ADU Rental Units - Key Financial Metrics

Accessory Dwelling Units are extremely valuable because of the flexibility and convenience they provide to property owners, who can use them as rental units, living spaces for relatives, private suites for guests, or even as private work-from-home spaces.  

However, building an ADU is a significant investment.  Property owners should consider the potential return on investment for a rental ADU, even if they choose to use the ADU for another purpose.

Rental Property Metrics

The two most important financial metrics are (1) Net Operating Income and (2) Cashflow.  Net Operating Income, or NOI, is the rental revenue minus operating expenses whereas Cashflow is the Net Operating Income minus loan payments.

Sample ADU Rental Calculations

For this example, we will use a 2-bedroom, 2-bathroom detached backyard ADU located in Jamaica, Queens with the following estimated financials.

Rental Income: $3,557/month*

*Source: M.N.S. Real Estate

Insurance: $150/month

Water/Sewer: $60/month

Property Taxes: $150/month

Maintenance: $50/month

Total Expenses: $410/month

Net Operating Income: $3,147/month or $37,764 annually

Cashflow

To get from Net Operating Income to Cashflow, we must estimate financing costs.  Let’s assume the property owner uses a Home Equity Line of Credit (HELOC) with an 8.25% annual interest rate, interest-only payments for the first ten years and a total ADU project cost of $275,000.

ADU Project Cost: $275,000

Amount Paid Out of Pocket: $55,000

Loan Amount: $220,000

Monthly Interest Payment: $1,512.50

Cashflow (Net Operating Income minus Loan Payments): 

$1,634.50/month or $19,614 annually

Interpreting the Results

The Net Operating Income and Cashflow figures for the example above are very strong and suggest that ADUs in NYC are excellent investments.  When factoring in annual rental appreciation, ADU owners will be able to pay off their HELOCs or Home Equity Loans in less than 10 years while also boosting their properties’ resale values.  We always recommend property owners perform their own research when evaluating estimated ADU rental income.

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