The cost of housing in California is pretty astronomical. One way to ease the strain is to earn a side income by renting an ADU in your backyard or garage.
The kind of dough you can make from ADU rent is not inconsequential, and, while you do have to build the thing (no way around that), it’s a very safe bet that in time the rent you collect will offset the construction costs. In cities like Los Angeles, the average ADU rents for about $1,500 per month. In the Bay Area, the numbers can climb higher, crossing a rental yield of $3,000. The rental income varies according to area and the condition of your ADU, but with a little investment, your dreams of passive income are as close as your own backyard.
What is an ADU & Can You Build One in California?
An accessory dwelling unit (ADU) is a self-contained living space with kitchen, bathroom, bedroom, and living area. Think of it as an apartment but it exists on the same lot as your home. In California, you’re allowed to build detached units, attached units (built onto your main house), converted spaces (such as a garage or basement) or junior ADUs. Junior ADUs (JADUs) are just what they sound like—slightly smaller ADUs. They are classified as under 500 square feet, and are often built by converting part of the existing home.
The state of California allows for at least one ADU of 800 square feet and 16 feet in height on most properties zoned residential anywhere in the state. Different cities and counties have their own regulations for ADUs, and it is definitely worth familiarizing yourself with the rules in your local jurisdiction. But keep in mind that this state mandate overrides local laws. So, even if the local building code says something different, you’re still allowed to build an accessory dwelling unit of at least 800 square feet.
If you get any flak from your local housing authority, just give them Governor Newsom’s direct phone number and let them know he’ll be sure to get back to them right away.
In all seriousness, if you’re in California, now might be the best time to invest in an ADU structure to create additional living space or a passive income stream from an ADU rental. The beauty of ADUs is that there are plenty of options—you could build a freestanding structure or a simple garage conversion, depending on your budget and goals. You can extend a garage conversion by 150 square feet without a penalty, and garage conversions are free from parking and setback limits. (Setbacks refer to the minimum distance of the ADU from property lines, roads, and other structures. Setback limits serve to maintain privacy and safety standards.)
How Much Does It Cost to Build an ADU in 2025?
It’s worth keeping in mind that the most expensive part of an ADU is the construction itself. While you don’t have to pay for the land, you’re building a small house with all-inclusive components like a kitchen, bath, bedroom and living space. It’s more complex than just putting up four walls–your ADU rental needs all the essential systems (plumbing, electrical, and HVAC) to be considered code compliant, and all of these systems have a base cost that has to be paid regardless of the size of the ADU.
According to Angi.com, the cost of building an ADU ranges from $60k-$285k with most people spending less than $200k nationwide. Per square foot, the cost is typically around $150-$300, but can climb up to $600. Depending on where you live in California, the cost of building your ADU will vary based on local materials and labor costs, among other factors.
It’s important to note that construction expenses in certain areas have gone up recently. The construction material drives the cost in most cities. According to the California Construction Cost Index, building cost has increased by 31.62% since June 2021. That means a building project that used to cost $200,000 will now have a high price tag of $263,240.
You can split your estimated budget into three parts; approx. 45% for material, 40% for labor and the rest for building permits and design. General contractors can charge 10%-20% of the project value as they source materials, prepare plans and put together a team of subcontractors to work on your project.
Other options include buying a prefab ADU, which can help save on the cost. Prefab ADUs can help save on the cost. These are partially constructed kits that can be assembled on-site like modular homes. Choose durable and long-lasting materials if you’re planning to rent the ADU. If you are handy (or want to be), you can also try to tackle some parts of the project yourself.
When considering whether a backyard ADU is a good investment, you have to keep in mind that, in almost all cases, it’s a safe bet that ADU rent will offset the cost of construction.
How Much Does it Cost to Convert a Garage Into an ADU in California?
Converting a garage into an ADU is one of the most cost-effective ways to add a rental unit or guest space to your property. Since the structure is already there, you’re saving on major construction costs like framing and roofing.
Almost every home has a garage that can be turned into an ADU for rent, making this an easy go-to option for a simple, straightforward ADU.
At the same time, keep in mind that making a garage livable takes a lot of work. Even though you're starting with a shell, turning a garage into a legal home takes more than a coat of paint. An ADU has to have essential systems before it can be considered a different unit. You will be spending a big portion of time and money on HVAC, plumbing, and electrical systems, and an ADU for rent must have proper insulation to meet California’s energy efficiency standards.
