What Is an Accessory Dwelling Unit (ADU) and How Do You Insure It?
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An accessory dwelling unit (ADU) is a living structure located on the same grounds as your primary residence. It usually takes the form of a converted basement apartment, attic apartment or garage apartment and can provide an opportunity for generating rental income and increasing your property value. Just be sure to research zoning, regulations and costs if you plan to build an ADU.
Keep reading to see how much ADUs cost and how to insure them.
What Are the Benefits of an ADU?
Using or building an ADU can provide homeowners with some unique benefits, including:
- Additional income: An ADU can be used as rental housing, providing additional passive income for the property owner.
- Increased property value: Adding an ADU can increase the overall value of a property.
- Housing for family members: ADUs can provide a separate living space for elderly family members or adult children, allowing them to maintain their independence while remaining close to family.
- Flexible living options: ADUs can function as guest houses, home offices and rental properties.
- More sustainable: Accessory dwelling units can be built with sustainable features, such as energy-efficient appliances and insulation, which can reduce the environmental impact of the property.
- Reduced costs: Building an ADU can be an affordable alternative to building a separate single-family home.
Are There Any Drawbacks To Having an Accessory Dwelling Unit?
There are some potential drawbacks to having an accessory dwelling unit (ADU):
- Zoning and permitting: Depending on the location, obtaining the necessary permits to build an ADU may be difficult or expensive. Local zoning laws and building codes may also limit the size or type of ADU that can be built.
- Extra cost: While typically cheaper than building a single-family home, ADU costs for construction, materials and labor can add up.
- Property taxes: Adding an ADU to a property may increase the property taxes, which could be a financial burden for the property owner.
- Privacy: Having a separate living unit on the same property may affect the privacy of both those living in the primary residence.
- Parking: Parking may be limited and this could be a problem for both the property owner and the tenant.
- Maintenance: The property owner will be responsible for maintaining the ADU, which can be an added burden and expense.
- Insurance: The property owner will need to insure both the main residence and ADU, which will increase their homeowners insurance premium.
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Do Accessory Dwelling Units Have Any Requirements or Restrictions?
Each state will have its own restrictions and requirements for ADUs, usually specifying the size of the structure and where it’s located on the property. For instance, California has a 1,200-square-foot cap on the size of an accessory dwelling unit. New York residents are allowed a 1,500-square-foot structure. Texans can only build a 1,100-square-foot ADU.
How Much Does An ADU Cost?
Depending on the type of structure, building an ADU may range from $80,000 to $400,000. Actual costs will consider other factors, including its location and size.
It generally costs more to build a detached ADU than it is to convert a pre-existing space into something livable, such as a basement apartment. What’s more, it is likely cheaper to purchase a prefab structure and have it brought to your land than it is to build something from scratch. The table below shows a breakdown of prices between all three ADU types.
Note: The prices shown above are not absolute and will vary based on where you live.
Building an ADU is not going to cost the same amount of money in every state, as labor, material and permit costs will vary by location. Moreover, as it is with the price of insurance or purchasing a home, you will spend more in Hawaii, New York or California than you will in Mississippi, Kansas or Alabama.
The size of your ADU will dictate the amount of materials you will need to build your secondary unit. The larger the unit, the more materials you’ll need. This means you’ll be spending more money on your ADU.
What Type of Insurance Do You Need To Cover an ADU?
The type of ADU insurance you need will depend on whether it’s already constructed and its intended purpose.
Builders Risk Insurance
A builders risk insurance policy often covers both the building that is being constructed and the property utilized in its construction, such as the tools, supplies and materials. Builders risk insurance covers damage to property caused by fire, explosions, severe weather occurrences like lightning, hail, hurricanes, tornadoes, theft and vandalism.
Damage or theft to covered property caused by events that occur outside of the construction process is frequently included in builders risk coverage. The expenditures incurred as a result of building delays are known as soft costs and are covered by your builders risk policy. These can include lost business as a result of the project taking longer than expected, lost rental income and equipment rental costs. It may also cover additional interest costs if loan repayment is delayed alongside the construction process.
Your homeowners insurance can include multiple forms of coverage that can help protect your ADU from multiple events. This is perfect for ADUs used for family members, storage or a home office. Coverage may include:
- Dwelling coverage protects your home from risks covered in your policy (for example, fire, explosion and windstorm) that could harm the building itself, such as the roof and walls.
- Other structures coverage protects facilities that are not attached to your main house, such as sheds, gazebos, fences and detached garages. It accounts for 10% of the structural or dwelling coverage amount for your home.
- Personal liability insurance protects you from legal duty if someone is injured or property damage occurs at your home, such as if a guest is bitten by your pet or a tree on your property falling on your neighbor’s house siding.
- Personal property coverage protects your belongings if they are damaged, stolen or destroyed in a covered incident. It protects your furniture, gadgets, clothing and valuables — usually up to 70% of your home's dwelling limits. More valuable items can be covered by riders and endorsements.
- Loss of use coverage pays for your additional living expenses (ALE), such as meals and lodging if a covered event occurs up to your policy’s limits.
- Medical payments coverage is optional and pays for the medical bills of anyone hurt on your property, regardless of fault.
DP-1, DP-2 and DP-3 are the three types of landlord insurance from which you can select based on your requirements and financial situation. Each type of insurance has a corresponding degree of coverage, with DP-3 policies offering the highest level of coverage. Keep in mind this coverage is only necessary if you’re intending to rent out your ADU.
Home-Based Business Insurance
Home-based business insurance provides coverage for any inventory and equipment that is stored on your personal property. If you’re looking to run a business out of your ADU, getting home-based business insurance would be a wise decision as your homeowners plan may not cover your company assets. You can purchase this insurance as an endorsement on your homeowners policy.
How To Insure an ADU
The steps for insuring your ADU can shift slightly depending on its design and purpose. An attached ADU can be covered by your homeowners policy and you would need to contact your insurance provider and let them know and possibly adjust your limits. This is similar to a detached ADU. However, any space you have, whether it’s attached or not, will need a landlord policy if you’re renting it to a non-family member and charging rental income. Consider the following when you’re looking to insure your ADU:
- Establish the ADU purpose: Is the ADU used for storage, rental property or office space?
- Determine which policy you need: Depending on the ADU’s purpose, you can either increase limits on your existing homeowners policy, buy a home-based business endorsement or buy a landlord policy.
- Contact your insurance company: Your insurance provider can also recommend what policy you should purchase.
- Update your coverage limits or purchase a new policy: Your insurance company will update your premium after factoring in the ADU and coverage starts when you pay the new rate.
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