Accessory or auxiliary dwelling units—known as ADUs—are small, independent residential units located on the same lot as stand-alone single-family homes. They can be income-producing rentals, house family members and guests, or used as office space or art studios. Colloquially they’ve been called granny flats, cottages, bungalows, hideaways, and more.
And they’re one of the fastest growing trends in housing—both remodeling and new construction—growing at an annual rate of almost 9%, according to Freddie Mac. However, their construction is highly regulated, and at the time of publication, only 18 states have laws allowing ADUs. (Note: some cities and municipalities outside of these 18 states may have their own rules and regulations allowing ADU construction.) But there’s growing demand for them and a push to expand their legalization, arguing that they can help address the nation’s housing shortage and affordability issues.
In this section, you can parse important housing data, learn about state legislation governing ADU construction, learn about ADU financing, and see real-world examples of granny flats, cottages, and hideaways.
Big Data: Housing and Affordability
The housing sector in the United States is facing two major and related problems: 1) A shortage of available homes and 2) A shortage of affordable homes. To keep up with demand, the nation needs to add millions of new homes—just how many millions is hard to pinpoint because different studies cite different numbers. But in all cases, the numbers are significant.
On the low end, we’re short 1.5 million homes and on the high end, the figure is more than seven million, according to data compiled by Moody’s Analytics and included in its report “Bringing the Housing Shortage Into Sharper Focus” published in July.
As for affordability, nationwide home prices earlier this year were up 60% since 2019 and are rising at a rate of 3.9% year over year, according to the S&P CoreLogic Case-Shiller US National Home Price Index.
The nation’s median home price is $412,500, and to become a homeowner today, buyers need an average annual household income of at least $126,700, according to the report “The State of the Nation’s Housing” released in June by the Joint Center for Housing Studies of Harvard University. The report notes that while home prices vary by market, a household would still need to earn at least $100,000 in 53% of the nation’s metro areas in order to purchase the median price home. That’s up from 11% just four years ago.
So, of the roughly 46 million rental households, only six million can meet the buyer benchmark, according to the American Community Survey, which is conducted by the U.S. Census Bureau. That means about 40 million households are stuck renting.
It’s a good thing renting is affordable. Oh, wait. Not so fast…
Early this year, the average U.S. advertised asking rent was up 1.2% from the previous year, according to Yardi Matrix. And, in July, Apartments.com reported that the median rent for a one-bedroom apartment was $1,637 and $1,898 for a two-bedroom. Zillow reported a median rent of $2,100 for a single-family home. According to a 2023 U.S. Census Bureau report, more than 21 million renter households were considered rent-burdened (meaning they spent more than 30% of their income on housing costs). That’s close to half of all renter households.
And for rental households with extremely low incomes (at or below either the federal poverty guideline or 30% of the median income in their area, whichever is greater), there’s a shortage of around 7.1 million affordable properties, according to the National Low Income Housing Coalition.
Another concern is how the housing shortage and affordability issues have slowed the formation of new households. Moody’s Analytics called these “pent-up households,” and it projected that 1.2 million households failed to form through 2024 due to an inadequate supply of affordable housing. This number takes into account pent-up households resulting from individuals who were living with parents, roommates, or relatives because they were unable to find or afford housing that would allow them to form independent households.
Legislating ADUs
If the construction of ADUs is going to help with housing shortages and affordability, it makes sense that they’re being added to locales where they’re most needed. Currently, 18 states have laws allowing ADUs: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Iowa, Maine, Maryland, Massachusetts, Montana, Nevada, New Hampshire, Oregon, Rhode Island, Utah, Vermont, and Washington.
The states with the most acute housing shortages:
The good news: eight states with critical housing shortages have ADUs laws. The bad news: many states with significant housing shortages aren’t getting the relief they need from (legal) ADU construction.
ADU Legalization, Requirements, and Potential Hurdles
As of August, 18 states have passed laws that broadly allow homeowners to build and rent out ADUs, with 11 of the states adopting their laws in just the past four years, according to a policy brief from the Mercatus Center at George Mason University. (See Tables 1-4)
The legislation is necessary because most of the land in the U.S. that’s zoned for residential use limits construction to a detached single unit. Changing the zoning laws is a way for policymakers to increase the stock of affordable housing; the brief calls these efforts the “lowest-hanging fruit politically.”
Despite the growing interest in ADUs, the Mercatus policy brief noted three “poison pill” regulations that may present a hurdle to construction, even in states where ADUs are legal.