On the low end, a garage conversion is achievable for $50,000–$60,000. You can budget for that amount if your garage is in great shape. However, for high-end finishes or extensive repairs (fixing an old foundation or upgrading utilities), you can expect to pay up to $160,000 or more.
How to Finance an ADU in California?
While it’s worth pointing out again that ADUs for rent are, in most cases, going to generate a passive income stream that will offset construction costs, if you can invest the money up front, you can safely expect your backyard ADU to pay for itself within a decade.
If you’re looking for financing to build an ADU, California is a great place to be. The state legislature has been passing a series of laws to incentivize new ADU construction since 2016 as a way to promote affordable housing opportunities statewide. In 2021, the California Housing Finance Agency (CalFHA) secured a budget of $100 million to begin issuing funds for affordable housing projects. These grants issued up to $40,000 to ADU builders for pre-development (site prep, architectural design, permits, soil tests, impact fees, property surveys, energy costs) and non-recurring closing costs. As of December 2023, the latest round of funding has been allocated, but stay tuned for more opportunities in the near future.
Other options for financing an ADU in California include:
HELOC
A Home Equity Line of Credit (HELOC) gives you a draw period of 5–10 years followed by a repayment period of 10–25 years. Choose this option if you have high equity and a high income—above the median for your county. The downside is HELOCs come with variable interest rates, which can get tricky at times. That’s why a:
Home Equity Loan
A home equity loan is a better and more suitable option if you have built enough equity in the house. You can check interest rates with your mortgage lender and see if it makes sense to obtain a loan at this stage. You can borrow from your equity and pay in the next 5–20 years depending on your terms.
Cash-Out Refinance
A cash-out refinance makes sense if you would like to opt for a low-interest mortgage overall. Depending on your personal situation, an improved credit score or income might qualify you for better rates. With a mortgage refinance, you can borrow 80%–90% of your home’s current value. A refinance could be an ideal option if your mortgage is paid and you’re building an ADU for rent as a source of additional income for retirement years.
FHA Renovation and Construction Loans
For FHA loans, you can now consider up to 75% of the income you make from your ADU rent when qualifying for a mortgage on a limited income. If you are buying a property with an already built ADU, this is definitely something worth keeping in mind.
Further, you can use 50% of the estimated rental income from your ADU to qualify for an FHA 203(k) (rehabilitation mortgage insurance program). Such renovation and construction loans might be offered by your mortgage provider. Consult a local mortgage officer, as ADU laws are inherently local.
How to Get a Building Permit for ADU Construction in California?
Most cities in California have options for standard-issue ADU floor layout plans that can really streamline and simplify the entire process. These ready-made (or pre-approved) plans come in different variations to suit different needs. If you’re looking for the quickest and simplest route to building an ADU, check with your city’s planning division to obtain these plans for designing studio, one-bedroom, and two-bedroom ADUs.
Whether you use a city-approved ADU plan, purchase another kind of prefab model, or design your own, you will need to submit the proposed ADU’s layout, material, and structural plan to your local planning division before beginning to build. If it complies with the city’s building code, your building permit will be issued. Routine inspections are carried out in different phases to ensure compliance and final approval of your new construction. After completing these steps, you will have a building permit and financing ready to convert your backyard into an ADU.
Consult the ADU Handbook
The California Department of Housing and Community Development (HCD) has published a booklet about the latest plans regarding ADUs. As of January 2025, it is current. You can read about the updated fee structure, building permits, laws, and recent flexibilities offered to combat the housing crisis in California. It’s a comprehensive guide for homeowners, builders, and city planners, and offers more than just the latest laws, regulations, and best practices for building ADUs in California. If you’re thinking you’re ready to get started on your journey to earning passive income through a backyard ADU, reading this guide is a great place to start to familiarize yourself with the wide world of ADUs in California.
Tenants all over California are searching for small units. List your ADU rental here—an exclusive ADU listing website that gives you exposure and qualified tenants. List today and start making passive ADU income today.
Additional Resources:
https://www.steadily.com/blog/adu-laws-regulations-san-diego
https://www.hcd.ca.gov/sites/default/files/docs/policy-and-research/ADUHandbookUpdate.pdf
https://maxablespace.com/10-things-to-know-before-starting-your-adu-in-2025/
https://www.greatbuildz.com/blog/new-adu-laws-in-california-for-2025/
https://www.nar.realtor/magazine/real-estate-news/study-adus-can-add-35-to-home-s-value
https://sfbayadu.com/blog/guide-to-californias-adu-grant-program.html
