This article appeared in the Fall 2021 issue of This Old House Magazine. Click here to learn how to subscribe.
For a growing number of Americans, home is where mom, dad, grandparents, aunts, uncles, and the kids (and sometimes their kids) are. A 2021 survey by Generations United, a national advocacy organization, found that 26 percent of us live in households that include three or more generations. The same survey in 2011 found that only 7 percent were residing in multigenerational housing.
While the pandemic and resulting economic pressure may have driven some families together, many are now sold on big family meals, more hands to help with schoolwork, and the ability to keep a closer eye on elderly parents. In the Generations United survey, nearly three-quarters of those in multigen households say they will stick with the setup. “People may have come together by need, but they are staying together by choice,” says Donna Butts, the group’s executive director.
The ideal way to accommodate aging parents or adult children, often with kids of their own, is with a separate apartment that has its own entrance, called an accessory dwelling unit (ADU) but commonly known as an in-law suite, granny flat, and the like. In addition to a bedroom, these typically have a bath, a kitchenette, and a living area. As a result, adding one can be complicated and costly. Here are some things to consider.
Expect a Major Renovation
When the National Association of Home Builders surveyed homeowners about renovations in 2019, it found that one in five remodelers had completed an ADU project in the past year. For eight out of 10 of them, that project cost $50,000 or more.
To keep the price down, start with what you have—be it basement space, an attic, or the garage—before you commit to an extension. “Try to work within the envelope of your home,” says Kevin Kennedy, a remodeling contractor in Richboro, PA, and cohost of the podcast Your Valuable Home. “That can keep costs down by about 25 percent.”
Bear in mind that these renovations can entail more than new walls, doors, finishes, and plumbing. Since a septic system can be based on the number of bedrooms, Kennedy points out, you may need to expand it. Your current HVAC system may not be able to support a larger living area. Plus, if the space is for grandparents, you may need to include grab bars and a no-curb shower as safety measures (for more aging-in-place upgrades, see Creating a Forever Home: Aging in Place)
Does Adding an ADU Increase Property Value?
The good news is that buyers are increasingly interested in homes that can house extended families. A recent survey by the National Association of Realtors found that in the past year, one in 10 buyers opted for a multigenerational home; for buyers aged 41 to 55, that number was 18 percent. “Adding an ADU can add to the marketability of your home,” says Peter Murray, a real estate broker in Frederick, MD.
Still, “don’t make it so unique that no one else would like it,” says Len Sarvela, a realtor in Duluth, MN. “Know your local housing trends, and align with those.” While a walk-out basement apartment might be appealing to potential buyers, converting a garage to a living space may be a turnoff. “Taking away a convenience can hurt your property value,” says Sarvela.
Murray agrees. “No one gets excited when they walk into a living room or a bedroom that used to be a garage,” he says—though he concedes that in today’s hot real estate market, drawbacks like that may not matter. “People are throwing money at houses right now, but that may not always be the case.”
Get Acquainted with the Rules
As with any renovation project, you’ll need to adhere to local building codes and apply for all necessary permits. But adding an ADU could subject you to more regulatory hurdles, such as rules that dictate how many parking spaces you must provide.
Most importantly, you’ll need to make sure local zoning laws allow for multiunit housing. Fortunately, housing shortages in some high-cost areas have led to new laws reducing zoning restrictions. Also, turning an in-law suite into a rental apartment once family moves out can be a great way to earn extra income, notes Sarvela. If that’s your long-term plan, make sure your community allows such rentals.
“Talking about money is always awkward, and mixing family and money is even more awkward. It may help to ask a professional to facilitate the conversation.” —Marguerita Cheng, CFP, Gaithersburg, MD
Work Out the Finances
Faced with the cost of a new in-law suite—whether or not you go the full ADU route—you have a few options for financing your renovation. Continued low interest rates make a home equity line of credit (HELOC) or a cash-out refinance attractive options.
However, keep in mind that interest rates may rise over the coming years, leaving you with higher HELOC payments if you don’t pay off that loan quickly. For a costly project, you may be better off locking in a fixed rate by refinancing into a larger mortgage. “People are reluctant to take on more debt as they get older, but it’s about cash flow,” says Columbus, OH, certified financial planner Jill Gianola. “Figure out what you can afford for a monthly payment and work backwards.”
If your parents are selling a home to move in with you, they may be willing to foot the bill—a gift that has to be planned carefully. One wrinkle to consider is what your parents enhancing the value of your home means for estate planning, especially when there are siblings in the picture. If your parents invest $100,000 in your home, they could reduce what you’ll inherit from their estate by that amount—or less, to take into account the help you’ll be giving them while they live with you. “The biggest issue is to have complete transparency with your parents and siblings,” says J.J. Burns, a certified financial planner in Melville, NY. You may want to draft an agreement laying out how your family will handle the transaction.
Another issue is whether to make your parents co-owners. In most cases, experts say it’s best not to. That’s because if elderly parents were to later go into a nursing home, they might have to sell their interest in the home and spend down the proceeds if they need to qualify for Medicaid. On the flip side, if parents stay off the title, their gift of the renovation costs could be treated as a transfer of assets. “Talk to a professional before you make any titling decisions, especially if there’s the possibility of a nursing home within five years,” says Chicago lawyer Wendy Cappelletto, president of the National Association of Elder Care Attorneys.
Plan for Day-to-Day Money Issues
Finally, financial questions won’t go away after the moving van leaves. You need to work out an ongoing series of issues, from how you’ll split the utility bills (if you haven’t put in separate meters) to taxes to the cost of food. Talk about who will do the grocery shopping, whether you’re sharing a car, and what chores everyone will be responsible for, including child care. Is this a temporary setup or open-ended? “It’s important to set expectations and important to put them in writing, even if it feels strange to do so with family,” says Gianola.
When adult children come to live with you, Gianola suggests charging rent, even if it’s below the market rate, to foster fiscal responsibility. “If you can afford to, consider putting aside the money in your child’s name, and let him know you want him to have it in the future, maybe for a down payment,” she says. Also, your agreement should cover what happens in the event you want to sell the home and move elsewhere.
Helping out one adult child can create tensions in the family, but with a financial agreement in place, other siblings may be less likely to feel that their sibling is freeloading or taking advantage of their parents, says Gianola. Still, she adds, “different children have different needs, and when it comes to helping out, equitable doesn’t always mean equal.” If you plan to leave your home to a child who has moved in, you can compensate by leaving more of your investments to other children.
In Generations United’s 2021 survey nearly all multigenerational households reported that they were satisfied with the arrangement, but three-quarters also reported it was stressful at times. “The problem is that families haven’t really talked through the finances of the house, who pays for what, who is going to cook and clean, and whether you will share a car,” says Butts. “You need clarity of communication and agreed-upon expectations,” she adds, for everyone to coexist happily.
“If you plan to stay in your house for the next five to ten years, renovate in whatever way works for you. But if you think you’ll move in one to three years, you may not want to consider it.” —Peter Murray, Realtor, Frederick, MD