ADU Rental Income: What to Realistically Expect

Rental income is the reason most ADUs get built, and it's also where the most optimistic assumptions hide. The gross number — what a tenant pays each month — is the easy part and the least useful. What matters is what's left after the costs nobody puts in the brochure. Here's how to build a rental projection you can actually trust.

Start with real comparables, not averages

Don't use citywide average rents. A detached 600 sq ft ADU with its own entrance and a small patio rents differently than a converted garage sharing a wall with your living room. Search current listings within a mile or two for units of similar size, privacy, and parking situation, and use the middle of that range rather than the top. Then check how long those listings have been up — a high asking rent that nobody has taken is not a market rate.

Subtract the things spreadsheets forget

Vacancy is the first: even a well-run unit sits empty between tenants, so model 5–8% of annual rent rather than assuming twelve paid months every year. Maintenance and repairs run roughly 1% of build cost annually over the long run — low in the early years, then a water heater fails. Landlord insurance costs more than you'd guess. Property tax rises: in California your existing home isn't reassessed when you add an ADU, but the ADU's own value is added to your bill.

Then there's utilities. If the ADU isn't separately metered — common in conversions — you're paying the tenant's water, power, and gas unless you build a share into the rent. Sub-metering costs money upfront and saves arguments forever.

The cost of the money is the biggest line

If you financed the build, debt service is usually the single largest expense, and it decides whether the project cash-flows at all. A cash build and a fully financed build can produce identical rent and completely different outcomes. Run your projection with the actual loan payment in it, not just operating costs — and if the result is negative in year one, that's not automatically a reason to stop, but it must be a decision you made knowingly rather than discovered later.

Taxes, briefly and honestly

Rental income is taxable, but it's taxed on net, not gross — you deduct operating expenses, mortgage interest attributable to the rental, and depreciation, which is a significant non-cash deduction that shelters part of the income. There's also a catch on the other end: depreciation gets recaptured when you sell. This is genuinely worth a conversation with a tax professional before your first tenant, not after your first return. We're not accountants and neither is any calculator.

The other ways an ADU pays

Not all returns arrive as rent. Housing a parent instead of paying for assisted living, replacing an office lease, or letting an adult child save for a down payment are all real financial outcomes that never show up as income — often larger ones than a tenant would provide. And there's option value: a unit rented to family today can be rented at market later, or house you while you rent out the main home.

Building the projection

Take a conservative market rent, subtract 5–8% vacancy, subtract insurance, maintenance reserve, added property tax, and any utilities you'll cover, then subtract debt service. What remains is your real monthly number. Compare it against your all-in build cost from the cost calculator to get a yield you can defend — and read our honest investment math for how that yield compares to the alternatives.

Run the numbers for your project

Every project is different — size, scope, and city move the total by six figures. Get an itemized estimate in under a minute:

Written and reviewed by ADUCostGuide. Cost figures reflect 2026 data and typical projects; rules and prices vary by city — see our city guides and confirm details with your local planning department and licensed contractors.