Tiny homes = huge opportunity?

The problem: America needs more homes, at lower prices. The fix? Make them waaaay smaller and plunk them down in your own backyard.

Real estate investor Paul Dashevsky has been putting this simple plan into action since 2020, when California eased restrictions around adding accessory dwelling units (ADUs) to properties with a primary residence. Just last year, he finished his latest project: a 750-square-foot two-bedroom, one-bath domicile on a 9,500-square-foot lot where he was already renting out a 1,100-square-foot house.

“Since I already owned the land, I felt that it was a good investment to add an ADU on the same property, which I could rent out,” Dashevsky points out. “It’s certainly much cheaper than buying another home.”

The ADU cost $250,000 to build and is now occupied by a family of three paying $2,700 per month, amounting to $32,400 per year in rental income. To maintain privacy between his tenants, Dashevsky fenced off separate yards for each unit and also lowered the rent for the original tenants to reflect that they no longer have the entire property to themselves. So far, this arrangement has worked out great.

“I have several rental properties with both a main house and an ADU we built, and we’ve had zero issues between neighbors. Our tenants love them,” Dashevsky says. “ADUs attract tenants that want more privacy than an apartment [offers], but may not be able to afford a single-family home. For investors, it’s an opportunity to double your rental income from a single property.”

The ADU boom

Tiny homes are popping up in yards across the country, and it’s not just because they’re budget-friendly and cute as a button. A growing number of states have loosened laws around ADU construction, and California leads the charge with 26,926 permits filed last year (followed by Washington, Oregon, and Colorado), according to renovation site Realm.

ADUs differ a bit from true tiny homes in that they’re built on properties with a larger primary residence, making it easier to hook up electrical, plumbing, and other necessities. ADUs assume many forms, from freestanding structures to attached units such as converted basements, attics, and garages (also called junior accessory dwelling units or JADUs). They’re also used in many ways, according to a survey by Villa: to house friends and family (56%), as an office (39%), or as a short- or long-term rental (46%). Some ADUs are built around themes to make stays more memorable, from treehouses to Snow White’s cottage.

But although it’s getting easier to build these mini-homes, that doesn’t mean it’s a cinch. Each state requires an application and has its unique regulations on aspects from size to setback. HOAs may have their own rules to follow, too. Financing can be tricky, with homeowners often tapping into their primary residence for a refi or home equity loan, or line of credit.

“Building an ADU is a process, with a lot of experts and moving parts along the way, and it does take time—about 12 months in total from planning to completion,” says Dashevsky. Shady ADU operations have also surfaced, flaunting renderings of properties that never end up being built once the company makes off with a hefty upfront fee.

“Finding the right team can make or break your ADU construction experience,” warns Dashevsky, who is co-CEO of Maxable, which connects homeowners with ADU specialists. He recommends vetting professionals carefully, adding, “I was fortunate to find a great contractor, but I still found it was important to meet with them at the project every week to discuss any issues that arose.”

In the end, the effort was worth it—not only for him financially but also because Dashevsky was providing comfortable quarters for a family that might not otherwise afford it easily.

“Our latest tenants are a young family who fled Ukraine with a 10-year-old daughter and are starting a better life here in America,” says Dashevsky. “As urban populations swell, the ability to build smaller homes will be key. ADUs offer a pathway to fostering community resilience by creating affordable housing options that work for everyone.”

You can download this ADU starter kit to learn more about the legal landscape, costs, and financing options in your area.