ADU: Accessory Dwelling Unit

What is an ADU?

ADU stands for "accessory dwelling unit". An ADU is a smaller residential dwelling unit, commonly referred to as a "granny flat", "secondary suite", "accessory apartment", "in-law suite", "backyard cottage", or "casita", located on the same lot as a larger detached single-family home.

An ADU is self-contained, meaning it has its own kitchen, bathroom, sleeping area, and separate entrance, independent of the primary residence. This is what distinguishes an ADU from an ordinary spare room: it can function as a complete, standalone home.

Types of ADUs

ADUs generally fall into four categories based on how they relate to the primary home:

• Detached ADU (DADU): A freestanding structure separate from the main house, such as a backyard cottage or a standalone unit.
• Attached ADU: A unit that shares at least one wall with the primary home, such as an addition built onto the side or rear.
• Garage conversion: An existing garage converted into a self-contained living unit, often the most cost-effective path.
• Interior conversion: Existing interior space, such as a basement or attic, converted into a separate dwelling unit.

Why ADUs matter to real estate investors

ADUs are one of the most effective ways to add an income stream to a property without acquiring a second parcel. A single lot becomes a multi-income asset, which can improve cash flow, increase property value, and support multigenerational living. As housing affordability pressures have grown, many states and cities have passed laws making ADUs easier to build, fueling a steady rise in their popularity.

For investors, the added rental income an ADU produces can also strengthen financing. Because a DSCR loan qualifies a deal based on the property's rental income rather than the borrower's personal income, every legitimate income stream on the property helps. ADU rent can push a property's debt service coverage ratio higher, which can mean easier qualification and better terms.

Using ADU income to qualify for a loan

There is one critical requirement investors should understand: to count ADU rental income in a DSCR calculation, the appraiser generally must find at least one comparable sale and one comparable rental nearby that also has an ADU. Without those comparables, the ADU income is typically excluded, even if the unit is legal, permitted, and already rented. The unit must also be legal and permitted, often with a certificate of occupancy.

Recent guideline expansions now allow some programs to count income from up to two ADUs on a property with as many as three accessory units, capped at four total units including the primary. To understand exactly how ADU income is used to qualify, which markets have the strongest ADU comparables, and the specific conditions that apply, see our full guide: DSCR Loan for ADU.

Related concepts

• DSCR Loan for ADU
• DSCR loan
• SFR
• Duplex
• Rental property calculator
• DSCR loan calculator