Is Using A Prefab ADU As A Rental Property Worth It In 2024?

With the increasing demand for affordable housing in cities, many homeowners are turning to Accessory Dwelling Units (ADUs) to generate rental income. After all, ADUs are a cost-effective and convenient option for adding an additional living space to your property. 

But what about prefab ADUs? Is using a prefab ADU as a rental property a good decision in 2024? Let's understand more about prefab ADUs and their potential as a rental property.

What is an ADU? 

An ADU (Accessory Dwelling Unit) is an independent residential unit situated on the same property lot as a single-family home. These units are often referred to as accessory apartments, secondary suites, granny suites, or guest houses. → Explore Prefab ADUs available near you here. ←

The introduction of ADUs holds promise for enhancing housing affordability for both homeowners and renters, diversifying housing options within communities, enabling seniors to reside close to family members as they age, and optimizing the utilization of existing residential areas in established neighbourhoods. Consequently, numerous municipalities are supporting the installation of ADUs in their planning efforts and have implemented zoning regulations permitting their construction in low-density residential zones. Be sure to check regulations in your municipality. You might be sitting on a great investment opportunity, right in your backyard.

What About a Prefab ADU? 

The term "Prefab" is a shorthand for prefabricated, which indicates that the Accessory Dwelling Unit or ADU fabrication is partially or completely done in a factory setting before being transported and assembled on your property.

This approach is different from the usual way of building. Instead of constructing everything at the final location, much of the work happens off-site in a controlled setting. As a result, it streamlines the construction process and presents a significant advantage by delivering a professionally designed, new home directly to your location, ready for immediate use.

Here are two types of prefab ADU:

1. Modular Prefabs

This is often the go-to option for many people. Arriving fully or almost fully built, modular prefabs can be lifted by a crane or rolled onto your property, making them highly efficient in terms of installation. Although the floor plans are fixed, most companies offer choices in finishes like flooring, roofing, and exterior cladding. This allows some customization in terms of style and appearance.

2. Panelized Prefabs

For those looking for a bit more flexibility in design, panelized prefabs might be the answer. They come in pre-made wall sections that are transported to your site and assembled there. While you still get the advantage of prefabricated parts, such as wall sections and roof trusses, this method allows for the addition of electrical and plumbing systems, along with interior and exterior finishes, post-assembly on your property.

Compared to modular prefabs, panelized prefabs offer a broader range of customizable floor plans, making them attractive to people with specific design preferences.

Benefits of Using Prefab ADU as a Rental Property

Here are the main advantages of using a prefab ADU as a rental property:

Affordable

The financial and time savings aspects of prefab ADUs are significant, primarily due to the construction process and materials used. On average, opting for a prefab ADU can be 10-20% more cost-effective than engaging in a custom ADU. This cost efficiency comes from the factory setting in which these units are produced. In a controlled environment, material waste is minimized, and labour is more efficiently managed, passing on the cost savings to the homeowners.

As a result, prefab ADUs can be an affordable option for homeowners to invest in and generate rental income without breaking the bank. Homeowners can set the rents at a more competitive price point, making it an attractive choice for tenants, especially in areas with high rent prices.

Faster Construction

Another advantage of prefab ADUs is the speed at which they can be built and, of course, delivered. Unlike traditional construction projects that can drag on for months due to unexpected delays such as bad weather, scheduling conflicts, or problems with supplies, prefab units can be assembled and ready for use within a few weeks. This efficiency is because the main components of the ADU are pre-made and only need assembling on your property.

This quick turnaround time ensures that homeowners can generate rental income as soon as possible. Prefab ADUs are an excellent option as they can be built and rented out pretty quickly.

Less Stressful Installation

The installation process of a prefab ADU offers a less disruptive experience than traditional construction methods. This streamlined approach is because the majority of construction activities happen off-site in a factory setting. When the components arrive at your property, they are ready for quick assembly. 

