What You Should Know Before Buying a Home With an ADU

ADUs, accessory dwelling units, have become increasingly common in Los Angeles as homeowners look to add rental income or housing for family members. If you're buying a property with an existing ADU, here's what you need to understand before you make an offer.

Is it permitted?

This is the first and most important question. A legal ADU has permits, passed inspections, and is recognised by the city. An unpermitted ADU is just an unpermitted addition with all the risks that come with that.

Ask the seller for copies of the permits and final inspection signoff. If they can't produce them, assume it's unpermitted and proceed accordingly. That means either negotiating a significant discount, budgeting to permit it retroactively, or walking away.

What are the rental income prospects?

If part of your purchase decision is based on rental income from the ADU, do proper research on what it can realistically rent for. Don't rely on the seller's projections or what they're currently getting from an existing tenant.

Check comparable ADU rentals in the neighbourhood. Factor in vacancy periods, maintenance costs, and property management if you're not planning to manage it yourself. The income rarely covers as much of the mortgage as people expect going in.

Financing and insurance complications

Some lenders treat properties with ADUs differently. If the ADU is rented, it might affect your loan-to-value ratio or require a different loan product. If the ADU is unpermitted, some lenders won't finance the property at all.

Insurance can also be more complicated. You'll need landlord coverage if the ADU is rented, and you'll need to make sure the ADU itself is covered. Unpermitted units are often excluded from standard policies, which means if something goes wrong, you're paying out of pocket.

Utilities and ongoing costs

How are utilities handled? Does the ADU have its own meters, or is it sharing with the main house? If it's sharing, are you comfortable with a tenant's usage being on your bill?

ADUs also add to your overall property tax assessment. The additional square footage and rental income potential increase assessed value, which means higher property taxes. Factor that into your carrying costs before you fall in love with the income projections.

Tenant considerations

If the ADU is currently rented, all the same considerations from buying a home with tenants apply. You inherit the lease, you're responsible for the tenancy, and you can't reclaim the space without following proper legal processes.

If the ADU is vacant, think honestly about whether you want to be a landlord. Managing a rental, even a small one, requires time and a willingness to deal with maintenance requests, tenant issues, and occasional conflict. It's not passive income.

A legal, well-built ADU generally adds value and expands your buyer pool when you eventually sell. An unpermitted or poorly built one can do the opposite.

ADUs can be a genuine asset if they're done properly and fit your needs. But they add complexity to the purchase, the financing, and the ongoing ownership. Make sure you're getting proper disclosures, verify the permits, run realistic numbers on rental income, and go in knowing what you're taking on.

If you're looking at a property with an ADU and want to talk through whether it makes sense, get in touch.

Anj Catalano, The Agency  |  310.404.6955  |  hello@anjinla.com