A growing number of homeowners in Los Angeles are exploring Accessory Dwelling Units (ADUs) as a way to supplement their income. However, the process of adding an ADU can be more complex and expensive than typical home renovations. Even with the help of professional contractors, architects, or consultants, homeowners are faced with a series of decisions related to legal, financial, and design aspects—all of which come at a cost. Given that ADUs are a relatively new and unique segment in the housing market, the financial support system for homeowners looking to build is still developing. In this article, we shed light on several pilot ADU programs in Los Angeles that are designed to encourage homeowners to build affordable ADUs.
Addressing the Housing Crisis in California
California is grappling with a severe housing crisis. Home values and rents in the state are among the most expensive in the nation, leading to one of the highest rates of homelessness. In 2022, over 65,000 Angelenos were experiencing homelessness, rising to over 71,000 in 2023. The median price of a house in Los Angeles is about $920,000, and in San Francisco, it’s $1.5 million. This has resulted in nearly 60% of renter households in Los Angeles County—over 1 million households—being cost-burdened, meaning they spend more than 30% of their income on rent.
This crisis is a primary motivator for policymakers to create ADU programs that encourage homeowners to build affordable ADUs. These units can be rented to low and middle-income individuals and families (generally defined as those making less than 80% of area median income), providing a solution to the housing shortage while also offering homeowners an additional source of income.
What are Income-Restricted ADUs
Income-Restricted ADUs are a specific type of Accessory Dwelling Unit (ADU) that are locally restricted for occupancy by households whose income falls within a certain range and homeowners will need to set ADU rent levels within designated ranges. These units are generally offered at a below-market rate, making them an affordable housing option for low-income residents.
But making newly constructed ADUs affordable to low- or moderate-income tenants runs into a basic math problem. Homeowners typically cover construction costs of market-rate ADUs through loans, repaid by rental income. However, the lower rents from income-restricted ADUs may not cover operating costs, requiring subsidies to make their development viable.
Why Build Affordable ADUs?
As a homeowner, you might be wondering, “Why should I build an affordable ADU? What’s in it for me?” Let’s delve into the reasons and benefits.
Financial Incentives
The total cost of building a new ADU in California varies widely, which. Building an ADU involves costs, which can range from $100,000 to $400,000 depending on the size, design, and location. The pre-development phase—including architectural design, structural engineering services, and obtaining required permits from local governments—accounts for roughly 10% to 15% of total costs. Hard costs—site preparation, construction materials, labor, and plumbing, electrical, and mechanical systems—account for the largest costs.
Mortgage payments represent a substantial portion of overall operating costs. CalHFA grants and similar upfront reductions in development costs bring down overall monthly costs considerably by reducing the loan amount needed (Scenario 2). Interest rate subsidies (Scenario 3) also help, but not as much as upfront grants. Combining both an upfront grant and lower interest rate (Scenario 4) lowers monthly operating costs by nearly $800 compared to completely market rate financing. For broader context, Zillow reports the median rent in Los Angeles across all property types was $2,800 as of February 2024—suggesting that even newly built market rate ADUs offer cost savings for renter households.
Whether ADU rents are “affordable” depends on the intersection between rent levels and household income. To assess whether new ADUs could be within the means of low- and moderate-income households, Figure 2 estimates the relationship between what renter households at various income levels can pay toward their housing costs (30% of monthly income) and ADU operating costs from Figure 1.
However, various incentives and subsidies can help offset these costs. For instance, local governments offer low-cost loans or grants for upfront development, and federal housing vouchers are provided to tenants in affordable ADUs. California offers grants of up to $40,000 for pre-development costs through the California Housing Finance Agency (CalHFA). To qualify, property owners’ household income must be less than 80% of area median income (just under $85,000 in Los Angeles County). These financial aids can significantly reduce the burden of the initial investment.
Steady Source of Income
Once built, an ADU can serve as a steady source of rental income. While the rent for income-restricted ADUs is lower than the market rate, the operating subsidies ensure that you, as a homeowner, can cover the operating costs and still make a profit.
Contribution to the Community
By building an affordable ADU, you’re not just creating an income source for yourself, but also contributing to the solution for the housing crisis in your community. You’re providing a home for low-income individuals and families, making your neighborhood a more inclusive place.
To assess whether new ADUs could be within the means of low- and moderate-income households, Figure 2 estimates the relationship between what renter households at various income levels can pay toward their housing costs (30% of monthly income) and ADU operating costs from Figure 1.
For homeowners who are willing to set moderate rents, they may require subsidies to cover the costs of building and maintaining an income-restricted ADU.
The following programs are designed to incentivize homeowners to contribute to the affordable housing stock. By participating in these programs, homeowners not only gain financially but also play a crucial role in addressing the housing shortage, making Southern California a more inclusive region for all its residents.
