Over the last several years, states and municipalities across the country have loosened local zoning laws for multi house properties. From full secondary homes to granny flats or ADUs, multi house lots are becoming more common. This is in part due to the fact that Gen X and Millennial homeowners are focused on helping their Baby Boomer and Silent Generation parents age in place. The flipside is also true, with retired parents adapting their existing properties to provide a space for adult children and their young families. Over the last thirty years, the percentage of multigenerational homes in the US has nearly doubled and last year, nursing home populations dropped significantly. Though caring for aging parents or offering adult children a leg up are both reasons compound living is gaining traction in the US, additional incentives exist as well. Other property owners have constructed additional housing units either as part of government incentive programs or for supplementary rental income. Given the many benefits of constructing extra housing on a single property, many homeowners across the country are wondering if they can build multiple houses on a lot. Follow below to learn more about ADUs, compound houses and legal restrictions related to building a second home on a single property. 

What is a Real Estate Compound?

a real estate compound is when you build a second house on one property

Compounds are typically defined as single lot properties with multiple housing structures. Many properties include a single family home and several outbuildings -- from barns and detached garages to storage sheds and greenhouses. However, a real estate compound usually refers to more than one home on one property, not just more than one building. Steve Lander elaborates in his article “What Determines a Real Estate ‘Compound’?” for SF Gate. Lander writes that compound living serves many purposes. For instance, “some compounds allow people to live and work in the same place, while others achieve lower environmental impacts than traditional residences.” 

While compounds offer a number of benefits, building a separate housing structure on an already developed lot can “run afoul of local zoning laws” if the homeowner does not prepare properly. It can also upset neighbors and negatively affect the existing community.  Lander writes that “creating a compound isn't always as easy as building a second house in your backyard, even if you have the space” because many “communities limit the number of buildings that can be built on a residential parcel.” Today, homeowners avoid issues with zoning laws -- and neighbor complaints -- by establishing “almost” compounds. These are created by “buying up adjacent houses to create buffer spaces on either side of the main house” while keeping the community together. Thankfully, many local and state governments across the country have recently loosened restrictions on compounds to alleviate the national housing crisis. Learn more about the benefits of compound housing below.

5 Reasons Why Compound Living is Gaining Traction in the US

#1 Helping Parents Age in Place

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Fewer adult children -- particularly those of the Gen X and Millennial generations -- are either willing or financially able to place aging parents in nursing or assisted living homes. Though the COVID-19 pandemic revealed harsh, disorganized and often shocking treatment in such facilities like never before, Millennials had been turning away from care homes for years. Hillary Hoffower explains in her 2018 article “It looks like it's not just crushing student loans holding millennials back anymore — it's also their aging parents” for Business Insider. Hoffower writes that in 2018, “about 6.2 million millennials and counting [were] acting as caregivers for a parent, in-law, or grandparent.” Caregivers are much younger than in prior decades, are spending much more and are doing so with fewer resources, writes Hoffower. 

She notes that “millennial caregivers are spending more of their incomes than older generations on caring for aging family members.” As of 2018, writes Clare Ansberry in her article “The Call to Care for Aging Parents Comes Sooner Now” for The Wall Street Journal, Millennials made “up 24% of the nation’s unpaid caregivers, up from 22% of young adult caregivers in 2009.” This number exploded during the pandemic, according to Paul Davidson in his article “As COVID-19 rages, millennials make up a growing share of 'sandwich generation,' caring for kids and parents” for USA Today. Davidson writes that “forty percent of millennials are more likely to be caring for an elderly parent” now, compared to 24% prior to the pandemic. 

ADUs Offer Both Oversight and Independence to Aging Parents

As a solution, Millennials and Gen X’ers have begun pooling resources with elderly family members -- e.g. grandparents, aunts, uncles and parents -- to build ADUs on their existing properties. In her article “Accessory Dwelling Units Allow Homeowners to Choose Where They Age” for AARP, Gabriela Hasbun writes that “ADUs allow people to age in place by providing an array of options.” ADUs allow aging homeowners to easily “downsize to a separate, more accessible home on the property” while renting the existing home or allowing “a grown child [to] live there (with his or her family).” Loosened restrictions surrounding the construction of accessory dwelling units on properties with existing homes allows aging homeowners to try a “different living arrangement [while] staying in their communities.” 

