Renting Your ADU

The Growing Popularity of ADUs

Accessory Dwelling Units (ADUs) are rapidly becoming a go-to solution for homeowners looking to maximize their property’s potential. Once considered a niche housing option, ADUs are now at the forefront of urban development, offering a way to increase housing supply without drastically altering neighborhood landscapes.

Why ADUs Are on the Rise

The increasing demand for affordable housing has made ADUs a key player in cities like San Diego, where space is limited, and rental prices continue to climb. Local and state governments have responded by relaxing zoning laws, streamlining permits, and offering financial incentives, making ADU construction more accessible than ever.

Housing Demand is Driving ADU Growth

With urban populations growing and rental prices surging, ADUs provide much-needed housing without requiring new developments. They offer renters a more affordable, private alternative to traditional apartments, while homeowners benefit from a valuable, income-generating asset.

More Than Just Rentals

Beyond rental income, ADUs cater to multi-generational living, home office needs, and guest accommodations. Their adaptability makes them an appealing long-term investment, whether homeowners choose to use it for rental properties or repurpose it later. As cities continue to embrace ADUs, their role in the housing market is only expected to grow.

ADUs are not just for rental income—they can be used for guest housing, multigenerational living, or future personal space.

Can you rent out your ADU in San Diego, California?

Yes, you can rent your ADU in San Diego, California. ADUs are super popular in the U.S. and provide owners with numerous benefits and creative ways to use their land. These units, called granny flats or in-law suites, are great for new sources of income, upping property value, and offering versatile living spaces.

Renting out your ADU can provide a reliable income stream, increase property value, and offer long-term financial stability.

Steady Passive Income

Renting out an ADU provides a consistent revenue stream, helping homeowners cover mortgage payments, property expenses, or savings goals. Whether through long-term leases or short-term rentals, an ADU can generate reliable monthly income with minimal ongoing effort.

Boosting Property Value

Adding an ADU doesn’t just bring in rental income—it also increases your property’s overall value. Homes with permitted, well-designed ADUs are more attractive to buyers and often sell at a premium compared to similar properties without one.

Flexible Use

An ADU is more than just a rental unit—it’s a multi-purpose investment. Homeowners can rent it out now and repurpose it later as a guest house, home office, or space for family members. This flexibility makes ADUs a future-proof addition to any property.

High Demand in Cities

Urban areas face housing shortages and rising rental costs, making ADUs a highly desirable living option. Tenants appreciate the affordability and privacy they offer, ensuring low vacancy rates and steady demand in competitive rental markets.

Easier Than Ever

New state and local laws have simplified the ADU process, reducing permitting barriers and making construction more accessible. With faster approvals, fewer restrictions, and financing incentives, building and renting an ADU has never been easier.

Sustainability & Cost Efficiency

Modern ADUs often include energy-efficient appliances, solar panels, and smart home technology, reducing utility costs for homeowners and renters. These eco-friendly features not only lower expenses but also increase rental appeal for environmentally conscious tenants.

Renting Options for Your ADU

Renting out an ADU can be a highly profitable investment, but choosing the right rental strategy is essential for maximizing income and ensuring compliance with local regulations. Homeowners must weigh the benefits of short-term rentals (STRs) versus long-term rentals (LTRs), considering factors like income stability, tenant turnover, legal restrictions, and management efforts.

Short-Term Rentals

Short-term rentals, like vacation rentals listed on Airbnb and Vrbo, can generate higher per-night income, particularly in tourist-friendly areas. However, frequent turnover, management demands, and legal restrictions make them more complex to operate.

Short-term rentals can generate higher income but require more management and must comply with local regulations to remain viable.

Pros of Short-Term Rentals:

• Higher nightly rates: STRs can earn more monthly than LTRs if demand is high.
• Flexibility: Homeowners can block off dates for personal use when needed.
• Attracts different types of renters: Business travelers, vacationers, and remote workers often seek short-term stays.

