As much of the country continues to struggle with a persistent housing shortage, accessory dwelling units (ADUs) are stepping back into the spotlight as a smart, flexible solution for homeowners and communities. These stand-alone living spaces—sometimes called in-law suites, carriage houses, backyard cottages or garage conversions—are typically built on single-family residential lots alongside a primary home.

Many states are making it easier and more affordable for homeowners to construct ADUs as a practical option to increase housing options without relying solely on large-scale developments. In 2024 alone, states like Arizona, Colorado, Hawaii and Massachusetts passed major ADU legislation, while states including California and Oregon continued to expand and streamline their existing ADU laws.

For homeowners, the benefits can go far beyond adding extra square footage. If you own a home in a state that permits ADU development, here are five ways ADUs open doors for homeowners.

Rental Income Potential

Arguably, the most attractive advantage of an ADU is the opportunity to generate passive rental income, through either long-term tenants or short-term vacation rentals. Many ADU owners choose to rent on traditional long-term leases, while others in particularly desirable or tourist-friendly areas opt for vacation platforms like VRBO or Airbnb.

The extra income from an ADU can help offset your mortgage payment, cover property taxes or simply provide steady cash flow—all from a separate, private living space without the disruption of renting out space inside your primary home. In high-demand rental markets, properties with ADUs can earn thousands of dollars per year in supplemental income, turning an otherwise unused portion of your property into a powerful financial asset.

Higher Property Values

Adding an ADU expands usable square footage, provides versatile functionality and offers future buyers a built-in source of potential rental income. These factors can boost your home’s long-term value tremendously, and homes with ADUs usually appraise higher than comparable properties without them.

Freddie Mac research shows that properties with ADUs are not only growing in number nationwide, but are also commanding premium sales prices. The National Association of REALTORS estimates that ADU-equipped homes tend to sell for about 35 percent more on average. If you are considering resale at any point in the future, an ADU can deliver a strong return on investment by making the property more desirable and marketable. Many lenders and home appraisers even factor in projected rental income from ADUs as part of their loan approval process.

Lower Construction Costs, Easier Financing

ADUs offer one of the most affordable ways to add new housing, which is a key reason why policymakers are supporting them through new legislation and financial incentives. Since these units are built on land you already own, you eliminate the biggest upfront expense—purchasing property. Construction costs are significantly lower than building a full new single-family home, and many ADUs are even prefabricated and delivered to the site. Freddie Mac estimates these manufactured options can cost as much as 50 percent less per square foot compared to conventional construction.

When it comes to financing, most homeowners rely on a mix of personal savings, home equity loans or lines of credit. But there are also dedicated grants and financing programs available today: both Fannie Mae and Freddie Mac offer home renovation loans that can be used to finance ADU construction. In states like California, where ADU policies are in place to address housing shortages, substantial government grants and other incentives are available. Research local programs and check with your local housing authority to see what financial support might be available in your area.

Flexible Space Adapts to Your Life

Flexibility is another key selling point of an ADU. Even if you choose to use your unit as a rental today, you can always pivot into a private living space for family or friends when needed. Whether you’re looking to house aging parents, create independent space for adult children or offer temporary housing for friends in transition, ADUs make it possible for multiple generations—and even multiple families—to live together while still maintaining privacy.

Compared to a traditional spare bedroom, an ADU provides much more comfort and convenience for both short-term and long-term visitors. Many homeowners dedicate their ADUs as home offices, studios or workshops, adding functionality while keeping work or hobbies separate from the main house. Others choose to downsize into the ADU later in life, renting out the primary residence to reduce living expenses. This adaptability ensures that your investment can grow with you, evolving to meet your changing financial and personal needs over time.

Save on Taxes

ADUs can often offer meaningful tax advantages for homeowners. Rental income generated from an ADU is taxable, but many related expenses are deductible—like mortgage interest, property taxes, utilities and maintenance—and can help reduce your overall taxable income while maintaining a steady revenue stream. Some states offer additional tax incentives, exemptions or rebates for homeowners building ADUs, which can further lower construction costs and boost your return on investment. By leveraging these tax benefits, homeowners can maximize the financial payoff of adding an ADU.

A Low-Risk Investment

If you have the space to add an ADU, it can be a smart, low-risk option to increase your property’s value and functionality. You’ll start building equity as soon as construction is complete, and the flexibility of an entirely separate living space has a myriad of financial and personal benefits. Compared to the high cost of buying or building another home, and with ADU regulations becoming increasingly favorable, investing in an ADU is a practical, forward-thinking choice that will deliver long-term rewards.

Thinking About An ADU? 5 Reasons Why It’s Worth The Investment by Brentnie Daggett | RISMedia housecall