This situation is different from having construction crews, equipment, and materials all over your property for a traditional ADU build. When you choose a prefab ADU, there's a lot less mess and noise. Homeowners really notice the difference because there is minimal disruption, making life much easier during the installation process.

Customization Options

Customizing your prefab ADU is the same as picking out the perfect outfit. Imagine choosing how your rental property looks, from the colour of the walls to the type of floors, and even adding cool things like solar panels or programmable lights. However, this is not limited to just the design elements; homeowners can also select other customizations including energy-saving features that could reduce the overall cost of utility bills.

If your rental property stands out from other apartments or rental units, you stand a better chance of attracting potential tenants and maximizing your rental income. With prefab ADUs, homeowners have more control over the final product, ensuring that it meets their expectations and investment goals.

Investment Strategy Flexibility

Depending on your strategy and investment goals, you can opt to use your ADU as a long-term rental unit, or as a short-term rental unit on platforms like Airbnb or VRBO. Indeed, prefab ADUs and cabins can be a great opportunity to monetize unused or underused property.

Use → this calculator to model out what kind of business you can expect using Airbnb to rent your prefab ADU, and use → this calculator to analyze your cash flow if you use your prefab as a long-term rental property. A Short-term rental property may offer higher profit, but usually requires more hands-on management than a long-term rental property.

Things to Consider Before Opting for a Prefab ADU

Here are some important things to consider before you decide to invest in a prefab ADU:

Financing and Appraisal

It is important to know that getting loans and figuring out the value of prefab ADUs might be a bit tricky. Since prefab homes are somewhat new in many municipalities, banks and other lenders might not be as willing to give you a traditional mortgage or loan given that their value is more difficult to assess. However, there are alternative options available, such as: Construction Loans, Temp to Perm Loans, Personal Loans, HELOCs, & Lines of Credit. → Check out our partner Upstart here to find out what personal loan rate you could qualify for.

Understanding Construction Methods

Every company that makes prefab ADUs does things differently, which can make it hard to figure out how one company's way of making ADUs compares to another's. Vetting the reliability of a prefab building manufacturer is an important step to ensure that you are working with a reputable and trustworthy company. Here are some ways to vet the reliability of a prefab building manufacturer: research the manufacturer's reputation, look for online reviews, testimonials, and references from previous customers, check for certifications, review the manufacturer's portfolio, ask about the manufacturing process, and request references.

Local Experience Matters

Before you decide on a builder for your prefab ADU, make sure to inform yourself about the local regulations for your ADU project. Most local government websites have information on building codes, zoning, and permitting. Look for a section on building and development or a similar topic. There may be specific regulations for prefabricated buildings, so make sure to look for that information as well. A local prefab builder (or general contractor) may also be familiar with the regulations for building in your area. They may be able to provide guidance on the specific requirements for prefab builds in your location and can help ensure that your project is in compliance with local regulations. It's important to make sure you understand the local regulations before starting your prefab build to avoid any issues with permitting or compliance.

Insurance and Warranty

Lastly, don't forget to look into insurance and warranty information very carefully. Talk to your home insurance provider to find out if they can include your new prefab ADU under your existing insurance policy and how much it will cost. Not every insurance company is okay with covering prefab buildings in the same way they do with other homes, so this is a really important step.

Also, make sure to check the warranty and insurance the prefab company offers. You should know exactly what they will cover, especially if something goes wrong while the ADU is being installed or if there are any problems with how it is built later on.

For a more detailed guide on everything prefab, we highly recommend you check out our Prefab Handbook! ←

Final Verdict: Using a Prefab ADU as a Rental Property

So, is using a prefab ADU as a rental property a good investment in 2024? The answer is yes! Prefab ADUs offer many advantages such as affordability, fast construction, and customization options. And many municipalities are even encouraging us to take advantage of ADUs as additional units on our property. Just be sure to do your research and choose a reputable builder in your local area, and make sure that the project would meet your investment goals with the help of available calculators. ←

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Wishing you best of luck with your project!

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