Making Your Money Last

A Retirement Home Is a Tiny House in the Kids’ Backyard

A tiny home in retirement could be a more-affordable way to downsize and still be close to family.

When Cary Childre, 65, of Athens, Ga., considered moving closer to her daughter, Eva Maudlin, of Decatur, an Atlanta suburb, she realized she couldn’t afford to buy “much of anything.” So, Eva, 31, researched building a cottage in her own backyard. In October, they made a deposit on a Craftsman-style design by local architect Adam Wall, of ATL ADU Co., who will manage the project from permits to completion. The 429-square-foot home will have one bedroom and bathroom, a galley kitchen and living area, and a small, covered porch. 

Fueled by an aging population and a scarcity of affordable housing, accessory dwelling units are a hot new trend in multigenerational living. You may know them better as in-law suites, garage apartments, carriage houses, casitas and granny flats. Freddie Mac says the share of for-sale listings with an ADU rose 8.6% year-over-year since 2009.

These homes can be created by finishing a basement or attic, converting a garage, reconfiguring unused space, adding on, custom-building a detached unit or installing a prefab one. Over time, you could rent the ADU for income; house a parent, child or caregiver; downsize into it yourself and rent the main house; or make it an office or guest quarters. 

How much you’ll spend varies by city, type and degree of customization, says Kol Peterson, an ADU advocate and consultant in Portland, Ore. He says he’s seen the cost range from $20,000 for a basement unit to more than $400,000 for one built above a garage.

He offers a few rules of thumb wherever you live: The higher the cost of housing, the higher the cost of construction. Converting existing space is cheaper than building a detached unit. Because of the fixed costs to build a detached home of any size, a larger unit will be only marginally more expensive than a smaller one; he recommends building up to the largest allowable size.

A prefab ADU is cheaper and quicker to install than one built on site, but a custom design lets you include aging-in-place features, such as a step-free entry, wider doorways and a curbless shower. If you hire a design-builder, look for an aging-in-place specialist certified by the National Association of Home Builders.

An ADU should also allow elders privacy, so they will feel at home, not like a visitor or intruder, says Michael K. Lenahen, an architect and president of Aurora Builders, in Jacksonville, Fla. Consider creating a private entrance and adding soundproofing to the shared walls of an in-law suite. Sitting areas indoors and outdoors will allow you or a parent to enjoy solitude, entertain friends without asking for permission and avoid feeling confined.

Most homeowners pay for their ADUs with cash, home equity borrowing or a cash-out refinance. Other options include a construction loan or renovation mortgage for purchase or refinance backed by Fannie Mae or Freddie Mac. The simplest, most expensive option is an uncollateralized personal loan of up to $100,000 from online lenders LightStream or SoFi.

When Childre’s cottage is ready, she expects to sell her home for about $300,000, pay $190,000 for the cottage and stash the rest for future needs. Mother and daughter look forward to living footsteps away. 

Before you invest your nest egg to create an ADU on a child’s property, consider how you will pay for the care you will inevitably need someday, says Lisa Mayfield, a certified care manager and past president of the Aging Life Care Association. You can’t sell the ADU to raise funds, and renting it out after you’ve moved elsewhere is unlikely to cover the cost of your care, says Angela Macey-Cushman, who practices elder law in Seattle. Plus, if you give a child money to build an ADU within five years (30 months in California) of applying for Medicaid, you could be penalized with delayed coverage.

Most Popular

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
estate planning

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!

Upstream basis planning is a trust strategy that can save wealthy people on their capital gains taxes and income taxes associated with highly apprecia…
July 3, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022

Recommended

How 13 Types of Retirement Income Get Taxed
retirement

How 13 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don't forget about taxes.
June 30, 2022
In What Order Should You Tap Your Retirement Funds?
retirement planning

In What Order Should You Tap Your Retirement Funds?

Should you go with your IRA first or your brokerage account? Pulling money haphazardly can have negative implications. Instead follow this road map fo…
June 28, 2022
An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022
Retirement Comfort: How to Avoid Running Out of Money
retirement planning

Retirement Comfort: How to Avoid Running Out of Money

When it comes to retirement planning, one thing all of us worry about is whether we will have enough money to last. Financial professionals can help y…
June 25, 2022