How much can I earn renting out an ADU?

Rent and real estate price growth in the US

Over the past 10 years, both rent and real estate prices in the US have increased significantly. 

Here are the key figures:
In 2013-2016, the average annual rent increase was 3.5%, and so did the average annual increase in real estate prices. As for the years 2016-2019, there was an average annual rent increase of 4%, while the average annual growth in real estate prices was 3.8%. Subsequently, in the years 2019-2023, the average annual rent growth was 5% and the average annual growth in real estate prices increased by up to 6%. This means that rent prices are growing steadily and often faster than real estate prices, which makes investing in ADUs attractive.

Short-term rentals through Airbnb

Short-term rentals through platforms like Airbnb can be very profitable, especially in tourist-friendly areas. The average figures for Los Angeles in 2023 are:
• Average Daily Rate (ADR): $191
• Average Monthly Occupancy: 69%
• Average Annual Income: $45,000

For specific examples:
• 1-bedroom apartment in Santa Monica: $3,500 per month
• 2-bedroom apartment in Downtown LA: $4,500 per month
• 1-bedroom apartment in Koreatown: $2,800 per month
• 2-bedroom apartment in East LA: $3,200 per month
These figures show that the location and size of the property significantly affect short-term rental income.

Long-term rental

Long-term rental provides stable and predictable income. The average figures for Los Angeles in 2023 are:
• 1-bedroom apartment: $2,500 per month
• 2-bedroom apartment: $3,200 per month

Advantages of long-term rentals:
• Stable income
• Lower management costs
• Long-term tenant reduces vacancy risk

Disadvantages of long-term rentals:
• Lower yield compared to short-term rentals
• Less flexible income
• Potentially higher maintenance costs

Comparing short-term and long-term rentals
If we look into short-term rental, average monthly income can get into something between 3000-4500 dollars, while advantages are higher yield and flexibity, however there are also disadvantages such as higher management costs and seasoanality, connected with it. 
On the other hand, when we take into consideration long-term rentals, average monthly income can raise to 2500-3200 dolars, while advantages are stability, lower costs, and disadvantages are lower yield and i tis less flexible income. 
Therefore, it is important to realise, that investing in an ADU can be profitable whether you choose to rent short-term or long-term. Short-term rentals offer higher returns, but also higher costs and risks. Long-term rentals provide stability and predictability. The choice depends on your preferences, ability to manage the property, and risk tolerance.

Hidden costs to consider

While renting an ADU (Accessory Dwelling Unit) can bring in attractive returns, it’s important to consider costs that can reduce your bottom line. Here are the most important ones:

1. Property management
If you choose a property manager, expect them to take:
• 10–15% of your monthly income for long-term rentals,
• Up to 20–30% of your income for short-term rentals through Airbnb (where there’s more management work and more frequent cleaning).

2. Maintenance and Repairs
Like any other living space, an ADU requires maintenance:
• Regular cleaning (even several times a week for short-term rentals),
• Routine repairs (plumbing, electrical),
• Equipment replacement (furniture, appliances).

3. Fees and Taxes
• Rental income is taxable - be sure to report it on your tax return.
• In some cities, you need to pay a tax on short-term accommodation (so-called Transient Occupancy Tax).

Return on Investment in an ADU

If you are considering building or converting an ADU, it is important to consider the return on investment:
Example calculation:
• Investment: $100,000 (converting a garage)
• Annual income from long-term rental: $30,000
• Annual costs (maintenance, management, taxes): -$6,000
• Net profit: $24,000
• ROI: 24%

➡️ This means that in less than 5 years you can get your investment back, and then you only generate profit.

Combination of own use and rental

Some owners use ADUs in a combination of ways:
• renting them out on short-term basis on Airbnb on weekends,
• using it as a home office or study/children's space during the week,
• offering it seasonally to friends, family or a long-term tenant.
This flexible use allows you to maximize your income without losing control of your space.

Who is an ADU a good investment for?
✔️ Do you have a spare garage, yard, or outbuilding
✔️ Do you live in an area with high housing demand (LA, San Diego)
✔️ Are you ready to invest in construction or remodeling
✔️ Do you want to diversify your income and appreciate your property

If you answered "yes" to at least two of these questions, renting out an ADU may be the ideal way to create passive income and strengthen your financial stability.

Sources: 
https://ipropertymanagement.com/research/average-rent-increase-per-year?
https://www.fastcompany.com/91119427/housing-market-more-home-price-growth-this-decade-more-than-1990s-and-2010s?
https://www.rent.com/research/average-rent-prices-leap-year/?
https://www.resiclubanalytics.com/p/national-home-price-growth-decade-already-surpassed-entire-1990s-2010s?
https://www.globalpropertyguide.com/north-america/united-states/rent-price-trends?
https://breznikar.com/article/average-rent-by-year-1940-2023-historical-rental-rates/1781?u
https://todayshomeowner.com/home-finances/guides/housing-market-performance/
https://www.har.com/blog_131833_housing-prices-around-america-update
https://www.bigtownrealestate.co/real-estate/investing/long-term-rental/#
https://www.bigtownrealestate.co/real-estate/investing/long-term-rental/#