What is the ROI for an ADU in PDX?
Part II
Let’s look at the different types of rental options and their specific payback periods or ROIs.
Short-Term Rental (STR): is defined by the City of Portland in the Type A Accessory Short-Term Rental web page for a 1 or 2 dwelling structure (a typical Portland home) as a 30 day or less rental of a 1 or 2 bedroom unit. This covers all of the services like Airbnb and VRBO. Long-Term Rental (LTR) is a rental with a lease time longer than 1 month and analyzed below.
The following numbers for STR are based on statistics from home hospitality sites:
For a new construction, dedicated use Short-Term rental in Portland, you can expect to charge approximately $150/night. This varies by location but is a good place to start.
Occupancy is variable, but a safe assumption during the summer months is 80%, and down to 40% the rest of the year.
Gross revenue for a unit with these factors is $19,600/year. That’s $1,633/mo. Total costs for the year is up to 15% of revenue ($244/mo), leaving a net income of about $1,380/mo.
Assumed fixed costs/month are $700 Mortgage, $40 increase in taxes, $40 increase in utilities (LTR only), and $50 for maintenance.
What this means to you is if your additional monthly payment to build the unit is less than $1,400 you are cash positive as soon as it is ready.
With net rental revenue of $1,400/mo, and a mortgage cost of $700/mo, the initial 1 1/2 months cover the payments during construction and everything after that goes into this cash flow calculation. After that initial outlay is covered you will be averaging a net cash flow of up to $700/mo above your Airbnb and Mortgage costs. That is a big deal!
ROI for an ADU in PDX: STR
Long-Term Rental: is a rental of 30 days or more. This is a typical lease rental you’d find on Craigslist, or for an apartment. Renting your ADU for a year is much less paperwork and reduced host duty. Tenants are responsible for their own cleaning, utilities, etc. Occupancy is much more consistent and with some planning and work, can be at almost 100% over the years. There are other actual and implied duties as a landlord for a long term lease property, but in general, they are less hands-on than a short-term rental. Revenue is lower for these types of rentals as well, and for the ADU Studio described above, you can anticipate a gross monthly rental income of about $1,000 depending on location. This lower rental rate also comes with lower costs and the net monthly revenue can be upwards of $950. With the same loan amount as above, you will only net about $250/mo. This means it will take longer to balance out the initial cash outlay to build, perhaps even a year, but after that, it is easy to make a consistent net income on a property.
ROI for an ADU in PDX: LTR
The added bonus to all of these calculations is that your property is now worth more – in both cases with the same ADU, your cost of $95,000 will equate to nearly that much in added value for your property. Buyers will also see the net income opportunity of your property which is a major asset when you sell. Many new homes being built and sold now include an ADU for this very reason. Additionally rent rises over time and your mortgage cost will stay the same, so the net income will rise every year.
