Pros and Cons of Using Your ADU as a Vacation Rental

Disclaimer: PropStream doesn’t offer financial or legal advice. Before using an ADU as a vacation rental, we recommend researching local ADU and short-term rental regulations and consulting financial and legal professionals.

Adding an accessory dwelling unit (ADU) to your primary residence can be a great way to start investing in real estate. The secondary dwelling can generate regular rental income to offset your mortgage or help you save for a separate investment property.

But should you turn your ADU into a vacation rental? This depends on your preferences, the local market, and other factors.

Key Takeaways:

🔑 Before converting your ADU into a vacation rental, thoroughly research local ADU and short-term rental regulations. Seek advice from financial and legal professionals to ensure compliance with zoning laws and other requirements.

🔑 ADUs as short-term rentals offer several advantages, like higher potential rental income due to increased per-night rates, growing demand for short-term rentals, and convenient property management/flexibility in blocking dates.

🔑 Using ADUs for short-term rental purposes can also have disadvantages, like strict regulatory restrictions, property management challenges (including privacy issues and cleaning requirements), and platform fees.

What Is a Vacation Rental?

A vacation rental, aka a short-term rental (STR), is a residential dwelling rented out for short periods—generally 30 days or less. Anything longer would be considered a mid- or long-term rental.

Since many ADUs have minimal living space, they can be well-suited for short-term tenants who just need a place to stay while traveling. But before turning your ADU into an STR, consider the pros and cons.

Pros of Using Your ADU as a Vacation Rental

Let’s start with the benefits of short-term rental ADUs:

Potential Rental Income

Though bookings can be inconsistent, STRs tend to generate more revenue than equivalent long-term rentals because they’re typically able to command a higher per-night rate.

Of course, rental income varies greatly by ADU size, quality, and location. To get an idea of what you can expect to make, research daily rental and occupancy rates for similar STR properties nearby.

Growing Market Demand

Demand for short-term rentals is growing. In Q1 2023, it jumped 16% annually. At the same time, average daily rental rates were up 3.4%, occupancy climbed 17.6%, and revenue per available room was 21.6% ahead of last year.

One major contributor to the increasing demand for STRs is the rise of remote work. According to the U.S. Census Bureau, the number of people working from home tripled between 2019 and 2021. Furthermore, a McKinsey & Company study shows that 58% of Americans can work from home at least part-time. With the availability of STRs, work from home is turning into work from anywhere.

According to Grand View Research, the global short-term rental market was valued at $109.76 billion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 11.2% from 2023 to 2030.

Keep in mind that demand for STRs can fluctuate with location and season. For example, an ADU rental may see a bump in interest leading up to a nearby tradeshow or conference or during the summer when the weather is nice.

Convenience and Flexibility

Turning your ADU into an STR adds convenience and flexibility to being a landlord. For one, it lets you start investing with your primary residence, aka house hacking. That way, you don’t have to wait until you can afford an entirely new property.

The proximity of ADU rentals makes them easier to manage, saving you time and money from commuting to and from properties.

With STRs, you don’t have to worry about getting stuck with difficult tenants for long periods. If you have a guest who doesn’t meet your expectations, you can choose not to host them again.

Finally, STR platforms make it easy to block certain dates to limit your ADU’s availability. That way, you can reserve the ADU for when you have family or friends in town and want to house them in it.

Cons of Using Your ADU as a Vacation Rental

While there are many benefits to short-term rental ADUs, they also have potential drawbacks:

Legal and Regulatory Restrictions

Before building an ADU, you must ensure it complies with local zoning ordinances. For example, many states and counties don’t permit ADUs or have strict requirements regarding size, occupancy limits, and minimum parking space. Other areas have particular restrictions on using ADUs as rentals. So before constructing an ADU, research local ADU laws and make sure to get the necessary building permits.

Additionally, some cities have restrictions against short-term rentals. For example, New York City and D.C. have recently cracked down on STRs, claiming they drive up long-term rents and make housing less affordable. The restrictions generally prohibit off-site landlords from listing their properties as STRs. However, if the owner is present during the rental stay (as is common with ADUs), STRs may still be permissible with a license from the city.

Again, do your due diligence before listing your ADU as an STR. Research local STR regulations and consult a legal professional who can help you understand the legalities around short-term ADU rentals in your region.

Property Management Challenges

Having an STR in your backyard can sacrifice privacy, with visitors regularly coming in and out.

Many STR hosts are also expected to greet guests and explain house rules. Given the higher turnover rate, this requires more frequent communication and coordination than typical with long-term tenants.

Moreover, STR owners must ensure their rental is cleaned between guests. This takes time and effort or hiring a cleaner, adding property expenses to your regular maintenance and repair costs.

Short-term Rental Platform Requirements and Fees

To regularly attract new short-term tenants, you’ll likely need to partner with an STR platform like Airbnb or VRBO. They can advertise your ADU listing to their many online viewers. However, getting regular bookings can take time. You may need positive reviews on your host profile to gain traction. Unlike long-term rental owners, STR owners typically depend on booking platforms for success.

Keep in mind that STR platforms also take a cut of your earnings. For example, under its split-fee structure, Airbnb charges hosts a fee of 3% or more of the booking charge. Those who opt for the host-only fee structure (meaning hosts cover the service fee normally charged to guests) pay 14-16%. These fees eat into your profit margins.

The Final Verdict (+ 3 Encouraging ADU Trends)

Ultimately, incorporating an ADU rental into your investment strategy can be a great way to unlock untapped home value—if you understand the relevant regulations and challenges involved.

You may also want to consider these recent ADU trends:

• ADU construction regulations are loosening—especially in West Coast states. In California, ADU permits increased from 8,905 in 2018 to 23,663 in 2021 (165%).
• ADU financing options are growing. The Federal Housing Administration (FHA) now allows lenders to count income from ADU rentals when underwriting mortgages.
• ADUs can increase the value of your home. According to a Porch study, homes with ADUs in America’s biggest cities are priced 35% higher than units without one.

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