Cons of Short-Term Rentals:

• Strict regulations: In San Diego, STRs in ADUs are prohibited unless permitted before September 2017. Properties must also comply with the Short-Term Residential Occupancy (STRO) ordinance, which includes licensing rules and rental caps in high-demand areas like Mission Beach.
• Higher vacancy rates: STR demand fluctuates, making earnings less predictable than LTRs.
• Increased maintenance: Frequent cleaning, restocking, and guest turnover add to management costs.

Long-Term Rentals

Long-term rentals (leases of 30+ days) provide a stable, predictable income with lower turnover costs. Given San Diego’s high housing demand, ADUs used for long-term rentals remain in steady demand and typically face fewer regulatory hurdles.

Long-term ADU rentals offer consistent income, reduced vacancy risk, and lower management costs compared to short-term rentals.

Pros of Long-Term Rentals:

• Consistent cash flow: Long-term tenants provide monthly payments to create steady, predictable income.
• Lower management effort: Rental agreements provide fewer turnovers mean less frequent maintenance and cleaning.
• Easier compliance: ADUs are encouraged for long-term renters, making them easier to manage legally.

Cons of Long-Term Rentals:

• Less flexibility: Homeowners cannot use the space intermittently as they would with STRs.
• Tenant risks: Long-term leases come with legal complexities, including tenant protection laws in San Diego, which require landlords to provide relocation assistance (2-3 months’ rent) for no-fault evictions.
• Wear and tear: Extended use by tenants may increase maintenance costs over time.

Which Option is Best?

For most San Diego homeowners, long-term rentals are the preferred and legally viable choice, given the city’s strict STR restrictions on ADUs. However, in areas where STRs are allowed, those willing to manage frequent turnovers and regulatory compliance may find higher profit margins. Ultimately, the right choice depends on income goals, management preferences, and legal considerations.

Legal Regulations to Consider

Renting out an Accessory Dwelling Unit (ADU) in San Diego requires navigating several legal regulations to ensure compliance and avoid costly mistakes. From zoning laws to rental licenses, homeowners must follow strict rules to legally rent their ADU while protecting their investment.

San Diego’s ADU rental laws dictate zoning requirements, permits, and tenant protections—understanding them is crucial for compliance and long-term rental success.

Zoning Laws

San Diego’s zoning regulations dictate where ADUs can be built and how they can be used as rentals.

• Unit Size Restrictions: Detached ADUs can be up to 1,200 sq. ft., while attached ADUs cannot exceed 50% of the main residence’s size.
• Setback Requirements: Detached ADUs require a minimum 4-foot setback from side and rear property lines.
• Parking Rules: Parking is not required if the property is within half a mile of public transit or in a historic district. Otherwise, one off-street parking space per unit may be necessary.

Rental Licenses

To legally operate an ADU rental in San Diego, homeowners must ensure they have the proper permits:

• Building Permit: Required before constructing or converting an ADU to confirm compliance with zoning, safety, and building codes.
• Certificate of Occupancy: Ensures the ADU meets all safety and habitability standards before it can be rented.
• Short-Term Rental License: If eligible for short-term rental use (pre-2017 ADUs), an STR license is mandatory under San Diego’s Short-Term Residential Occupancy (STRO) ordinance.

Failure to secure the proper permits can result in fines, legal disputes, or even forced eviction of tenant.

Tenant Rights

California has strict tenant protection laws, and ADU landlords must comply to avoid legal risks.

• Security Deposits: Under AB 12 (effective July 2024), security deposits are capped at one month’s rent. However, small landlords with two or fewer properties (totaling four or fewer units) can still charge up to two months’ rent.
• Rent Increases: AB 1482 limits annual rent increases to 5% plus inflation, with a maximum cap of 10%. This applies to most properties 15+ years old, with exemptions for certain single-family homes.
• Just Cause Evictions: Tenants who have lived in an ADU for 12+ months are protected under AB 1482, meaning landlords must have a valid legal reason for eviction (e.g., nonpayment of rent, owner move-in).
• Relocation Assistance: No-fault evictions require landlords to pay one month’s rent in relocation assistance or waive the final month’s rent.

Violations of tenant protection laws can result in lawsuits, financial penalties, and legal disputes, making compliance essential for landlords renting out ADUs.

