There is nothing more exciting than renting out a legal accessory dwelling unit (ADU) to great tenants. You might even be able to charge a premium for it.
But before you get too far, know that there are risks associated with renting out an ADU. Make sure you do everything you can to mitigate them! Here are some ways to reduce the risks of renting out an ADU.
Adjust the rent accordingly
A lot of people who are looking for an ADU want one that will also serve as a primary residence. If you’re already renting out your main house, it might be difficult to charge enough in rent to cover all eventualities. Make sure you decide if this is likely to be something that could happen before going any further.
If you think there is a risk that the ADU tenants could decide to make your property their primary residence, ask for a higher amount of rent in exchange for the tenant taking out renter’s insurance. You’ll also need to perform an inspection on the house and check above and beyond any other inspections required by law. If you don’t feel qualified for this, making sure you know the code and have a good inspector will help.
If you’re worried that the ADU tenant could end up being a squatter or otherwise unauthorized resident in your main house, ask for an even higher amount of rent to compensate for that risk. If you think there is an even greater risk of this occurring, you should negotiate a higher rate. You’ll also need to perform an even more thorough inspection on the property and hire your own attorney to research local laws related to squatters.
If there is any way that you can reduce the risk of renting out an ADU, ask for it! Make sure you get something in return for that risk.
A lot of people are willing to take on a higher rate if they know it’s for an ADU that will not be their primary residence, and some might even pay more than you’d originally ask! Make sure you negotiate the best possible terms for yourself as the landlord. You need to make your rental property work for you, after all.
If you’re worried, investigate a lease option sale instead of renting out an ADU
A lease option is basically like selling your property to someone but it’s for a specified time period and price. The buyer will then pay you monthly installments until the end of that period, at which point they have the option to buy or not. This can be especially useful if you’re worried that an ADU tenant will become a squatter in your main house.
Write up a legally binding contract with all the terms
If you find someone interested in residential ADUs , make sure they sign a legally binding document stating exactly what is expected of them and what will happen if they fail to meet those expectations.
In a short-term rental agreement, it’s especially important to include information about what will happen if the tenants violate any local laws. The last thing you’ll want to deal with is law enforcement showing up because your ADU tenants are hosting a party or something along those lines. Include terms in the contract that indicate that they take full responsibility for everything their guests do and are liable for it if something happens.
If you’re renting out your property as a long-term rental, make sure the contract includes information about what will happen if one of them wants to move out and who is responsible for maintenance, upkeep, etc. You’ll also want to include information about what happens if you need to rent out your main house during a specified time period.
Make sure that they sign! Another option is to have them sign and notarize some sort of basic rental contract form just stating they will be renting the ADU for so many months/years at a certain rate, but it really depends on the situation. Make sure you know the local law on short-term rentals and that any contract you sign with your ADU tenant follows all those guidelines.
If you’re renting out a long-term rental, it’s important to consider what will happen if they need to move out early or something happens where they need to leave before the specified time. If you won’t be able to rent out your main house, consider a lease option instead. Make sure there is some sort of compensation for this!
Offer a bigger monthly payment or ask them to pay extra up front
If you’re worried about the risk of renting out an ADU, ask for a higher rate than usual as well as some other sort of compensation. You should create a list of the risks you foresee and ask them to compensate for each one individually. That way, they will be more inclined to compensate for these things in order to lessen their own risk!
In order to offset as much risk as possible, try asking your potential tenant for an extra month’s payment up front. You can include this in your initial offer and use it as a bargaining chip during negotiations!
Include information about what will happen if they want to move out early or before the specified period is over
If you’re worried that an ADU renter might decide to leave early, you need to make sure that there are appropriate stipulations in the contract. You’ll need to have some sort of plan as to how they will pay for the remainder of their stay and what time period they’ll be bound to once their lease is up, but this can be a big source of contention so don’t expect it to go smoothly! If you’re looking for other ways to make sure they’ll leave if they need to early, include information about what will happen if you might need to rent out your main house!
Include a stipulation about who is responsible for maintenance and upkeep of the property
It’s important that you’re able to offset some risk yourself in order to feel comfortable renting out an ADU. Make sure you include a stipulation about who is responsible for maintenance, upkeep, and other things like snow removal each season. This way you can feel better about listing an ADU to rent!
If they’re renting your main house, make sure that there is a division of labor as far as who picks up slack in case one person isn’t available to do a certain thing. It will help you feel more comfortable in the short term if they must make sure someone is available for certain things!
Make sure that there are provisions about what happens when your main house needs to be rented out during an important time period at your ADU
If you want to rent out your property as a long-term rental, it’s important to consider what will happen if you need to rent your main house out during a specific time period. Make sure you come up with a plan as to how this will work and what timing the tenant has in order to move back into their ADU!
So many people think about renting out an ADU, but they aren’t sure how to offset the risks. Hopefully this has helped you think of some ways that you can reduce your risk and feel more comfortable renting out a secondary unit!