How Southern California Localities are Incentivizing Affordable ADUs
Let’s break down the financial framework of several pilot programs across the region.
- City of Los Angeles ADU Accelerator Program
- Los Angeles County Second Dwelling Unit Pilot Program
- Pasadena Second Unit ADU Program
- West Hollywood Affordable ADU Pilot Program
These programs, designed by four local governments, offer different upfront subsidies but similar operating subsidies. They also require varying durations of commitment from homeowners.
Los Angeles County, Pasadena, and West Hollywood have programs that offer low-cost loans or grants for upfront development, incentivizing homeowners to create income-restricted ADUs. These loans have very generous terms: interest rates well below market rates and deferred loan repayment. This should attract homeowners to participate while lowering the monthly rent needed to cover operating costs.
The programs in Pasadena and West Hollywood were designed as revolving loan funds, aiming to have homeowners pay off construction loans through refinancing after three years]. Los Angeles County’s program offers a forgivable no-interest loan—essentially a grant, as long as homeowners remain compliant.
The City of Los Angeles’ ADU Accelerator Program takes a different approach: it encourages owners of existing ADUs to rent to low-income tenants in exchange for guaranteed rent payments covered by the city, plus assistance in finding and screening tenants.
These programs are designed to make it easier for you, as a homeowner, to start earning rental income while contributing to the affordable housing stock in Southern California.
As a homeowner in Los Angeles, it’s important to understand that all four programs acknowledge the necessity for continuous subsidies. These subsidies bridge the gap between what low-income renters can afford and the operating costs of ADUs.
The new construction programs in Los Angeles County, Pasadena, and West Hollywood offer federal housing vouchers to tenants in affordable ADUs. On the other hand, the city of Los Angeles uses philanthropic funds to supplement rent payments. In this setup, tenants pay 30% of their income, and the city covers the rest up to a certain limit.
What’s great about these programs is that they reduce the workload for you as an ADU owner. City agencies or contractors handle the task of finding and screening eligible tenants, as well as the annual income certifications required for federal voucher recipients.
So far, these programs have led to the construction of fewer than 10 new affordable ADUs across Los Angeles County, Pasadena, and West Hollywood. They also support about 25 low-income renter households in existing ADUs in the city of Los Angeles.
These programs were initially designed as small-scale pilots to test the feasibility of the concept before committing to long-term funding. As we look to the future, we’ll be sharing updates regarding the status of these programs to keep you in loop. Subscribe to our mailing for more updates on this front.
The Future of Affordable ADUs
Like other forms of affordable housing, income-restricted ADUs will require ongoing subsidies. Policymakers across Los Angeles and other California communities are actively seeking new strategies to address the state’s persistent housing shortage, particularly for low-income renters. Over the past few years, new state laws have led to an increase in ADU production, providing homeowners with an opportunity to expand their living space or generate additional income.
Financial models suggest that newly built ADUs can offer relatively affordable rental housing to middle-income renters in Los Angeles compared to other types of rental housing in the region. However, due to high construction costs, making these ADUs affordable to low- and moderate-income households will require significant subsidies for both upfront development and ongoing operations.
Local governments across the Los Angeles metro area are experimenting with various pilot programs to encourage affordable ADU development. These initiatives provide valuable insights into the effectiveness of different types of subsidies. Future research will examine market and policy factors that support or hinder affordable ADU production, and will consider how ADUs fit into the larger ecosystem of affordable housing in the region.
As a homeowner in Los Angeles, this is an exciting time. Organizations like the Casita Coalition and others are advocating for middle housing and more support for homeowners looking to build ADUs. We at Yifu Design Studio fully support these initiatives. Our architectural services are built around creating affordable family homes. We believe in the potential of ADUs to not only provide a solution to the housing crisis but also to offer homeowners a viable way to generate additional income.
So, if you’re considering building an ADU, remember that you’re not alone. There’s a whole community of advocates, professionals, and fellow homeowners who are here to support you.
Get a Free Consultation with YDS Architects
We understand that the idea of building an ADU can be both exciting and a bit daunting. Here at Yifu Design Studio, we’re passionate about creating homes that are not only beautiful and minimalist, but also affordable. We’re here to guide you through every step of the ADU planning process, and we even offer free architect consultations.
We’re also advocates for you, helping you navigate the permits and programs that can make your project more cost-effective. So, if you’re considering this journey, schedule a free discovery call with us. No commitment needed. Let’s explore how we can bring your vision to life, together. After all, it’s not just about building ADUs, it’s about building homes.
Appendix: More information about affordable ADU pilot programs
City of Los Angeles ADU Accelerator Program
If you’re a homeowner in Los Angeles considering an ADU, you might be interested in the City of Los Angeles ADU Accelerator Program. This initiative was created by the city’s Housing and Community Investment Department in collaboration with the LA Bloomberg Innovation Team. The goal? To increase affordable rental housing for older, low-income residents.