- Owner-occupancy requirements. A home could potentially be difficult to sell because it must be the owner’s primary residence; anyone looking to purchase an investment property would be excluded. The Federal Housing Administration allows mortgage borrowers to qualify in part based on income generated by renting out an ADU but only if it can be rented without restriction. (see lending side bar page XX). The policy brief noted that in some cities, such as Los Angeles and Seattle, the repeal of owner-occupancy requirements led to a large increase in ADU construction.
- Parking requirements. Many existing houses have yards that can fit a backyard ADU within setback limits or an additional parking spot—but not both. The policy brief notes this requirement is a particular hindrance when a garage is converted to an ADU and replacement parking is required for both the primary residence and the new ADU.
- Discretionary permit review. Homeowners may be discouraged from building an ADU because applying for a conditional use permit can be time-consuming and require a public hearing, payment of a nonrefundable fee, and the presentation of site-plan drawings that can be expensive to commission. Homeowners could be reluctant to spend thousands of dollars to go through a process where they may not be allowed a permit.
Mortgage Financing for ADU Properties
Freddie Mac allows the financing of properties with accessory dwelling units through all of its mortgage offerings, noting that accessory dwelling units can help address many modern housing concerns, including providing independent living space for family members, letting owners earn rental income, or simply giving homeowners extra living space.
And, starting in October 2023, borrowers were allowed to use rental income from ADUs to help them qualify for an FHA-insured mortgage. The Federal Housing Administration (FHA) policy states that borrowers seeking financing for properties with an existing ADU can use up to 75% of the estimated ADU rental income to qualify for an FHA-insured mortgage. For existing properties on which borrowers plan to add an ADU, they can use up to 50% of the estimated rental income to qualify for a mortgage under FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program.
Eligible Properties and FHA Requirements
- Only one ADU is allowed on one-, two- and three-unit properties.An ADU on a one-, two- or three-unit property must comply with zoning and land-use requirements in the jurisdiction in which it is located. However, an ADU on a one-unit property that does not comply with the zoning and land-use requirements may be eligible under certain conditions.
- ADUs that are manufactured homes are allowed under certain conditions.
- An appraisal report is required.
- At least one qualifying borrower must participate in landlord education for purchase transactions unless the borrower has at least one year of investment property management experience or prior ADU rental management experience.
Find more information and financing requirements.
Fun Fact: ADUs and Counting
In 2020, Freddie Mac scoured the MLS looking at more than 600 transactions dating to the late 1990s and identified 1.4 million single-family homes with ADUs (both legal and illegal) across the United States. More than half were located in just four states: California, Florida, Texas, and Georgia.
The study notes that the actual number of ADUs may have been higher because they are difficult to track—not all home sales are listed on the MLS and listing can use alternative descriptions like granny flat, casita, backyard cottage, or garage apartment. Freddie has not produced an updated report, but since their study is five years old, the number of ADUs in the U.S. likely is much higher now, considering that Freddie estimated their annual growth close to 9%.
Urban Building Workshop
ADUs as a movement
“ADUs became a significant part of our work about four years ago when the first batch of laws started a kind of movement,” says Kevin Skiles, architect and principal at Urban Building Workshop in San Francisco. “That brought in a lot of new projects that were focused on either adding ADUs to existing properties or including ADUs as part of a new project.”
What’s driving the trend? Skiles says there are two main reasons: 1) The need for independent living space for an adult child or an aging parent and 2) An opportunity to add an income-producing rental unit to a property.
Typical Size and Features
“A number we seem to hit all the time is 650 to 700 square feet, although the laws allow you to go to 800 square feet without it counting against your floor area ratio,” Skiles says. Inside there’s usually a great room concept with a kitchen and living room all one space, a separate bedroom, and a bathroom. “It’s a pretty straightforward program.”
As for finishes? “When people go to the expense of building an ADU, they tend to not cheap out on appliances and finishes,” Skiles says. “For the most part, they mirror what’s in the main home. People tend to think of it as part of their home; they pay for quality in their own home so they view the ADU the same way.”
What’s Next?
“I think the next policy innovation is going to be around parking,” he says. Skiles is on the planning commission for Mill Valley, Calif., and he says the city is in the process of eliminating parking requirements for all commercial uses under 5,000 square feet. “That’s on the cutting edge for a suburban community,” Skiles says. “I suspect there's going to be similar policy innovations happening around reducing parking requirements for residential that I think will spur a whole bunch of innovation related to alternative dwellings like ADUs and junior ADUs.”
