Retirement requires you to renegotiate your lifestyle and budget as incomes tend to decline. For some retirees, this means downsizing and even moving out of the area to somewhere with a lower cost of living.
However, some retirees have figured out a rental hack that not only provides them with additional income in retirement, but also offers them benefits such as senior living, the tax advantages of continued home ownership, and more.
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Real estate experts Sean Phillips, California-based founder of Otto ADU, and Dawn David, a New York-based licensed real estate agent with Corcoran, explained the benefits of building or converting an accessory dwelling unit (ADU) on your retirement property.
Increase the value of an existing property by building
Phillips has found that people often choose to upgrade their existing property with an ADU because mortgage rates are high and people don’t want to move or buy unless they’ve secured a really good rate.
In other cases, people find that after their children move out, they have a house that is too big for their retirement. “They have the choice to move — maybe to a retirement community or to a smaller house. But then they would lose the interest rate, lose all their accumulated equity and then they would have to move to another area,” Phillips said.
Building an ADU then becomes an attractive option because it gives retirees two housing options on the same property and the ability to rent out the other property to pay their bills.
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Converting a garage or shed
Another option (if feasible due to building codes and permit requirements) is to convert an existing garage or shed into an ADU.
David said: “I have noticed that more and more homeowners are taking the opportunity to extend their home or make other rooms that may have been intended for storage into habitable spaces so that they can either live there or increase their income.”
Finance a construction with a HELOC
Those who prefer to build an ADU rather than remodel a space often use a Home Equity Line of Credit (HELOC), Phillips said, which allows homeowners to tap into the equity in their existing home or property.
“This way, you make the payments as the construction progresses and only start paying interest when you withdraw the money,” Phillips said.
He said there are some companies that will factor in the future value of the ADU into the value of your home and sometimes even the future rental income potential when determining the loan amount. “So this is for people who may not have as much equity,” he said.
In addition, you could also refinance the property at a lower interest rate if interest rates fall in the future.
Look for state, city and county incentives
Some cities, counties and even states may also offer incentives or assistance programs to make it easier to build an ADU, especially in areas with low rental availability. Check out such options before deciding how to finance one.
Design them to age in place
In addition to the potential rental income, many retirees design the ADU as their primary residence to live in as they age. They can then rent out their primary residence. “The cool thing about this is that you can plan for a lot of these aging-in-place features from the beginning,” Phillips said.
He talked about the additions they have made for seniors, such as threshold-free spaces with no floor thresholds and curbless areas where you can roll in a wheelchair or walker and use the area without having to climb the stairs. They also added wider doorways, roll-in showers and cork flooring that feels softer underfoot.
Rent to a caregiver
Another way to save money without necessarily generating rental income from an ADU is to use it to house a caregiver, Phillips said. If that can prevent someone from moving into an assisted living facility, it can be a huge financial savings, along with the emotional and psychological benefits of remaining in one’s own home.
If you are struggling to make ends meet
You may also find yourself with limited income in retirement and still have a mortgage that you may struggle to pay off. This is one case where an ADU could provide additional income to help cover those costs, David said.
Or more generally: Given the higher cost of living, simply having an alternative source of income can make a huge difference, she stressed.
“Many seniors I’ve spoken to are just struggling to make ends meet because of rising costs. I mean, utilities have gone up 30%, some have gone up 40%, everything is getting more expensive,” David said. “These are people on a fixed income and most of them don’t want to move into assisted living facilities, which already cost a fortune, or even to live with a family member – they want to stay in their own homes.”
If you do not want to maintain a property
When you reach retirement age, maintaining your property may be more work than you’re willing to do, David says.
“A good candidate is someone who is having trouble maintaining the property and just needs that extra income but wants to stay at home,” David said.
Maximize your income by using the smaller space
While some people rent out their ADUs for income, David emphasizes, “I think it’s nice when the homeowners live in them themselves because they can maximize their income by renting out the larger space.”
In any case, an ADU offers you options.
Don’t rush into anything
David also cautioned that this process shouldn’t be rushed, so it might be a better idea to build an ADU before you retire or need the extra income. “It’s better to take the time to make sure you’ve got all the details right, because sometimes once people move in, you can’t get them out and then they become legal renters.”
Consider these considerations
While an ADU is a great idea for many reasons, David clarified, “It’s not as simple as putting on a coat of paint. There are a lot of things you have to do to comply with city codes, whether it’s cooking gas, ceiling height, making sure bedrooms have windows and so many other things.”
However, if you can afford to build or remodel an ADU, it can greatly increase your financial and physical comfort in retirement.
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This article originally appeared on GOBankingRates.com: This rental hack could provide extra income in retirement