Instead of “facing the stress and dislocation of moving to a new neighborhood,” elderly homeowners can age in place more easily. Furthermore, moving an elderly parent or other relative into a newly constructed ADU can reduce living costs while meeting their needs more effectively. Hasbun writes that many older Americans “live in homes that were designed without mobility considerations” but now have disabilities or ambulatory difficulties. ADUs allow aging parents to maintain their independence by keeping a separate living space while remaining close to family or other caregivers. Though multigenerational living was once a small percentage of American households, a 2018 AARP survey found that “67 percent of adults would consider living in an ADU to be close to someone but still have a separate space.”

#2 Saving Money Through Economies of Scale

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Many Millennial and Gen X children have chosen to build a second house on their property to keep an eye on parents as they age in place with their dignity and independence intact. However, many Americans have chosen to live together -- in multiple houses on a single lot -- simply to save money. Because utility lines have already been laid to the existing home, land need not be purchased and communal areas can be shared. As such, building a secondary structure can cost quite a bit less than purchasing a separate property. Though upfront costs are lower than purchasing an extant home, continuing costs are often less as well. In her article "Multigenerational Households: The Benefits, and Perils" for The New York Times, Ann Carns explains. Carns writes that "the economic benefits of sharing services can be substantial." For instance, "grandparents and older family members can provide child care, while younger adults can care for elderly relatives." Furthermore, seasonal "travel costs are reduced, as members don’t have to pay for gas or airfare to visit." Other costs -- like those of groceries, toiletries and yard equipment -- can be shared across households.

#3 Supplementing Income with Rent

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In addition to helping relatives and reducing overall cost of living, property owners can also supplement existing income by renting out an ADU, guest house or other additional housing unit. According to Kate Reggev in her article "Accessory Dwelling Units Are on the Rise, and This One Is Cute As a Button" for Architectural Digest, "the square footage of the average ADU can range from 600 square feet to up to 1,200 square feet, depending on the state and municipality." Most ADUs are equipped with their own "kitchen or kitchenette, living area, and a separate entrance, making [them] ideal for extended family, guests, or additional income when used as a rental property." Building a second home on your property could bring in hundreds or thousands of dollars each month in supplementary income -- particularly in states like California. For instance -- according to Rent Cafe -- "the average size for a Los Angeles, CA apartment is 792 square feet," right around the average size of a one bedroom ADU. As of May 2021, the average one bedroom apartment in LA rents for $1,950 per month -- according to Zumper.

Property owners can use this extra income to either cover the cost of their build over several years or to pay off the mortgage on their main house. Homeowners typically pay off the cost of their ADU build within several years, writes Karen Springen in her article “Your Questions About ADUs Answered” for Realtor Magazine. Springen writes that “according to the Terner Center at the University of California, Berkeley…”the average cost is $156,000, [but] with a do-it-yourself kit, a homeowner can build one for as little as $50,000.” Most homeowners who “rent out their ADU typically pay off their costs in seven to 10 years.”

#4 Helping with the Housing Crisis

For years, the United States has faced a national affordable housing crisis. In their article “The affordable housing crisis, explained: Blame policy, demographics, and market forces,” Patrick Sisson, Jeff Andrews and Alex Bazeley explain why it continues and how communities are responding. Bazeley, Andrews and Sisson write that according to a 2018 survey conducted by the National Low Income Housing Coalition, “a renter working 40 hours a week and earning minimum wage can afford a typical two-bedroom apartment (i.e., not be cost-burdened) in exactly zero counties nationwide.” A 2016 Harvard study found that “nearly half of renters were cost-burdened (defined as spending 30 percent or more of their income on rent)” and with home prices “rising at twice the rate of wage growth,” many Americans are simply stuck. 

Affordable Housing Advocates Urge Officials to Lift Zoning Restrictions 

In recent years, affordable housing advocates have placed pressure on local and state governments to alleviate oppressive zoning restrictions in residential and mixed use areas. Considering the additional housing accessory dwelling units could offer, many governments did indeed choose to lift restrictions on multi house properties. In his article “Will California’s new ADU laws create a backyard building boom?” for Curbed, Patrick Sisson writes that permit applications for ADUs have skyrocketed since the California government passed “a slate of new state laws [that] have empowered homeowners.” Quoting Bay Area State Senator Bob Wieckowski (D), Sisson writes that ADUs “‘are a critical part of what needs to be a multi-faceted solution to our housing shortage’” While Senator Wieckowski knows there is “‘no single solution,’” he believes that “‘ADUs can make a dent in our housing shortage.’” The data supports this, Wieckowski notes. In fact, if just ten percent “‘of homeowners built an ADU, that would be roughly 900,000 new units.’”