![This project in Santa Rosa, Calif., is what Skiles calls a classic ADU. “This is probably the version we do the most,” he says. By that he means a self-contained structure located on the same property as the larger main residence. The owners of this 3,500-square foot home have parents living in the one-bedroom, one-bathroom, 750-square-foot ADU [background left] during the summer. The rest of the year it serves dual purposes as a home office, a guest suite, a pool house, and an entertainment cabana. “It’s used in a very multi-dimensional way, and they get a lot of use out of it,” Skiles says.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b1f00563948b7bd3f77b0f-5000_the_pointe_exteriorpool.png?auto=format,compress&fit=max&q=45&w=250&width=250 "This project in Santa Rosa, Calif., is what Skiles calls a classic ADU. “This is probably the version we do the most,” he says. By that he means a self-contained structure located on the same property as the larger main residence. The owners of this 3,500-square foot home have parents living in the one-bedroom, one-bathroom, 750-square-foot ADU [background left] during the summer. The rest of the year it serves dual purposes as a home office, a guest suite, a pool house, and an entertainment cabana. “It’s used in a very multi-dimensional way, and they get a lot of use out of it,” Skiles says.")
![“When you look at this home from the street, it's going to look like a single-family home, but in fact, it has a one- bedroom ADU on the ground floor,” Skiles says. [See plan below] He integrated the ADU into the footprint of this home in Mill Valley, Calif. to preserve as much of the lot as possible. The compact design both eliminates the look of sprawl that can result from having multiple buildings on a single property and it preserved as much of the natural landscape as possible. “This site is in a really beautiful part of Marin County with lots of redwoods and it has a beautiful fairytale forest feel so I wanted to touch as little of the lot as possible,” Skiles says. He adds there may be a level of comfort knowing that an adult child or aging parent is actually living under the same roof but they have enough separation to live independently. Or it could be rented out to a non-family member.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b1f117ee387d6e4b427a98-316_w_blithedale_03102025_photoshoped_rendering_v1.png?auto=format,compress&fit=max&q=45&w=250&width=250 "“When you look at this home from the street, it's going to look like a single-family home, but in fact, it has a one- bedroom ADU on the ground floor,” Skiles says. [See plan below] He integrated the ADU into the footprint of this home in Mill Valley, Calif. to preserve as much of the lot as possible. The compact design both eliminates the look of sprawl that can result from having multiple buildings on a single property and it preserved as much of the natural landscape as possible. “This site is in a really beautiful part of Marin County with lots of redwoods and it has a beautiful fairytale forest feel so I wanted to touch as little of the lot as possible,” Skiles says. He adds there may be a level of comfort knowing that an adult child or aging parent is actually living under the same roof but they have enough separation to live independently. Or it could be rented out to a non-family member.")
Sasquatch Contracting
Multigenerational Living
Mary Peters, CEO of Sasquatch Contracting in Boise, Idaho, has seen an increase in the number of ADUs her firm is building; by her estimate, the number of projects has doubled during the past two years. And most of them address the needs of multigenerational households.
“We’re either creating a space for kids to move into because it's too expensive to live somewhere else while they're trying to get on their feet or for people bringing parents into the house because they're not ready to be in assisted living or, more realistically, the cost of those places is so expensive that it makes more sense to bring them into their home,” Peters says.
Each of the firm’s projects is 100% custom. “We have done this enough times that we know the right questions to ask and make sure that it's going to work for how they want to use it,” she says. “Even if you’re talking about a space for parents, everyone’s parents have different needs and different problems to solve.”
Biggest Challenges
“Access is definitely an issue and also setbacks are a major problem,” Peters says. “People have this big, beautiful yard and they want to use all of it, but that’s just not the case.” And when Peters talks about access, she doesn’t only mean the ability for contractors to get to the site, she means access for the those using the ADU. “You can’t have them walking through the [main] house, right? You need to make sure there’s access to the outside that allows an independent lifestyle,” she says.
Trillium Architects Co-operative
ADUs for visitors and visual arts
![Designed for a family that wanted a space that could accommodate guests and serve as an art studio for the homeowner who is a sculptor, this ADU [above and below] in Redding, Conn., fits a bedroom, bathroom, kitchen, and studio space (which can double as a living room) into a 14-foot by 48-foot footprint. While the exterior design mimics the modern architecture of the 3,500-square-foot main residence, the project’s architect, Elizabeth DiSalvo, AIA, owner of Trillium Architects Co-operative in Ridgefield, Conn., said she scaled back the interior materials. “We know it's not going to be occupied that much, so the kitchen is off-the-shelf from Lowe's and the floors are Marmoleum rather than wood.” DiSalvo said she originally considered specifying a concrete floor, especially since the art studio can get messy, but ultimately decided it would be too hard under foot.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b2073e4f30b67af2f7eecf-sg_3.png?auto=format,compress&fit=max&q=45&w=250&width=250 "Designed for a family that wanted a space that could accommodate guests and serve as an art studio for the homeowner who is a sculptor, this ADU [above and below] in Redding, Conn., fits a bedroom, bathroom, kitchen, and studio space (which can double as a living room) into a 14-foot by 48-foot footprint. While the exterior design mimics the modern architecture of the 3,500-square-foot main residence, the project’s architect, Elizabeth DiSalvo, AIA, owner of Trillium Architects Co-operative in Ridgefield, Conn., said she scaled back the interior materials. “We know it's not going to be occupied that much, so the kitchen is off-the-shelf from Lowe's and the floors are Marmoleum rather than wood.” DiSalvo said she originally considered specifying a concrete floor, especially since the art studio can get messy, but ultimately decided it would be too hard under foot.")
