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ADUs: Retirement Income and Other Benefits

Posted by Johnine Larsen on November 21, 2019
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Darcie attended a workshop on Accessory Dwelling Units (ADUs) last week that drove home a lot of what we’ve been saying about this new type of housing.

Thanks to Seattle’s new, permissive ADU laws, homeowners can become micro developers pretty darn easily. This opportunity brings a host of benefits,* particularly to retirees. Here’s the low-down:


What is an ADU?

First, some background. An Accessory Dwelling Unit is a small, self-contained residential unit that shares the same lot as a single-family house. It as all the basic things needed for day-to-day life like:

  • kitchen/cooking area
  • living space
  • sleeping area
  • bathroom

You might have heard ADUs by other names: backyard cottage, mother-in-law suite, garage apartment. They aren’t true synonyms (more on that below), but you get the picture.


Types of ADUs

ADUs come in three flavors:

  • Separate unit in an existing home (a converted attic or basement)
  • New, constructed unit added to the home (an apartment with a separate entrance)
  • Completely separate structure on the same lot as an existing home (backyard cottage or converted garage)


Benefits of ADUs


  • ADUs provide simple, affordable homes perfect for young professionals living alone or new couples.


  • Because ADUs can emerge in what used to be prohibitively expensive single-family neighborhoods, they allow people at all income brackets to live in highly prized locations. Maybe be near jobs, maybe near good schools, public transit, or parks—with ADUs, you could more easily find a home there.


  • ADUs let elderly homeowners age in their own homes. A relative or caretaker can move into an ADU (or the homeowner can move into the ADU), which ensures someone is always nearby—but without sacrificing either party’s privacy. Developing and renting out ADUs also let older homeowners earn income from a rental property during their retirement


  • The benefits of rental income have typically been reserved for those wealthy enough to own two homes. In Seattle, that’s a high bar. But ADUs let a homeowner develop a rental revenue stream without needing to purchase a separate property.


  • This is a favorite talking point of those in favor of increasing Seattle’s density to combat sprawl, especially since doing so via ADUs doesn’t result in the loss of beautiful, historic homes. More units get added with ADUs, but it’s not as disruptive as replacing single-family homes with condos. ADUs also let people live closer to work, thereby reducing commute times and carbon emissions.


  • ADUs put lower-cost living opportunities on the market. As the cost of living in Seattle continues to grow, and as wealth inequality widens farther and farther, this helps those on the poorer side of that rift. ADUs help make Seattle a city for everyone. There’s a lot more to be done—especially for those who can’t afford any home—but this is something.


Financing options for an ADU


  • Self-explanatory. Cash could could come as a gift, inheritance, savings account, or liquidated investments
  • Pro: Low-cost; no origination fees or interest
  • Cons: You need a lot of cash upfront

Home Equity Line of Credit (HELOC)

  • A revolving credit line for a pre-approved maximum with a variable interest rate. Your home equity and income resource determines the amount of the HELOC.
  • Pro: Lets you access your home equity. You can draw on this credit line whenever you need it. You don’t pay interest on unused credit. Very low initiation fees.
  • Con: This credit line is limited by your home equity and income

Cash Out Mortgage Refinance

  • You can refinance your home mortgage for a greater amount than the existing mortgage balance
  • Pro: You can access your home equity. Low to moderate initiation fees and interest rate. Long-term, fixed-rate loan.
  • Con: The amount of cash out is limited by your home equity and income qualifications

Construction/restoration loan

  • Short-term transition loan you can use to build
  • Pro: You don’t need to access your home equity. This loan uses the building being built as loan collateral. After the house is built, some of the construction/restoration loan can be converted to long-term mortgage
  • Con: Higher initiation and loan fees than a traditional mortgage or HELOC. Higher interest rate and bigger down payment than a traditional mortgage. Amount of the loan depends on your income and project cost/market value. Some loans require the balance to be paid in full when construction finishes.

Reverse Mortgage

  • A loan that lets you access your home equity by using the home as collateral for the mortgage. It might take out cash upfront and/or open line of credit.
  • Pro: You don’t pay monthly payments of principal or interest. It improves your cash flow. This line of credit is irrevocable and increases over time. It’s not based on income.
  • Cons: Your home must be owner-occupied, and you must be older than 62. Determined by your home equity and your age. High origination fees. Higher interest than a traditional mortgage.

401K Plan Retirement Accounts

  • Tax advantage retirement savings and investment account
  • Pro: Many plans let you borrow cash out and make loan payments back into the account. Tax free.
  • Con: Loan amounts limited to 50% of account value (and has a $50k limit)

IRA Retirement Accounts

  • Tax advantage retirement savings and investment account
  • Pro: You can make one-time cash distributions for the build or ongoing distributions to qualify for a loan’s income requirements
  • Con: Distributions taxed at a higher tax rate (ordinary income) plus a 10% tax penalty if borrower is younger than 59.5 years old

Developer financing

  • A developer provides financing models for leasing the land and participates in appreciation and rental income
  • Pro: The developer can finance and build if you doesn’t have the money, time, or expertise
  • Con: The developer share in the profits

Condominium Property

  • Divide your property into condos, which are sold separately
  • Pro: Your property may be worth more when divided. This provides more affordable housing for buyers, not just renters
  • Con: Zoning regulations. You’ll need an attorney to handle the process


*ADUs and Seattle’s new ADU laws have their downsides, but as this is the law now, we’re focusing on the positives.

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