February 24, 2017 Eric Kronberg

ADU Math

One of the things that gets us most excited about ADUs is the financial math.  Here’s why.  Cities across the nation are struggling to find ways to provide more affordable housing to meet growing demand, both little ‘a’ affordable housing and big ‘A’ Affordable Housing.  Little ‘a’ housing is often also called workforce housing.  This housing is intended to be accessible to people making up to 80% of the area median income (AMI in housing speak).  Housing for police, firefighters, teachers, recent college grads with a lot of student debt.  For Atlanta, this translates into monthly rents of $764 for an efficiency, $820 for a one bedroom, and $949 for a two bedroom.

Let’s talk about approximate costs for the ADUs we are designing.  While we are still working through costing with our builder, we are expecting that the one bedroom version should cost somewhere between $95,000-$115,000 depending on specific site conditions.  The two bedroom is expecting to cost somewhere between $125,000-$145,000.  These numbers are the all-in cost.  Design, permitting, construction, utility hookups, etc. etc. are included in these numbers.

Home equity loans are currently running at between 4%-5% depending on a variety of borrower factors.  This means the following:  A monthly payment for the one bedroom unit would come in between $450-$615 per month (best case construction cost and rate versus worst case).  Add in an extra $100 per month for estimated taxes and insurance and you have an all in cost of $550-$715 a month.  The two bedroom unit would range $700-$900 all-in.  All this assumes that you as the borrower are putting no money into the transaction, you are borrowing 100% of the costs.

So let’s compare the workforce housing rent goals listed above versus the cost of an ADU.  Worst case cost of $715 per month for a one bedroom and $900 for a two bedroom.  With target rents of $820 and $949 respectively, both designs are cash flow positive with the worst case scenarios.  Now, let’s set workforce housing goals aside for a moment and ask what a cute, one bedroom carriage house would rent for in your neighborhood.  Most in town neighborhoods, and particularly those close to MARTA, these units would command a much higher rent rate.  $950-$1,400 a month is not outrageous, particularly considering that new apartments being built typically offer studios, not one bedrooms, for upwards of $1,200 per month.

There are a couple basic reasons why the math works.  Large apartment buildings choose to provide a multistory parking deck for vehicle storage.  The cost of this deck often adds as much as $200-$300 in additional monthly rent to cover those costs.  There is also essentially no extra land cost to build an ADU, and the storm water requirements are much less than for an apartment building.  Construction cost is higher for the ADU, eliminating some of the benefits, but you still net out at a significant competitive advantage.

Lastly, we haven’t even mentioned Air BnB.  We are seeing significant demand for Air BnB units close to MARTA, with apartments, spare bedrooms, and whole houses in constant demand.  Running an Air BnB requires much more engagement than an apartment, but the returns are significantly more.  We are not advocating for or against the merits of Air BnB, but we do recognize it exists, and provides an opportunity for a homeowner to capture additional income.  This income can be a critical component of housing security for older residents that have limited options to earn more to pay for increasing property taxes in rising neighborhoods.

Big picture, we see the vast stretches of “single-family” homes and neighborhoods that are under the impression that they should ONLY have single family homes based upon a flawed understanding of our current zoning.  Our zoning specifically permits these guest houses/ADUs, and these are a critical tool to address our growing housing demands without outside subsidy.

Image source: http://blog.newavenuehomes.com/index.php/2014/09/23/what-are-the-true-costs-of-an-accessory-dwelling/

About the Author

Eric Kronberg Eric Kronberg, AIA, LEED AP is co-founder and principal of Kronberg Wall Architects in Atlanta Georgia. A graduate of Tulane University, Eric has worked on a wide range of projects across the US. Eric and co-founder Adam Wall formed Kronberg Wall Architects in 2003 in order to focus on creating happier, healthier urban environments in Atlanta and elsewhere.

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