You found a property listing that mentions "ADU included" or "guest house with separate entrance." The main house looks solid, the numbers on the primary unit seem reasonable, and now you're trying to figure out what that second unit actually adds to the deal. This is where a lot of investors get the math wrong.
An [accessory dwelling unit](https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/accessory-dwelling-units) (ADU) changes the analysis significantly. You're not just buying a single-family home anymore. You're buying a property with two distinct income streams, two sets of operating assumptions, and sometimes two very different tenant profiles. Get the underwriting right and you might find a deal that pencils when most single-family rentals in the area don't. Get it wrong and you'll overpay for what amounts to a glorified storage shed.
Why ADU Properties Require Different Analysis
Most investors analyze ADU properties the same way they'd analyze a single-family rental: estimate total rent, subtract expenses, calculate cash flow. This approach misses several factors that matter.
First, the two units often have different vacancy patterns. Your main house might rent to a family that stays for three years. The ADU might turn over annually because it attracts different tenants (students, young professionals, people between housing situations). Different vacancy assumptions for each unit will give you a more accurate picture.
Second, operating expenses aren't always proportional. The ADU might be 400 square feet but still need its own water heater, HVAC maintenance, and appliances. Per-square-foot expense estimates will undercount what the ADU actually costs to maintain.
Third, the rent premium for an ADU doesn't scale linearly with the main house value. A $500,000 property with an ADU might rent for $3,200 total, while a $400,000 property with an ADU in the same neighborhood might rent for $2,900. The ADU's contribution to income depends on local demand for small units, not on property value.
Breaking Down the Income Side
Start by analyzing each unit separately before combining them.
Main House Income
Pull comparable rents for similar-sized homes in the area. If the main house is a 3-bedroom, 2-bath at 1,400 square feet, find what standalone 3/2s are renting for. Don't look at other properties with ADUs for this comp because you're isolating the main unit's contribution.
Apply a vacancy factor based on your local market. For a family-oriented rental in a stable neighborhood, 5% vacancy is reasonable. In a market with high turnover or seasonal demand, use 8-10%.
ADU Income
ADU rents vary wildly based on configuration. A 600 square foot 1-bedroom with a full kitchen commands very different rent than a 300 square foot studio with a kitchenette. Features that matter most for ADU rent:
For vacancy on the ADU, I typically use 8-10% even in strong markets. Smaller units turn over more frequently, and you'll occasionally have gaps between tenants because the renter pool is smaller.
Combined Gross Potential Income
Add both units together after applying their respective vacancy factors:
> Effective Gross Income = (Main House Rent x (1 - Main Vacancy)) + (ADU Rent x (1 - ADU Vacancy))
This gives you a more accurate income projection than applying a single vacancy rate to total rent.
Allocating Operating Expenses
Operating expenses for ADU properties don't split cleanly. Some costs scale with the property overall, others are unit-specific.
Property-Wide Expenses
These apply to the entire property regardless of how many units exist:
Unit-Specific Expenses
These need separate estimates for each unit:
Here's where many investors make a mistake: they assume the ADU's expenses are proportional to its rent contribution. If the ADU brings in 25% of the income, they allocate 25% of expenses to it. This underestimates ADU operating costs.
A more accurate approach: estimate property-wide expenses normally, then add a per-unit allowance for each dwelling. I use $1,200-1,800 per year per unit for interior maintenance and turnover, adjusted for unit age and condition.
Calculating Return Metrics
Once you have your income and expense projections, calculate returns using standard metrics.
Cash-on-Cash Return
This measures your annual cash flow relative to the money you put in:
> Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
Total cash invested includes your down payment, closing costs, and any immediate repairs or improvements. For ADU properties, pay attention to deferred maintenance on the ADU itself. Sellers sometimes neglect the smaller unit, and you might need to budget for repairs before it's rent-ready.
Cap Rate
Cap rate measures the property's return independent of financing:
> Cap Rate = Net Operating Income / Purchase Price
Net operating income is your effective gross income minus operating expenses, before debt service. Cap rate helps you compare properties across different price points, but remember that ADU properties often trade at lower cap rates because buyers are willing to pay a premium for the additional income stream.
Gross Rent Multiplier
This quick metric shows how many years of gross rent equal the purchase price:
> GRM = Purchase Price / Annual Gross Rent
Lower GRM generally means better value, but ADU properties typically have lower GRMs than single-family rentals because of their higher income. A GRM of 10 on an ADU property might be equivalent value to a GRM of 12 on a single-family.
Worked Example: Analyzing a Real ADU Property
Let's work through a complete analysis. The property is listed at $485,000 in a suburban market. Main house is 1,650 square feet with 3 bedrooms and 2 baths. The ADU is a detached 520 square foot 1-bedroom behind the garage.
Step 1: Estimate Income
Main house: Comparable 3/2 rentals in the area are getting $2,200-2,400/month. The property is in average condition, so I'll use $2,250. Vacancy assumption: 5%.
