If I Build a Guest House, Can I Rent It Out?

guest houses

The answer in many jurisdictions is no; even if you are allowed to build a guest house (or accessory dwelling unit, or guest casita), you can’t rent it out.  You can let someone live there (like older parents or grown kids) or let visiting friends stay there for free, but you cannot rent it out.  Even if the county or city does allow, often it is an HOA that prevents you from renting out your guest house legally.

However, some areas do permit you to have a guest house AND to rent it out separately from your main house.  San Diego County, for instance, does allow it, as long as the particular city and HOA you live in don’t further restrict it.  There are quite a few rules covering everything from setbacks, to floor area, to parking spaces, to utilities, to requiring you to sign a notarized statement that you understand the zoning regulations covering guest houses.  Do not invest money in architecture, engineering, or construction of a guest house unless and until you know for sure in writing that you can legally rent it out.

Home Improvements Usually Add Less Value than they Cost

Someone that wants to invest $30,000 into a new kitchen or a new pool is likely to add something to the eventual selling price of their house.  However, it is probably less than the $30,000 spent.  A REALTOR Magazine study showed that upgrading a complete kitchen usually results in an increase in property of value of 67% of what you spend.  So that $30,000 you spent will probably only add $20,000 to the home’s eventual selling price.  Most other home improvements, like putting on a new garage door, installing new windows, or even adding a bathroom, likewise cost more than the value they add.  Very few are break even; refinishing hardwoods and putting on a new roof being the exceptions, but just barely.

Obviously you get enjoyment out of living in a better house, but home improvements are usually not profitable.  However, building a guest house is one of the rare instances where you can invest in your own house and potentially add value because of the rental income stream you create while you own it.  Even if the person who buys your house does not care about being a landlord themselves, they will likely value having a separate dwelling where a family member or friend can come and stay for a weekend.

Airbnb is a Game Changer

Having access to short term renters through websites like Airbnb and VRBO is a game changer in making guest houses more profitable.  You can charge a lot more money operating your guest house like a hotel room than you can as a 1 bedroom/1 bathroom long-term rental apartment.  Living in a vacation destination like San Diego or Hawaii would be ideal for this, but don’t rule out any city that has a decent amount of travelers or part-time residents, as off-the-beaten vacation path as North Dakota or Yuma, Arizona.  It is not unheard of to find a guest house that could rent for 4 times more as a vacation rental than a long-term rental.  Vacancy and a higher level of management are obviously factors, but its something to strongly consider in any guest house investment.

 

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