Why DADUs Beat Buying Another Rental Property
Most investors are overpaying for cash flow they could build in their own backyard for half the price. You're scrolling through Zillow again. Another duplex just hit the market - $450K, needs work, in a "transitioning" neighborhood two hours away. You'll need to put down $90K, manage tenants you'll never meet, and pray the numbers work out after repairs.
Meanwhile, there's 1,200 square feet of unused space sitting behind your house right now.
Here's the truth most real estate gurus won't tell you: Detached Accessory Dwelling Units (DADUs) are quietly outperforming traditional rental properties for small-to-mid-level investors and it's not even close.
Let's get specific. A DADU in most markets costs between $150K–$250K to build. Compare that to buying another rental property where you're looking at:
20% down payment on a $400K property = $80K
Closing costs = $8K–$12K
Immediate repairs and upgrades = $15K–$40K
Total out-of-pocket: $103K–$132K (and you haven't collected a dollar yet)
With a DADU, your all-in cost is your construction budget. No bidding wars. No surprise foundation issues from a seller who "forgot" to mention them. You control the timeline, the quality, and the final product.
But here's where it gets interesting: Return on investment.
A 600–800 sq ft DADU in a decent urban market rents for $1,500–$2,500/month. At $200K construction cost and $2,000/month rent, you're looking at a 12% cash-on-cash return before appreciation. Try finding that on a turnkey rental in 2025.
Every rental property comes with baggage. Old plumbing. Deferred maintenance. That "charming" 1970s electrical panel that's actually a fire hazard. With a DADU, you're building new. Everything is up to code, warrantied, and designed exactly how you want it.
Managing a rental property across town - or across the state - is a tax on your time and sanity. Late-night maintenance calls. Drive-bys to check if the tenant is running a puppy mill. With a DADU, your tenant is 50 feet away. Issues get solved in minutes, not days. And bad tenants? They self-select out because who wants to live in their landlord's backyard if they're planning to trash the place?
This is huge. When you buy a second rental property, you're starting from zero on a new asset. When you build a DADU, you're compounding value on your primary residence. That $200K DADU can add $250K–$350K to your property value in strong markets. You're creating equity while generating cash flow. It's the real estate equivalent of a two-for-one deal.
Most investors can't write a check for $100K+ to buy another property. But a DADU? You can finance it through a home equity line of credit (HELOC), cash-out refinance, or construction loan using the equity you've already built in your home. You're leveraging an asset that's been appreciating while you sleep.
Cities are changing their laws FAST. Seattle, Portland, Los Angeles, Minneapolis, Austin - they're all loosening DADU restrictions because they're desperate for housing. What was impossible to build five years ago is now legal, encouraged, and sometimes fast-tracked. This window won't stay open forever. Early movers win.
Multigenerational wealth building. Need a place for aging parents? Your adult kid who's getting their life together? A DADU gives you flexibility a distant rental never could.
House hacking on steroids. Rent out the DADU and live in your main house, or flip it - live in the DADU and rent out the big house. Suddenly your mortgage payment is covered and you're living for free.
Tax advantages. Depreciation, mortgage interest deductions, operating expenses - all the same write-offs as a traditional rental, but with half the headache.
Let's get practical. Here's your roadmap:
Not every city allows DADUs, and those that do have size limits, setback requirements, and design standards. Start at your city's planning department website or call them directly.
Talk to your bank about HELOCs or construction loans. Know your numbers before you fall in love with an architect's rendering.
Find a builder who's done DADUs before. This isn't the same as a room addition. Permitting, utility connections, and site planning require specific experience.
Your DADU doesn't need to be a showcase home. It needs to be functional, durable, and appealing to tenants. Think open floor plan, quality finishes that can take a beating, efficient layout.
Permitting can be slow. Construction has delays. Budget extra time and 10–15% above your estimated costs.
I'm not here to blow smoke. DADUs have downsides:
Upfront capital requirement. You need access to $150K–$250K. If you don't have equity in your primary residence, this strategy doesn't work yet.
You're locked to one location. Can't move your DADU if the neighborhood tanks. It's attached to your land.
Neighbor relations matter. If you build a monstrosity that blocks everyone's view, you'll hear about it. Design matters.
But compared to the risks of buying a mystery-box rental property in a market you don't know? I'll take the DADU every time.
If you own a home with a backyard and you've been thinking about "getting into real estate investing," stop looking at Zillow.
Walk outside and look at your lot. That's your next rental property.
Here's what to do today:
Check if DADUs are legal in your area (15-minute Google search)
Calculate your available equity (call your lender or check your last mortgage statement)
Run the rent comps for small units in your neighborhood (Zillow, Craigslist, Facebook Marketplace)
The investors building wealth now aren't the ones buying overpriced properties in secondary markets. They're the ones building cash-flowing assets in their own backyards.