![At 1,200 square feet, this large one-bedroom ADU [above and below] sits on a property in Greenwich, Conn., that has a 9,000-square-foot main residence. The cost of this two-story project is around $900,000—but that also factors in the ground-floor garage and workshop. Still, when it comes to costs, DiSalvo said ADUs can have a higher price-per-square foot than a main residence because building small is less cost efficient.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b207de8251b23008993314-greenwich_adu_3.png?auto=format,compress&fit=max&q=45&w=250&width=250 "At 1,200 square feet, this large one-bedroom ADU [above and below] sits on a property in Greenwich, Conn., that has a 9,000-square-foot main residence. The cost of this two-story project is around $900,000—but that also factors in the ground-floor garage and workshop. Still, when it comes to costs, DiSalvo said ADUs can have a higher price-per-square foot than a main residence because building small is less cost efficient.")
A Few of Her Favorite Things
Sheri Koones is the author of 12 books on residential construction and remodeling, and her newest ADU: The Perfect Housing Solution was published in March 2024. Koones showcases 25 ADU projects in her book, and here she shares a few of her favorites. You can find more on Koones and her research by reading her Q&A on page 58.
![This 350-square-foot ADU was built atop a garage in Denver and has light-colored walls, tall ceilings, and abundant natural light [below] that makes the small space feel much larger than it is. The project was designed by Simple Homes.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b208c2539149c35ac2b06e-clayton001jpeg_2.png?auto=format,compress&fit=max&q=45&w=250&width=250 "This 350-square-foot ADU was built atop a garage in Denver and has light-colored walls, tall ceilings, and abundant natural light [below] that makes the small space feel much larger than it is. The project was designed by Simple Homes.")
![An open floor plan, high ceilings/butterfly roof, and large glass bifold doors make this modern space in Los Angeles [above and below] feel cozy and comfortable—and larger than its 370 square feet would suggest. The project was designed by Vertibre.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b2095cf3375946808ff3e5-plymouth001_copy.png?auto=format,compress&fit=max&q=45&w=250&width=250 "An open floor plan, high ceilings/butterfly roof, and large glass bifold doors make this modern space in Los Angeles [above and below] feel cozy and comfortable—and larger than its 370 square feet would suggest. The project was designed by Vertibre.")
![The owners purchased a Sonoma Valley, Calif., property with an existing log cabin and built this 1,038-square-foot ADU [above and below] to live in when they retire while renting out the log cabin. A spiral staircase provides access to the second floor but uses minimal floor space. The project’s sustainable features include a mini-split heating/cooling system, solar panels, and metal roofing.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b20a5d63948b7bd3f78a60-hwy1284_copy.png?auto=format,compress&fit=max&q=45&w=250&width=250 "The owners purchased a Sonoma Valley, Calif., property with an existing log cabin and built this 1,038-square-foot ADU [above and below] to live in when they retire while renting out the log cabin. A spiral staircase provides access to the second floor but uses minimal floor space. The project’s sustainable features include a mini-split heating/cooling system, solar panels, and metal roofing.")
![This small 227-square-foot ADU in Palo Alto, Calif., used to be a carport [see “before” photo below]. The addition is seamlessly integrated with the existing home and features a full kitchen with high-end Energy Star appliances and a private entrance at the rear.](https://img.proremodeler.com/files/base/ebm/proremodeler/image/2025/08/68b20b118251b2300899349c-marion002b.png?auto=format,compress&fit=max&q=45&w=250&width=250 "This small 227-square-foot ADU in Palo Alto, Calif., used to be a carport [see “before” photo below]. The addition is seamlessly integrated with the existing home and features a full kitchen with high-end Energy Star appliances and a private entrance at the rear.")
About the Author
Jay Schneider
Senior Editor
Jay Schneider is the Senior Editor for Pro Remodeler. He can be reached at [email protected].
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