Los Angeles Government Offers Incentives to Ease Housing Crisis

In addition to lifting residential construction restrictions, some states have also begun offering incentives to homeowners interested in lessening the housing crisis. A 2018 pilot program funded by the LA County government offered Los Angelenos cash to build if they provided housing for a resident in need. In her article “LA County To Pay Homeowners To Create Housing For The Homeless” for NPR’s The Two-Way, Vanessa Romo describes the program. Romo writes that “in an attempt to alleviate the soaring homelessness problem in Los Angeles County, officials want to pay homeowners to house people by building new living units or bringing existing dwellings up to code if they are in violation.” Encouraging homeowners to build ADUs, the LA Community Development Commission set aside half a million dollars to sweeten the deal. According to Romo, this fund will provide homeowners with “up to a $75,000 loan for constructing a new unit, and up to $50,000 for converting an existing structure.”

#5 Increased Property Value

Lastly, adding a second housing unit to an already developed property can increase that property’s value. In their Fall 2012 study entitled “Understanding and Appraising Properties with Accessory Dwelling Units” for The Appraisal Journal, Martin John Brown and Taylor Watkins outlined how much value ADUs actually add to a property. The pair studied fourteen properties with detached ADUs in Portland, Oregon. Brown and Watkins concluded that ADUs typically add between 17% and 48% to a property’s value, with the mean contribution hovering around 34%. Primarily referencing small ADUs between 400 and 800 square feet, this 34% mean contribution represented $137,183 in added value to the property upon appraisal.

5 Tips for Building a Second House on Your Property

#1 Research Restrictions Before Applying for Permits

As mentioned above, zoning restrictions have been lifted in many municipalities across California. However, some still remain in place -- particularly those regarding the size and use of a second home. As mentioned in the Design Everest post “10 Things to Consider Before You Build an ADU,” property owners must “make sure that your lot is eligible in accordance with local development standards” before getting started. Local governments often legislate how many ADUs one property can have, how high the roof line can be and how the utilities are tapped and utilized by the new home. The “Accessory Dwelling Unit Handbook” -- assembled by the California Department of Housing and Community Development -- outlines restrictions in detail. 

Property owners hoping to design and build their own ADU should rest a little easier knowing that -- according to the CDHCD -- “local governments may not preclude the creation of ADUs altogether, and any limitation should be accompanied by detailed findings.” Today, there are very few statewide rules on ADU construction. For instance, “a lot where there are currently multiple detached single-family dwellings is eligible for creation of one ADU per lot.” The CDCHD even allows ADU construction “within a historic district, and on lots where the primary residence is subject to historic preservation.” There are currently no state-imposed minimum lot size requirements, but homeowners should check with their local government before building to avoid fees or penalties.

#2 Consider the Costs in Your Area

Property owners should keep in mind that just because granny flats, ADUs and guest houses are typically less than half the size of single family homes, they still cost between $200 and $500 per square foot to build. Though ADUs and guest houses often end up with a built footprint between 400 and 1,200 square feet, they still require all the structural, electrical, plumbing, interior finishes and inspections of a regular house. ADUs may even be subject to additional inspections and costs that typical single family homes are not required to adhere to. In her article “4 Hidden Costs of Accessory Dwelling Units You Should Plan For” for Better Homes & Gardens, personal finance writer Mia Taylor tells homeowners what they should keep in mind.

Unexpected ADU Costs Homeowners Should Look Out For

First, Taylor writes that “many of us live in homes that were built a few decades ago, which means the electrical panels were most likely not designed to support a second, fully functioning living unit.” As such, homeowners will likely need to replace their electrical panel if their original home is a bit older.  Next, site work can be expensive and inconvenient -- particularly when working around a family that already inhabits the main home. Third, interior finishes can quickly add up. Quoting Maxable CEO Caitlin Bigelow, Taylor writes that “‘if you're building it for yourself, you might want to splurge on special or unique finishes,” but if you are determined to build a rental, “‘you might want to look at finishes that are durable and will hold up to having renters in the unit.’”