Insurance Needs for ADU Rentals

Standard homeowners insurance often does not cover tenant-related damages or rental income loss. Homeowners renting out their ADU should consider:

• Landlord Insurance: Covers tenant-caused damage, liability claims, and loss of rental income.
• Liability Coverage: Protects against tenant lawsuits for injuries or unsafe living conditions.
• Loss of Rental Income: Provides coverage if the ADU becomes uninhabitable due to fire, storm, or other covered events.
• Renters Insurance: Encouraging tenants to carry their own insurance can reduce liability risks for the landlord.

Proper landlord insurance is essential to protect your ADU from tenant-related damages, liability claims, and potential income loss.

How to Avoid Legal Pitfalls Before Renting Your ADU

• Obtain Proper Permits: Ensure the ADU is legally permitted and compliant with city regulations.
• Draft a Strong Lease Agreement: When negotiating with potential tenants, clearly define rental terms, tenant responsibilities, and maintenance obligations.
• Comply with Rent Control & Eviction Laws: Adhere to AB 1482 rent caps and eviction requirements.
• Ensure Safety & Code Compliance: Install smoke detectors, carbon monoxide alarms, and secure locks.
• Stay Updated on Local Regulations: Rental laws change frequently; consult legal professionals or city resources for updates.

Before renting your ADU, ensure you follow local zoning laws, tenant rights, and rental regulations to avoid legal risks and maximize your investment.

What to Consider Before Renting Your ADU

Renting out an Accessory Dwelling Unit (ADU) in San Diego can be a lucrative investment, but careful financial planning and market research are essential to maximize your return on investment (ROI). From construction costs to rental demand, here’s what to consider before listing your ADU.

Before renting your ADU, evaluate costs, ROI, local regulations, and tenant expectations to ensure long-term success.

Building Costs

The cost of building an ADU in San Diego varies based on size, type, and finishes:

• Detached ADUs: $250,000–$430,000+ (higher due to separate foundation and utilities).
• Attached ADUs: $150,000–$350,000 (leverages existing structure for lower costs).
• Garage Conversions: $100,000–$250,000 (most affordable, but size is limited).

Homeowners should also budget for permits, design, and landscaping. Financing options include home equity loans, construction loans, and cash savings.

Ongoing Expenses

Beyond construction, recurring costs include:

• Property taxes: Typically 1% of the total project cost.
• Maintenance: Around 10% of annual rental income.
• Insurance: Landlord insurance is essential for liability and property protection.
• Vacancy costs: Potential income loss during tenant transitions.

Rental Income Potential

• Long-term rentals:
  • Smaller ADUs: $1,500–$2,500/month.
  • Larger ADUs (in prime areas like Carlsbad or Oceanside): $4,000–$4,500+/month.
• Short-term rentals (if permitted): Can generate $3,500–$5,000+ per month, but San Diego restricts short-term ADUs unless grandfathered in under pre-2017 rules.

Return on Investment (ROI)

ROI is calculated by dividing net annual rental income by total investment cost.

• Example: A $348,000 detached ADU rented at $3,500/month generates $34,320 annually after expenses, leading to a 9.86% ROI.
• Some ADUs pay for themselves in as little as five years, depending on rental pricing and location.

What ADUs Work Best for Renting?

ADUs vary, each offering different perks, challenges, and ideal renters. Picking the right ADU type that aligns with your goals and rental strategy will ensure you maximize your rental potential and build an ADU that meets your needs.

Here, we explore how different ADU construction types vary in cost and give a glimpse into budget considerations for each type.

Choosing the right ADU type—detached, attached, or garage conversion—can impact rental income and long-term investment value.

How much do ADUs rent for in San Diego?

The diversity of ADU types offers a range of investment opportunities, each with its unique appeal and financial prospects. From detached units that promise privacy and space to cozy Junior ADUs perfect for single tenants, the financial landscape varies widely. The following table illustrates the potential earnings from different ADU configurations, showcasing average construction costs, annual upkeep, and expected rental revenue. These figures highlight the versatility and profitability of ADUs in a dynamic market like San Diego, providing a clearer picture of what each ADU type can yield in terms of rental income. Remember, the actual return on your investment will be influenced by several factors, including the ADU’s design, location, and how well it meets current market demands.

