ADUs are an increasingly popular answer to rental shortages, but their cost and complexity make the economics difficult.

By Dina Katgara Down a path landscaped with aloe vera and bougainvillea sits a one-bedroom cottage where an empty patch of land stood last year. Elaine Yang rents it to a veterinarian and his rescue dog for $3,000 a month, income that covers her $1,600 loan payments for the ADU, or accessory dwelling unit.

Call it a granny flat, mother-in-law suite or backyard bungalow, an ADU can be a converted attic, garage or basement or a standalone mini-house like Yang’s in Irvine, California. Strict definitions can vary by state or city, but in basic terms, they’re living spaces carved out of a homeowner’s property and equipped with their own entrances, kitchens and bathrooms.

Yang bought her prefab cottage from Samara, a company that specializes in standalone ADUs. The 540-square-foot unit has an air-filtration system, a full kitchen with appliances and a washer and dryer. There’s even a lemon tree in the unit’s own little backyard.

With the rest of the rental income going toward taxes, insurance and maintenance for the unit, Yang considers the cottage a long-term investment alongside the simple two-bedroom house she purchased in 2020 for almost $700,000.

“I’m maximizing the value I can get from the property, which can potentially increase my income and create flexibility for me in terms of where I can live and age,” says Yang, 43, an urban planner, adding that her parents might want to move onto the lot with her someday. “They could live in the main house, and I could live in the ADU. So it’s definitely on the table.”Most reasons a homeowner would want to add an ADU are personal — often for a family member or to generate income to make the mortgage easier to pay.

But they’re becoming a bigger part of the national housing conversation because of their potential to ease shortages of lower-cost rental units, and even help cool rising rents in especially tight markets.

That’s the goal in New York, which only recently started allowing ADUs as part of former Mayor Eric Adams’ campaign to get more affordable housing built in the notoriously expensive and critically undersupplied city. His successor, Zohran Mamdani, has championed the effort and taken steps to speed up the ADU-approval process for homeowners.

Of course, building more housing is easier said than done, and ADUs are no exception. Local governments need to set rules for the units and determine where they can go, a process that’s often complicated and contentious. Sometimes the state has to step in — something that happened in California, where, in 2016, reforms to loosen zoning restrictions and streamline environmental reviews kicked off an ADU boom that’s been gaining momentum.

Roughly 1 in 4 new housing structures built in California last year was an ADU, according to the state’s Department of Finance. In some pricier cities, including Los Angeles and San Francisco, more permits were issued to build ADUs last year than for all other types of housing combined, data from Cotality show.

While California has led the way on ADUs, they’ve started making inroads elsewhere. Arizona, Washington and other states have passed laws to ease restrictions, and Congress recently approved grants to help local governments adopt preapproved housing designs, including ADUs, as part of a broader push to accelerate homebuilding.

Now it’s New York’s turn. The skyscraper-packed city isn’t exactly known for having many suburban-style homes with yards that could accommodate an ADU. But officials do expect them to make a measurable contribution to the housing supply, accounting for roughly 25,000 of the 80,000 new units projected to be added over the next 15 years under the City of Yes initiative.

Even that upper number is just a fraction of the 700,000 units needed over the next decade to address New York’s housing shortage, according to an estimate by city planners and the Department of Housing Preservation and Development. So it’s questionable that a few thousand ADUs could make much of an impact on rents, which are hovering around all-time highs in some boroughs.

Under Mamdani, the buildings department has worked toward speeding up the permit process and produced a guide for homeowners with preapproved designs for ADUs. Other improvements, such as using artificial intelligence to help with application reviews, are being considered, according to Ahmed Tigani, the department’s commissioner.

“It’s all about creating more opportunity, access, tearing down walls for people to live wherever they want to live,” Tigani says. “And this part of it — creating rental housing, either through conversion or detached housing — is one part of that larger strategy.”So far, enthusiasm has collided with reality for some early adopters.