Lastly, unexpected delays in construction could blow up the homeowner’s budget. Mia Taylor writes that “building an ADU isn't necessarily a quick or easy project.” The time it takes to “plan and manage construction...can impact how soon you will be making any money back on your investment.” Because a construction project is so time and money intensive, homeowners are often best served by a design-build firm that can handle the entire contract.

#3 Hire the Right Design-Build Firm

As mentioned in Step #2, managing a construction project is a second full-time job for many property owners. Given this, homeowners often choose to hire a design-build firm with architects, designers, engineers and planners who understand the legal restrictions, know safety codes and have lots of experience building ADUs. The Element Homes post “Benefits of Working with a Design-Build Firm from Start to Finish” explains that effective design-build firms “assemble a team from within their ranks -- and from trusted contractors like landscapers and electricians as well as beloved sourcing partners -- specifically for your project.” This leaves the property owner free to live their everyday life without fear of handling each contract or making every tiny decision. 

As Element Homes describes, “full-service firms like Element Homes will actually send a project manager to the site before a build starts, walking throughout the space with the client and tracing prospective layouts.” This team will aid the client in applying for and securing permits and will “update the homeowner throughout the entire project.” Choosing the right design-build firm limits legal issues by establishing a single, overarching contract. It also ensures an all-inclusive budget and timeline while protecting the client’s vision at every step.

#4 Decide on the Function of Your ADU

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Deciding on the function of your ADU early on is incredibly important because there could be legal restrictions placed on some uses in your area. Furthermore, the property owner could end up spending unnecessarily on quality finishes -- as mentioned above -- or an inappropriate layout. On the one hand, a homeowner planning to rent now and offer to an elderly parent later should consider how they might install accessible doorways, flooring and other elements from the get-go. On the other hand, a number of municipalities throughout California have recently banned short-term rental contracts -- e.g. those created by Airbnb and VRBO -- in ADUs. 

At the same time, the homeowner should think about whether or not they really want to be a landlord or if they will need to hire a property manager. In her article “Essential Questions to Ask Before You Build a Granny Flat” for Houzz, Catherine Smith writes that “it pays to think through how the plan would work under different scenarios” before committing to the build. Whenever possible, opting for a flexible design is a good idea

#5 Remember that a Granny Flat Differs from an Addition

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Lastly, homeowners should keep in mind that ADUs and granny flats are very different conceptually, cost-wise and functionally than home additions. If cost and accessibility are a concern -- e.g. when caring for an elderly parent with significant needs --, an addition might be more appropriate than a separate house. Brian Martucci explains what to keep in mind in his article “What Is an Accessory Dwelling Unit (Granny Flat) – ADU Costs & Benefits” for Money Crashers. Martucci writes that “adding an ADU is a major investment,” with the “median cost to build a detached ADU in Portland, Oregon [settling at] $90,000.” The cost of an addition could be much less -- but it might not be. The HomeGuide Cost Guide “How Much Does It Cost To Build A Home Addition?” estimates between $22,500 – $74,000.

Though more expensive in the short term, unlike home additions, “ADUs may be easier for rank-and-file homeowners to finance than some other big-ticket purchases,” writes Martucci. However, one drawback of choosing an ADU over an addition “is building and maintenance costs.” Because ADUs are detached from the main home, they need their “own utility hookups and mechanical appliances (furnace, water heater), and likely require more raw material to construct.” Given this, homeowners should consider the benefits and potential pitfalls of building an ADU as compared to those of construction an addition on the main house.

How Element Can Help You Build a Second House on Your Property

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As mentioned in the post “Benefits of Working with a Design-Build Firm from Start to Finish,” Element is one of California’s premier design and build firms. Boasting a talented team of architects and designers, Element Homes has worked with all kinds of property owners around the state -- from those affected by wildfires to others considering multigenerational living. Regardless of the situation, Element offers customization throughout every step of the home building process. As a full service design and build firm, “Element Homes mobilizes the ideal teams to take care of every specific need posed by the homeowner." Because the team is based in California, each member is very up-to-date with state building codes and local restrictions on ADU construction. As such, Element Homes is poised to assist homeowners in building their ADUs from start to finish -- whether for supplementary rental income or for an elderly parent.

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