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Accessory Dwelling Units

Here’s what you need to know before you invest in a home with an ADU or add an ADU to an exiting property.

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ADU Laws

Find out if you can legally build or operate an ADU in your local market.

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Build an ADU

Add or build an ADU on your existing property

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Manage an ADU

Lease, operate and maximize your ROI from your ADU

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In 2024, Denver passed the Citywide Accessory Dwelling Units Measure

Allows ADUs on all residential areas covering 70% of land in Denver.

Colorado is following California and Oregon.

CA and OR have passed progressive ADU laws to allow more density on single-family homes.

You can find a list of every ADU in your city by checking the County Assessor data base.

This will help you find off market listings.

The Numbers are Tough.

It’s much easier to add an attached than a detached ADU. Building costs and fees are just too high for a new build detached ADU.

ADU Resources

The Colorado ADU Guide

Use the ADU Guide to discover if investing in an Accessory Dwelling Unit in Colorado is the right financial decision for you.

What's an ADU?

An ADU is a separate legal dwelling structure that can be attached or detached from the primary home.

By definition the ADU is an accessory unit to the primary home and can not be owned or sold separately from the primary home.

Why Invest in an ADU?

The short answer is rental cash flow. 

You can buy an investment property with an existing ADU or your can add an ADU and then rent it out as a separate rental unit. 

Rent on a 1,000sqft ADU will typically run from $1,500 to $3,000 a month.

Is it Profitable?

This is the $200,00 question.

It’s expensive to build or remodel an ADU. You can budget around $200sqft or about $200,000 for a 1,000sqft unit. 

The buildout timeline is at least 12-months.

If you finance the remodel or construction, that’s around $1,200 a month in mortgage payments at a 6% interest rate on $200K. Add in insurance, maintenance and other contingency costs and you need to rent the unit out for at least $2,000 a month to break even. 

It’s usually less expensive and takes less time to add an attached ADU.

Is it Legal?

The answer is complicated because there are overlapping State, County and Municipal laws and regulations that govern the legality of ADUs in each jurisdiction.

The basic rule is that your local town has jurisdiction over zoning and town planning matters and will have a set of rules and regulations that govern the building and operating an ADU.

Be aware that your county and city will have different laws and the regulations change all the time. You need to carefully determine your jurisdiction based on where the property is located.

There is growing momentum in favor of building ADUs as state and local government has recognized the need to increase housing density to address the nationwide housing affordability crisis.

Getting Started

Step 1 is to do do a rough preliminary feasibility analysis.

You need to download and review your local municipality’s laws and regulations.

Start by determining which local authority has jurisdiction over your property. Are you in the county or in the city?

The next step is to pull up the zoning map and determine if your property is zoned to allow an ADU. If it is not zoned for an ADU, you will need to rezone the property. This is probably a deal killer.

If it is zoned to allow for an ADU, download the ADU application packet and determine if your property is able to meet the planning, building and design guidelines.

It may be obvious that the physical characteristics of your property simply don’t meet the requirements for an ADU.

I recommend that you read the regulations and then go and view a property that has an ADU. Check MLS listings for a listing with an ADU and set up a showing.

Take notes on things like where the ADU is located and how big it is in relation to the primary house. Does it have off street parking? How far are the set backs from the side and back of the home? How are the utilities and meters configured? How is the ADU accessed? What about privacy?

Try to map out each regulation on paper to a real life example.

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FAQ

What's another name for an ADU?

An ADU is an Accessory Dwelling Unit. By definition it is an accessory unit to a primary dwelling unit. It is also known as a carriage house, granny flat, mother-in-law suite or a backyard cottage.

In Colorado, zoning, planning and building activities are delegated and regulated at the local level by each county and by each city or town within the county. There are Federal and State laws that impact housing (think Fair Housing laws), but almost everything is delegated to the local level. This makes things extremely complicated as each county and town has its own rules, regulations and processes. In most cases, the county has a different set of rules than each town. It is imperative that you check the local zoning, planning and building regulations for your local market. 

The State of Colorado has come out strongly in favor of ADUs as a strategy to address the critical housing. Colorado is following the position taken by California and Oregon to promote greater housing density, particularly in areas zoned as single-family. Local counties and towns have taken note of the State’s position and many towns have started to pass much more relaxed zoning and planning regulations. It’s looking very positive for single-family homeowners who want to add an ADU to their property.

An ADU by definition is an accessory unit to the primary home on the property. Almost every local planning jurisdiction that allows ADUs, prohibits separate ownership of the ADU. In other words, the owner of the ADU is the same as the owner of the primary residence. The ADU can not be separately titled and sold. That doesn’t mean you won’t think about ways to get around this restriction, but even if you do, it is likely that your local municipality will ban and prohibit your workaround.   

Yes. You will need a permit to add or build an ADU. You may even need to rezone your property if your current zoning does not allow for an ADU. This is how your local municipality controls the zoning, planning and building of all housing structures in your local market. 

Maybe. It depends on the rental laws in your local municipality. As an example, Denver and Boulder require a rental license for all rental units. Although not required now, there is a general expectation that other counties and towns will follow Denver and Boulder and start to require rental licenses. 

An ADU can be attached or detached from the main residence. An example of an attached ADU would be a walk out basement or a suite with a separate entrance at the side of the home. There are different design and planning rules for attached and detached units. Generally, an attached unit is easier and cheaper to add to the residence, but tenants prefer and are willing to pay higher rent for the privacy and lifestyle of a detached ADU.

All ADUs require their own utilities and services. This is the way that local municipalities control the addition of ADUs as they control the installation and delivery of utilities and services and require that you license and permit all ADU structures. You will need to follow the planning, zoning and building permit regulations mandated by your local municipality. You may be able to get away with operating an illegal ADU, but this is extremely risky.

Usually no. Most local municipalities require that the homeowner lives in either the primary home or the ADU. But what if the local regulations are silent on the issue or what if you lease the entire property on a tenant and the tenant subleases the ADU? The rules and regulations will evolve over time on this issue.

Maybe. Some local municipalities expressly prohibit renting out the ADU as a Short-term rental, while other towns are silent on the matter. AT a minimum, each local authority has it’s own separate set of short-term rental rules and regulations that overlap with their ADU rules. The rules and regulations will evolve over time on this issue.