Understanding Market Demand for Your ADU

Knowing your local rental market helps you set the right price, attract quality tenants, and maximize occupancy. Researching trends ensures your ADU stays competitive and profitable.

Understanding local market demand helps you price your ADU strategically, ensuring steady occupancy and rental profitability.

Local Demand for ADUs

San Diego’s housing shortage has increased demand for affordable rental units. ADUs attract:

• Young professionals seeking affordable alternatives to apartments.
• Families looking for multi-generational housing.
• Remote workers and students wanting private living spaces.

Pricing Based on Location

Rental rates vary by neighborhood:

• Coastal areas (Pacific Beach, La Jolla, Mission Beach): Premium pricing due to location.
• Urban centers (Downtown, Little Italy, East Village): High demand from professionals.
• Suburban neighborhoods (North Park, University City, Carmel Valley): Consistent rental interest from families.

Seasonal Demand Trends

• Winter (Dec–Feb): Low vacancies due to stable renters and business professionals.
• Spring (Mar–May): Increased demand from military relocations and new job hires.
• Summer (Jun–Aug): Higher turnover, best for marketing new listings.
• Fall (Sep–Nov): Slower market, potential rent adjustments to attract tenants.

Competitive Pricing Strategies

• Use rental comps from Zillow, Apartments.com, or Craigslist to set competitive rates.
• Adjust pricing seasonally to optimize occupancy rates.
• Offer move-in incentives (reduced first-month rent, flexible lease terms) to fill vacancies faster.

Potential Impact on Property Value

Adding an Accessory Dwelling Unit (ADU) can significantly boost home resale value while providing steady rental income. In high-demand housing markets like San Diego, properties with ADUs are increasingly sought after, making them a valuable long-term investment.

ADUs can increase home resale value by 20-30%, making them a smart long-term investment for homeowners.

Added Livable Space

Since home value is largely based on square footage, an ADU increases total usable living space, making the property more desirable to buyers. Homes with detached ADUs, guest houses, or in-law suites often sell for 20-30% more than similar properties without them.

Rental Income Potential

Homes with ADUs appeal to investors and homeowners alike because they offer passive income opportunities. Buyers are willing to pay a premium for properties that can generate rental income, offsetting mortgage costs.

Market Demand

With San Diego’s ongoing housing shortage, homes with ADUs are in high demand. Whether used for long-term rentals, multi-generational living, or future personal use, ADUs provide flexibility that increases property value.

Understanding Taxes Related to ADU Rentals

Renting out an Accessory Dwelling Unit (ADU) impacts property taxes and provides valuable tax deductions that can offset costs and improve rental profitability.

ADU owners can offset increased property taxes through deductions like depreciation, mortgage interest, and maintenance expenses.

Increased Assessed Value

• Blended Assessment: In California, ADUs trigger a blended assessment, meaning only the ADU’s value is reassessed, not the entire property. This helps preserve the original tax base of the primary home.
• Property Tax Increase: Expect an annual property tax increase of 1-1.5% based on the ADU’s construction cost. For example, a $300,000 ADU may add $3,000–$4,500 annually in property taxes.

Tax Deductions

Homeowners renting an ADU can deduct:

• Mortgage Interest on loans used for ADU construction or renovations.
• Depreciation spread over 27.5 years, lowering taxable income annually.
• Maintenance & Repairs, fully deductible when incurred.
• Utilities & Insurance, if separately metered or proportionally allocated based on usage.

Keeping detailed financial records ensures homeowners maximize deductions while staying compliant with IRS and state tax regulations.

Optimizing Your ADU for Rental Purposes

To attract high-quality tenants and maximize rental income, ADU upgrades and amenities should focus on space efficiency, durability, and modern features. Well-planned renovations can increase tenant satisfaction, reduce maintenance costs, and justify higher rent.

Maximize rental appeal by incorporating smart layouts, high-quality materials, and in-demand amenities like in-unit laundry and modern kitchens.