In 2018, the city received $1 million in funding from Bloomberg Philanthropies. This funding was used to subsidize rents for tenants and cover program operating costs.
Here’s how it works: Homeowners with an existing, legally permitted ADU could apply to the city to be matched with a tenant. The city then guarantees the rent, provides free case management, and assists with tenant placement. The focus is on subsidizing rent in existing ADUs rather than paying for new ones, as it’s seen as more cost-effective.
The program is open to Los Angeles residents over age 61 who make 30% or less of the area median income. These residents can apply to be matched with a homeowner and commit to renting the ADU for five years. This provides homeowners with stable rental income and minimal turnover.
The program has seen minimal turnover of tenants or homeowners. Rents range from $1,369 for a studio to $2,735 for a three-bedroom. Tenants contribute 30% of their income toward rent, and the city pays the remainder using the philanthropic funding.
Although the program is not currently accepting applications, it may reopen in the future depending on funding and political will.
Los Angeles County Second Dwelling Unit Pilot Program
Launched by the Los Angeles County Development Authority (LACDA) in 2018, this program aimed to increase affordable rental housing. The county set aside funds for construction loans to homeowners who agreed to build ADUs for people who had experienced homelessness.
Here’s how it worked: Single-family property owners could apply for a forgivable loan of $75,000 from the county to construct an ADU. Additionally, homeowners could apply for a $50,000 grant from the city to preserve existing unpermitted ADUs. As a participating homeowner, you would also receive free project management to help navigate the development process, including design, permitting, and construction.
Once completed, these ADUs would be occupied by renters who had previously experienced homelessness. As a homeowner, you would commit to renting to a recently homeless tenant for 10 years.
The pilot program opened for applications in 2018. By 2021, one unit was completed and two others were still in progress. County supervisors passed a motion in 2022 to create a permanent program with similar financial incentives and outcomes. Stay connected with us for updates on Los Angeles County Second Dwelling Unit Pilot Program and other similar initiatives
Pasadena Second Unit ADU Program
This initiative was launched by the city’s Department of Housing in 2020 with the aim of increasing affordable rental housing, enhancing the quality and safety of existing unpermitted ADUs, and providing less affluent homeowners with an additional income source.
Here’s how it worked: Single-family property owners could apply for a three-year construction loan of up to $200,000 at a 1% simple interest rate, which is significantly lower than typical construction loan rates. If you owned an existing unpermitted ADU, you could apply for a $100,000 loan to bring your ADU up to code. Payments were deferred for the first three years, and these loans also carried a 1% simple interest rate over a 20-year term.
The program was designed as a revolving loan fund¹[1]. The idea was that once the ADU was completed, you as a property owner could refinance into a permanent loan and repay the city’s construction loan, freeing up funds for another project. As a participating homeowner, you would also receive free project management to help navigate the development process, including design, permitting, construction, and lease-up.
Once completed, these ADUs would be occupied by low-income renters who receive federal housing choice vouchers, selected from those already on Pasadena’s voucher wait list. This made it easier for you as a property owner to participate, as you wouldn’t have to search for renters or verify their income.
The pilot program opened for applications in 2020. By the end of the program, two new ADUs were created and two unpermitted ADUs were brought up to code. The program may reopen in spring 2024, and the city plans to increase the number of ADUs for the second round.
West Hollywood Affordable ADU Pilot Program
If you’re a homeowner in West Hollywood, you might be interested in the West Hollywood Affordable ADU Pilot Program. This initiative was launched by the city in 2022 with the aim of increasing affordable rental housing. The city set aside funds for construction loans to homeowners who agreed to build ADUs for low-income renters.
Here’s how it worked: Both single-family and multifamily property owners could apply for a three-year construction loan of up to $150,000 at a 1% simple interest rate, which is significantly lower than typical construction loan rates. Payments were deferred for the first three years.
The program was designed as a revolving loan fund1. The idea was that once the ADU was completed, you as a property owner could refinance into a permanent loan and repay the city’s construction loan, freeing up funds for another project. As a participating homeowner, you would also receive free project management to help navigate the development process, including design, permitting, construction, and lease-up.
Once completed, these ADUs would be occupied by low-income renters who receive federal housing choice vouchers, selected from those already on West Hollywood’s voucher wait list. This made it easier for you as a property owner to participate, as you wouldn’t have to search for renters or verify their income.
The pilot program opened for applications in 2022. By the end of the program, two units were under construction. Although the program is not currently accepting applications, the city council plans to discuss establishing the program on a long-term basis.
At Yifu Design Studio, we’re excited about the potential of programs like this and we’re here to help you navigate the ADU landscape. We encourage you to stay connected with us for updates on this and other similar initiatives. Together, we can explore how ADUs can benefit you and our community.
