A quiet housing evolution is taking place in backyards across the U.S., from California to Maine. New zoning laws and faster permitting processes are making accessory dwelling units — also known as ADUs — a viable option for homeowners to build and use as guest cottages or rental units.^1,2

These small units, sometimes called in-law suites, casitas, or granny flats, are one solution to the affordable housing shortage.³ The Joint Center for Housing Studies at Harvard describes ADUs as “independent living spaces, outfitted with their own kitchen, bathroom, and sleeping area, and located on the same lot as a primary dwelling, but are smaller in size.”⁴

The global market for tiny homes, which includes ADUs, is projected to increase by $3.71 billion at a CAGR of 4.2% between 2024 and 2029.⁵

New zoning laws open doors

In California, a landmark bill passed last September eased the way for additional ADU construction.⁶ There is now more flexibility for multifamily properties that were constrained by previous legislation. Since 2016, when the first ADU reform bill was passed in California, more than 80,000 ADUs have been constructed in the state and the new law will allow for more ADU housing permits.^7,8

In February, a new ADU law took effect in Massachusetts to simplify and ease the permitting process. It is estimated that 8,000 to 10,000 ADUs will be constructed there over the next five years.⁹

Five other states — Colorado, Oregon, Washington, Montana, and Arizona — have passed ADU-friendly laws as well. It’s also under debate from New York and Virginia to New Mexico.¹⁰

Several individual markets, including Los Angeles, San Francisco, Seattle, Nashville, Minneapolis, and Austin, Texas, are making ADUs easier to build by imposing fewer restrictions.¹¹ These changes can make the idea of building a second unit less intimidating for first-time ADU builders.

Read more: Homebuyers gain edge in challenging spring market

Laying the foundation for financial benefits

The cost to build ADUs range from $200 to $400 per square foot, although homeowners can opt to install a manufactured ADU, use a shipping container, or convert existing space such as a garage to keep costs down.^12,13

For many households, the motivation to build an ADU goes beyond convenience to wallets — from creating an income stream or improving financing eligibility to optimizing property values.

An ADU can generate from $1,000 to $3,000 or more of rental income each month, depending on location, size, and amenities.¹⁴

In 2023, the federal government began allowing lenders to include 75% of the estimated ADU rental income to help borrowers qualify for an FHA-insured mortgage on a property with an existing ADU, or 50% of the expected rental income for a new ADU the borrower plans to build.¹⁵

Homes with ADUs are becoming more attractive to prospective buyers, especially in cities where space is limited and rental demand remains high. A property with a second, fully functional unit offers possibilities: Additional income, a guesthouse, a home office, or future flexibility for the next owner.

There’s potential for a sizable return on investment for sellers too. In 2021, the most recent year with figures available, homes with an ADU sold for 35% more than similar homes without ADUs.¹⁶

Read more: Homeowners are doing mortgage math – this is their tipping point

Adapting to modern family life

ADUs are also solving another growing challenge — how to meet the needs of multi-generational families. With housing prices climbing and assisted living costs rising, more families are looking for ways to live close together while still maintaining privacy.¹⁷

Adding an ADU offers a practical option. Those who want to age in place can build an ADU for a full-time caregiver. Empower research shows that 34% of American adults say they plan to retire one day in their current city

As an alternative, aging parents can move into a space near their adult offspring in order to have support nearby. Or, adult children working toward financial milestones — like saving for a down payment on their own home — might live in their parents’ ADU to have space of their own without the high cost of a separate rental.

As housing trends shift, having the ability to adapt to different stages of life — and different financial realities — is becoming an important part of long-term planning.

Tiny homes, huge possibilities

ADUs are tapping into a growing need for more flexible, affordable ways to live and to plan for the future. Building a backyard home creates options, whether a rental stream that can help weather financial ups and downs, a place for family, or an investment in long-term property value.