Just months after buying a two-family house in Queens, Yotlaire Guillou looked into turning his detached garage into a studio apartment but was disheartened to see estimates of around $200,000 from an ADU company. To save money, he may try to do some of the work himself, he says, though the project would still require city approval and licensed professionals for certain parts of the job.

The economics are difficult to square. Guillou estimates the finished studio could bring in about $1,000 to $1,200 a month, helping offset his roughly $8,500 monthly mortgage and other household expenses.

“That extra one grand would be very, very valuable for me,” he says. But that $200,000 bill for construction is daunting: “I don’t think most people that want the ADU have that much to spend.”That tension between ADUs as an affordable-housing solution and the high cost of actually building one is emerging as a major challenge. A pilot program offering loans and grants of as much as $395,000 for New York City homeowners willing to build an ADU drew more than 2,800 applications in 2025 — far more than it was funded to serve — before it closed in February that year. The program reopened for three months in 2026 and is currently funded to provide assistance for 25 homeowners a year.

Even while applicants wait to hear if they qualify for help, they’re reaching out to architects like Karim Ahmed. His firm, Reform Architecture, designed one of the city’s preapproved ADU plans, but the $550,000 project, with 400 square feet of living space and room for two cars, is impractical for most of the homeowners he’s heard from. They’re more interested in converting garages or other spaces they already have, or custom builds that are better suited for a small New York backyard, he says.

Still, new companies that help homeowners navigate the process are excited for the business possibilities. Wil Fisher, principal at Unit Two Development in Queens, sees an “enormous total addressable market,” with potential for more than 100,000 ADUs in New York City. But they’ll take some time to catch on, and cost is an obstacle, he acknowledges.

“It’s not the sort of well-funded, sophisticated developers that are in charge here,” says Fisher, whose company gave Guillou his $200,000 estimate. “It is, you know, everyday folks making difficult decisions.”There’s also potential neighborhood pushback to consider. Some residents are worried about construction and increased parking needs clogging their streets. Others might be concerned about how a sudden wave of additional housing could overload local services.

City Council Member Vickie Paladino, who represents a Queens district that she says has struggled with flooding and squatters, foresees additional strains on roads, schools, sewers and the energy grid. She says the city could also be overwhelmed with tenant issues arising from ADUs. “It sounds wonderful if you look at it in its purest form, but it never stays that way,” she says. “It always gets made into something that’s detrimental to a neighborhood, or to a homeowner, who’s doing it with the right intention but then they get tenants that don’t take care.”

At the city’s projected pace, ADUs won’t be built at a large enough scale to push services to a breaking point, according to David Rastegar, chief executive officer of Metro Design Associates, who assists developers on ADU projects in previously restricted areas in New York. And many ADUs can be hidden within a homeowner’s property, virtually invisible to anyone else in the neighborhood, he says.

But even when a homeowner is willing and able to afford an ADU, the process of adding one is fraught with potential obstacles. Careful planning and knowledge of the rules — size restrictions and more — are essential. Patience helps.

Even for Yang, who spent years as a city planner in Southern California, there were roadblocks to getting her backyard cottage built. For one, Irvine officials wanted her to sign an agreement that she said would have unnecessarily limited her property rights. That delayed the project for months. To help pay for the $308,000 cottage — plus $17,000 for property improvements and appliances — she picked up a side job as a planning consultant.

As Yang learned, the high costs of setting up ADUs limit their value as income-generating properties. That’s why family reasons will likely remain the primary motivation for most homeowners, according to Michael Lens, a professor of urban planning and public policy at the University of California at Los Angeles.

Ten years after moving to LA from New York, Lens turned the garage of his new single-family home into a $300,000 ADU that his teenage kids use as a game room. “That’s not housing,” he says. “That’s a fun place for a homeowner and his family.”

Legislation in California has “clearly been wildly effective at increasing ADU production. I think that in itself is good news,” Lens says. “Bad news, you can’t really solve a housing-market problem with people’s backyard casitas.”