ADU: Similar 1-bedrooms (non-ADU) rent for $1,100-1,300. The ADU has a separate entrance and its own parking space, but shares the yard with the main house. I'll estimate $1,150/month. Vacancy assumption: 8%.
| Unit | Monthly Rent | Annual Gross | Vacancy | Effective Income |
|---|---|---|---|---|
| Main House | $2,250 | $27,000 | 5% | $25,650 |
| ADU | $1,150 | $13,800 | 8% | $12,696 |
| **Total** | **$3,400** | **$40,800** | - | **$38,346** |
Step 2: Estimate Operating Expenses
| Expense | Annual Amount | Notes |
|---|---|---|
| Property taxes | $5,820 | 1.2% of purchase price |
| Insurance | $2,100 | Higher due to two structures |
| Property management | $3,067 | 8% of collected rent |
| Maintenance reserve | $3,600 | $1,800 per unit |
| Landscaping | $1,200 | Shared property |
| Utilities (owner-paid water) | $960 | $80/month |
| **Total Operating Expenses** | **$16,747** |
Step 3: Calculate NOI and Cash Flow
Net Operating Income: $38,346 - $16,747 = $21,599
Debt Service (assuming 25% down, 7% rate, 30-year amortization): Loan amount: $363,750 Monthly payment: $2,420 Annual debt service: $29,040
Annual Cash Flow: $21,599 - $29,040 = -$7,441
Wait, that's negative cash flow. Let's check the returns.
Step 4: Calculate Return Metrics
Cash-on-Cash Return: Total cash invested: $121,250 (down payment) + $12,125 (closing costs estimate) = $133,375 Cash-on-Cash: -$7,441 / $133,375 = -5.6%
Cap Rate: $21,599 / $485,000 = 4.45%
Gross Rent Multiplier: $485,000 / $40,800 = 11.9
Step 5: Interpret the Results
This deal doesn't work at the asking price with current interest rates. The cap rate of 4.45% is below typical financing costs, which explains the negative cash flow. The property would need to be priced around $410,000 to hit a 5.25% cap rate and break even on cash flow.
Alternatively, if the seller is motivated and you can negotiate to $435,000, you'd be closer to neutral cash flow. Or if you're betting on rent appreciation, you might accept modest negative cash flow for the first year or two.
This is exactly why running the numbers matters. The listing probably looked attractive at $3,400/month combined rent, but the purchase price doesn't support the income at today's rates.
Common Mistakes When Analyzing ADU Properties
Mistake 1: Using Pro Forma Rent for an Unfinished ADU
Some properties are listed with "ADU potential" or have a structure that's not currently habitable. Sellers will quote what the ADU could rent for once it's permitted and finished. Don't use these numbers.
If the ADU isn't currently generating income, estimate what it would cost to make it rent-ready (permitting, utilities, finishes) and subtract that from your offer price. Only count income from units that actually exist and are legal to rent.
Mistake 2: Ignoring ADU-Specific Regulations
Some jurisdictions have owner-occupancy requirements for properties with ADUs. Others limit ADU rents to "affordable" levels. A few don't allow separate utility meters, which means you'll be paying utilities that you thought tenants would cover.
Before making an offer, verify the ADU is permitted and research local regulations. An unpermitted ADU might need to be demolished or might be uninsurable, which changes everything about the deal.
Mistake 3: Underestimating Turnover Costs
ADUs turn over more frequently than primary units. Each turnover costs money: cleaning, touch-up paint, minor repairs, and potentially lost rent during the gap. If you're budgeting $500 for turnover costs but the ADU turns over annually, you're underestimating by 50-100%.
I budget $800-1,200 per ADU turnover depending on the unit condition and local labor costs. For a unit that might turn over every 12-18 months, that's a meaningful annual expense.
When ADU Properties Make Sense
Despite the complexity, ADU properties can be strong investments in the right circumstances.
House hacking: If you plan to live in the main house and rent the ADU (or vice versa), the ADU income offsets your housing cost. This strategy works especially well for owner-occupants who can get lower interest rates and smaller down payments.
High-rent markets: In expensive coastal cities, ADUs often rent for $1,500-2,500/month. The income contribution is substantial enough to make deals work that wouldn't pencil as single-family rentals.
Value-add opportunities: Properties with unpermitted ADUs or ADUs in poor condition sometimes sell at a discount. If you can do the work to bring the ADU up to standard, you capture value that wasn't reflected in the purchase price.
Long-term appreciation plays: In supply-constrained markets, properties with legal ADUs may appreciate faster than comparable single-family homes because zoning changes have made building new ADUs harder or impossible.
Running Your Own Numbers
Every ADU property is different. The unit sizes, configurations, local regulations, and market rents vary too much to rely on rules of thumb. You need to build a property-specific model with realistic assumptions for each unit.
The worked example above showed a deal that doesn't work at asking price. A different ADU property in a different market might pencil beautifully. The only way to know is to run the numbers with your actual down payment, your actual financing terms, and your best estimates of what each unit will rent for and cost to operate.
Our [single-family rental calculator](/tools/single-family) handles multi-unit analysis and lets you input separate rent assumptions for each unit. Plug in your numbers, stress-test the assumptions, and see whether the deal actually works before you make an offer.