apartment in the basement, a garage, a tiny house, or a backyard cottage.
A survey conducted by Freddie Mac in January 2023 revealed that 37% of people would consider an ADU to host out-of-town visitors, while 33% would rent them to tenants and 21% would rent them to vacationers, like Airbnb.
With the opportunities that ADUs present, they’re becoming more popular in California.
The number of ADU permits granted in California increased significantly following the 2019 reforms. After staying relatively stable between 2019 and 2020, permits increased by 61% between 2020 and 2021 (Figure 2). Between 2019 and 2022, the number of ADUs permitted grew 88%. Constructed ADUs follow the same general trend, rising from 5,852 in 2019 to 17,460 by 2022 (an almost 200% increase).
As modern homes are way too big for one or two persons, an ADU can be economical for Millenials, GenZ, and even older adults.
You can build one for your kids who want to be independent but can’t get their place. This way, they’ll get their privacy while saving money.
For older people, it can be efficient to live in an ADU and save up money while renting out the main house. You may get on-site property management while yielding income tax benefits.
A significant advantage of building an ADU is getting financing for it. Many local banks offer loans for ADUs, so contacting your Credit Union bank to check rates and options will be a good idea.
Another advantage of having an ADU (especially in California) is a ton of space (1200 square feet). While cottage homes are limited to 800 and tiny houses to 400 square feet. This would make it more attractive to young couples working from home and small families with one kid.
The construction must obviously be approved and inspected by your city or county and follow the appropriate building code.
But while that is a staple of any overland construction in the US, one major disadvantage is that an ADU cannot be sold separately and becomes a permanent part of the main property. Unless your city opts in for condoization.
A quick example of converting existing space is the conversion of a main bedroom with an ensuite bathroom into an independent unit. All you need to do is add an exterior entry and a kitchenette, and you have a new small space to rent out.
Creating a basement apartment is another option. It requires detailed construction plans. My recommendation would be to discuss your plans with the city planner first. There are different building code requirements that you will need to take into account – starting with heights and egress.
Advantages of Converting Existing Space
When converting existing Living space, you save BIG on construction costs. In fact, most of the time, you avoid new construction. Any changes can be done by licensed subcontractors (an electrician and a plumber).
No site preparation is required. Your landscape remains undamaged.
You get a new source of cash flow. I would not call it passive income, as you become a landlord by default.
The permitting process is less complicated.
The taxes remain the same as you are not adding new square feet.
Disadvantages of Converting Existing Space
Your primary residence becomes smaller – you must spend more time planning the space that will be considered the main house.
Your property’s value remains unchanged.
The construction zone is within your living space. Please consider details like sound insulation between the two units. Your Fire Department will insist on fire separation, too.
Everything depends on three things:
1. Location – What will be the best solution for your neighborhood? Will it be easy to rent the space out?
2. Your goals – What is the primary goal of this exercise, increased property valuation or cash flow?
3. Affordability – What can you afford without “breaking the bank”?
Whatever your choice is, we recommend consulting the local planning department, real estate, and tax advisors in your area to comply with regulations.