Renovations & Upgrades

• Open floor plans create a spacious feel in small units.
• Built-in storage (shelves, cabinets) maximizes space efficiency.
• Separate entrances enhance tenant privacy and appeal.
• Luxury vinyl plank (LVP) flooring is stylish, scratch-resistant, and easy to clean.
• Quartz countertops are long-lasting and low-maintenance.
• Tiled showers & modern fixtures add a premium touch without high costs.

Essential Amenities

• In-unit laundry is a top tenant priority.
• Fast WiFi & smart home features (keyless entry, thermostats) attract tech-savvy renters.
• Private outdoor spaces (patios, balconies) enhance livability.
• Energy-efficient appliances & solar panels reduce tenant utility costs.
• Secure locks & exterior lighting improve tenant safety.

Strategies for Maximizing Rental Income

Effectively pricing and marketing your Accessory Dwelling Unit (ADU) is key to attracting quality tenants and maximizing rental income.

Setting competitive rent and leveraging strong marketing strategies will ensure your ADU attracts high-quality tenants and maximizes income.

Pricing Strategies

• Research Comparable Rentals: Use Zillow, Rentometer, and Craigslist to compare ADUs in your area and set a competitive rate.
• Factor in Location & Amenities: Proximity to public transit, schools, and parks increases rental value. Features like in-unit laundry, parking, and energy-efficient appliances justify higher rent.
• Adjust for Seasonal Trends: Demand peaks in winter and spring, allowing for higher pricing. In slower seasons, offer move-in specials to fill vacancies.
• Offer Flexible Lease Terms: Month-to-month leases attract students, military personnel, and traveling professionals.
• Monitor Market Conditions: Adjust pricing based on demand and feedback from potential tenants.

Marketing Your ADU

• Create a Strong Listing: Highlight private entrances, smart home features, and nearby amenities.
• Use Professional Photography: High-quality photos and virtual tours increase engagement.
• Leverage Online Platforms: List on Zillow, Apartments.com, Craigslist, and Facebook Marketplace for maximum exposure.
• Utilize Social Media: Promote your ADU with Instagram and Facebook ads targeting local renters.
• Offer Incentives: Reduced first-month rent or waived application fees can attract tenants faster.

Practical Tips for Rental Success

To maximize the success of your ADU rental, focus on tenant satisfaction, legal compliance, and efficient management. Here’s how to create a profitable and hassle-free rental experience.

Successful ADU rentals require competitive pricing, proactive maintenance, and quality tenant screening to ensure long-term profitability.

Adapt to Market Conditions

• Regularly adjust rent based on local demand to stay competitive.
• Offer seasonal incentives (e.g., move-in specials) to fill vacancies faster.
• Monitor rental trends using Zillow, Craigslist, and Rentometer.

Streamline Tenant Management

• Automate rent collection through online payment systems.
• Set up a tenant portal for maintenance requests and lease communication.
• Use thorough screening criteria to select responsible tenants.

Enhance the Rental Experience

• Offer low-maintenance landscaping and energy-efficient features to reduce tenant costs.
• Provide smart home upgrades (keyless entry, WiFi thermostats) for added convenience.
• Maintain open communication to address tenant concerns promptly.

Reduce Long-Term Maintenance Costs

• Conduct routine inspections to catch repairs early.
• Use durable, high-quality materials for flooring, countertops, and fixtures.
• Establish relationships with reliable contractors for quick repairs.

Want to build an ADU for rental income? We can help

Renting your Accessory Dwelling Unit (ADU) is a powerful way to generate steady income, increase property value, and maximize your investment—but success requires the right strategy. From design and permitting to construction and rental optimization, Better Place Design & Build is here to guide you through every step of the process.

With our expert ADU solutions, you’ll have a well-designed, legally compliant, and highly marketable rental unit that attracts top-tier tenants. Our team ensures your ADU meets local regulations, features high-demand amenities, and maximizes ROI—so you can start earning confidently.

Turn your ADU into a profitable rental with Better Place Design & Build—let’s make it happen today.