Portland’s ADU Surge

Peggy, let’s start with the fundamentals of what an ADU actually is. How would you define an ADU to somebody who is curious?

First, I’d start with what it means. An ADU is an Accessory Dwelling Unit. The City of Portland is very pro people building ADUs on their property and/or turning spaces in a large home into an ADU. Doing so increases the tax base, not only for that single piece of real estate, but it increases the population of the neighborhood so there’s higher density. The City of Portland is pro high density, so that the infrastructure can be improved and benefit a higher number of people versus, for example, the extreme which would be all houses on really large lots and sprawl. The City of Portland is against sprawl, and they like to see high density. The ADU is a result of that focus for the city.

What is the difference between an ADU and a guesthouse or mother-in-law quarter? Are they attached to your home? Are they detached?

An ADU means they’ve actually gone through a permitting process to make an Accessory Dwelling Unit whereas a mother-in-law apartment doesn’t have to be permitted. You can just use your basement or whatever. You can’t legally, technically rent that, but you can have family stay in it. An ADU you can rent, it’s permitted, and it’s a legit use of space. And it also increases the salability, for example, of a property that has an ADU because it’s a permitted, legal dwelling unit.

You mentioned a little bit about the appeal of an ADU. Let’s explore that: why would someone want to put an ADU on their property? And what different types of uses have you seen for an ADU?

You wouldn’t want to put an ADU on your property if you didn’t want to rent it out. There’d be no reason to go through the permitting expense specifically to create an ADU unless you wanted to have an income-producing entity on your property. And it doesn’t have to be detached; it can be detached or it can be attached, but there’s specific code for an ADU. And you can rent it, so most people that do an ADU want to rent it out and have an income producing factor to their home.

Are there zoning laws to keep in mind? Does your lot’s square footage or what you already have on your lot matter? What do we have to keep in mind if we’re wanting to explore this?

There are factors. The city will pretty much let anybody do an ADU, but they won’t let the size of the ADU be larger than a certain percentage of the size of their home. So there are specific code restrictions which you need to comply with to get a permitted ADU. For example, if your house is 2,000 square feet, your ADU can’t be 2,000 square feet.

What about tiny homes, which are experiencing a similar trend in Portland right now?

The difference between a tiny home and an ADU is that tiny homes are not permanent and there are no codes in Portland to control tiny homes. None. There are very organized codes to control ADUs. Tiny homes can’t be taxed; ADUs are taxed. Tiny homes are legal anywhere unless a neighbor complains. If a neighbor complains then the city deals with the complaint based on whatever the complaint’s about, if it’s relevant. But there are no codes at this point in Portland controlling what you do with a tiny home.

Do you define a tiny home as being on a mobile foundation?

Has to be. Yes.

If I sell my own home, would an ADU on my lot increase the value of my property enough to recoup the cost of construction? What would the investment return scenario look like?

That’s an interesting question. I’m not going to say that it necessarily gives you a return as to what it costs you, but it’s giving you an income-producing entity, so the two combined make it a really, really good investment. Whatever it costs you, let’s say you completely financed building an ADU, the income monthly from the rent is probably going to recoup, in a period of 15 years or less, 100% what it costs you to build it. So the tenant that you have in there will pay for your ADU.

When you’ve sold properties that had ADUs, did they tend to appraise higher because of the ADU?

It’s based on square footage, so usually the ADU is given the same value per square foot as the home if the finishes are somewhat similar. If the finishes are lower quality, then it’s going to be a lower price per square foot than the home.

We currently have a home listed in Mt. Tabor that has an ADU, and I’m a little bit worried about the financing on it. What I’m hoping the bank will do is just simply attribute a relevant price per square foot to the ADU as to the house because it’s a similar finish. And that shouldn’t be a problem. I’ve not yet had one that didn’t appraise, but it’s always a concern, because it’s not typical for a transaction. Most sales don’t have an ADU and some banks don’t like anything out of the norm.

So as a cash buyer, appraisal is probably not a huge deal. If you are getting any sort of financing, that’s something to consider in the process: if there are not properties around that have ADUs, it might make it more difficult to find true value of the property.

Right.

What are the downsides of putting an ADU on your property? Have you ever seen it return negative? What would be the wrong reasons for doing an ADU? Have you seen it actually go in a negative direction where it wasn’t the right decision to make?

I haven’t really seen that, but people wouldn’t do an ADU if they were so private that they didn’t want to have some other person or people living in their space. If you’re really private, you wouldn’t do that.