# ADU Rental Income: What to Expect
An ADU can add $1,200 to $3,000 per month to your household income - that's $14,000 to $36,000 per year from space in your backyard you're not currently using. Most homeowners who build ADUs for rental income find it covers their mortgage payment, funds retirement savings, or helps pay for their kids' college. The income is real and consistent, and you don't need to be a landlord expert to make it work.
The question you're probably asking: "Will this actually pencil out for my situation?" Let's look at what homeowners are really experiencing.
## What ADUs Are Actually Earning
**Urban and suburban markets:**
A typical 500-700 sq ft ADU rents for $1,500-$2,200/month in most metro areas. That's competitive with small apartments, but you're offering something better - a private space with its own entrance, often a yard, in a residential neighborhood.
**Examples from real homeowners:**
- Portland: 600 sq ft one-bedroom ADU = $1,650/month
- Denver: 450 sq ft studio with full kitchen = $1,400/month
- Austin: 750 sq ft one-bedroom = $1,900/month
- Sacramento: 500 sq ft studio = $1,500/month
- Raleigh: 550 sq ft studio = $1,250/month
- Phoenix: 650 sq ft one-bedroom = $1,550/month
Even in smaller markets, homeowners report $1,000-$1,400/month for basic studio ADUs. Check rental listings in your area for "studio" or "small one-bedroom" - that's your ballpark.
## How Homeowners Make the Numbers Work
Most people building ADUs aren't paying cash. They're using home equity loans, refinancing, or construction loans - and the rental income covers the monthly payment plus expenses.
**Common scenario:**
- ADU build cost: $180,000
- Home equity loan: $180,000 at 7.5% for 15 years = $1,670/month
- Rental income: $1,800/month
- Actual expenses (insurance, maintenance, tax increase): ~$400/month
- Net: Break-even to slightly positive from month one
After the loan is paid off in 15 years, that full $1,800/month (minus expenses) becomes pure income. Meanwhile, you've added $100,000-$200,000 to your home's value.
Could you rent it for more and pocket the difference? Often yes - especially if you're in a higher-rent market or add desirable features like parking, washer/dryer, or modern finishes.
## Beyond Just Rental Income
Here's what homeowners tell us matters as much as the monthly check:
**Flexibility:** Start with long-term rental, switch to Airbnb later, move family in if plans change, or use it as a home office between tenants. You're not locked into one use forever.
**Home value:** ADUs typically add $100,000-$200,000 to property value - often more than they cost to build. You're not just generating income, you're building equity.
**Passive income that scales:** Unlike a second job, rental income doesn't require trading more time. And unlike stock dividends, you can walk outside and see what you own.
**Retirement security:** Rental income in retirement is worth more than the same amount saved in a 401k because it's consistent monthly cash flow, not a lump sum you're worried about depleting.
## Short-Term vs Long-Term Rental
**Long-term rental (12-month lease):**
More stable, less management, but locked into one rate. Most ADU owners go this route. Expected vacancy: 1-2 months per year between tenants.
**Typical long-term tenant:** Young professionals, grad students, small families, or people who moved to your city for work and want a quiet neighborhood over an apartment complex.
**Short-term rental (Airbnb/VRBO):**
Can earn 50-100% more in tourist-heavy or business travel areas, but check local regulations first - many cities restrict or ban short-term ADU rentals. You'll also spend 10-15 hours/month on management or pay 20-25% to a property manager.
**Reality check on short-term:** A beach town ADU might earn $4,000/month in summer and $800 in winter. Annual income often averages out closer to long-term rental rates once you factor in vacancy, cleaning fees, platform commissions, and additional wear and tear.
## What If You Don't Want to Be a Landlord?
Fair concern. Here are the options homeowners actually use:
**Property management:** Pay 8-10% of rent (~$140-220/month) and they handle everything - tenant screening, maintenance calls, rent collection. Many ADU owners do this and still net $1,200-$1,600/month.
**Long-term tenants:** One good tenant can stay for 3-5 years with minimal management. Many homeowners report checking in once a quarter and handling one maintenance issue per year.
**Family or friends:** Charge below market rate to someone you trust. Even $800-$1,000/month from a family member helps cover loan payments and expenses while keeping the unit occupied.
**House hack:** Some homeowners rent out their main house and live in the ADU, or vice versa. Creative option that can significantly increase total rental income.
## The Part Nobody Talks About
The first tenant is the hardest part - writing the lease, doing showings, setting up payments. After that? Most homeowners say it's surprisingly hands-off.
**What makes ADU rentals easier than traditional rentals:**
- Simple layouts with minimal maintenance
- Modern construction means fewer repair calls
- Tenants who want the "quiet backyard cottage" tend to be respectful
- You're on-site if something urgent happens
- Modern rent payment apps handle everything digitally
**Common tenant duration:** 2-4 years for long-term rentals. Once you find a good tenant, they often stay because ADUs offer privacy and value that apartments don't.
## Tax Considerations
**The income side:** Rental income is taxable, but you can deduct:
- Mortgage interest on the ADU loan
- Property tax (proportional to ADU square footage)
- Insurance, maintenance, and repairs
- Utilities if you pay them
- Property management fees
- Depreciation (spread over 27.5 years)
These deductions often offset 30-50% of your rental income for tax purposes. Many homeowners find their actual tax burden on ADU rental income is much lower than expected.
**Talk to an accountant** about whether your ADU qualifies as a rental property for depreciation - rules vary if you occasionally use it personally.
## What About Market Downturns?
Valid concern. Here's what happens:
Rental demand typically stays strong even when home prices dip because people who can't afford to buy still need housing. During the 2008 recession, rents in most markets stayed stable or dipped only 5-15%, while home values dropped 30-40%.
ADU rentals specifically tend to be resilient because:
- Lower rent than full houses attracts more demand
- People downsize from larger rentals during economic stress
- Your costs are fixed (loan payment doesn't change)
- You can adjust use (family, home office) if rental market truly tanks
## Start With What's Possible for You
Your rental income potential depends on your local market and what you can build on your property. The good news? You don't need to figure this out alone.
**Next steps:**
1. Check if your property qualifies for an ADU [property checker link]
2. Search rental listings in your area for "studio apartment" or "small 1-bedroom" to see actual market rates
3. Browse local ADU builders who can show you realistic build costs [builder directory link]
4. Do the simple math: monthly rental income minus loan payment minus $300-400 expenses
Most homeowners start exactly where you are - curious if the numbers work. The ones who take that next step to check their property and talk to builders? They're often surprised by how achievable this actually is.
The rental income isn't just theory - it's real money that real homeowners are collecting every month while building long-term wealth through property equity.