An accessory dwelling unit (ADU) is a second, self-contained living space on a lot that already holds a primary home, with its own kitchen, bathroom, and entrance. It goes by a lot of names: garage apartment, basement suite, in-law unit, backyard cottage, or casita, and the point is the same, a single parcel that can house two separate households and produce a second rent check.
In practice
Say you own a single-family house and convert the detached garage into a one-bedroom ADU. The build runs $90,000 all in: framing, plumbing, electrical, a small kitchen, and the permit fees. You rent the finished unit for $1,250 a month, so $15,000 a year in new gross rent against a $90,000 cost. That is a 16.7% gross yield on the conversion alone, before you net out the new operating costs the unit carries.
Those costs are real. Figure roughly 35% of that rent goes to its share of insurance, the higher property tax assessment, repairs, and a vacancy allowance, so call it about $9,750 of net operating income on the year. On the $90,000 you spent, that is a 10.8% return on the conversion, and you still own a building worth more than it was before. The unit also has to pass a final inspection and earn its own sign-off before a tenant can legally move in.
Why it matters to a small landlord
An ADU is one of the few ways to add a door without buying another property, which is why it sits next to strategies like house hacking, where you live in the main home and let the second unit cover part of your mortgage. The catch is local: zoning, setback rules, owner-occupancy requirements, and parking minimums vary by city and county, and some places still do not allow ADUs at all. Before you spend a dollar on design, confirm what your locality permits and what the approval path looks like, because a unit built without the right permits is a unit you cannot rent and may have to undo.
The money side deserves the same care. A new unit adds rent, but it also adds a separate stream of expenses and a depreciation schedule of its own, so it pays to model the deal the way you would any acquisition. Running the numbers through a cash-on-cash return before you break ground keeps the projected rent honest against the cash you are actually putting in.
An ADU touches several other terms worth knowing. The unit cannot be occupied until it earns a certificate of occupancy, the document a building department issues once the work passes inspection. The added income also lifts what an appraiser will assign as the property's after-repair value, which matters if you plan to refinance and pull the conversion cost back out. Treat the ADU as its own small business with its own rent, its own costs, and its own paperwork, and it earns its keep.