Do Accessory Dwelling Units (ADUs) Add Value to Your Toronto Home? Here’s What You Need to Know!
Toronto homeowners are buzzing about Accessory Dwelling Units (ADUs). Whether it’s a laneway house, garden suite, or coach house, these secondary units offer extra space, potential rental income, and an opportunity to maximize a property’s value. But do they actually increase the value of your home? Or is it just wishful thinking?
To get some expert insight, I recently sat down with David Wenger from Ridgepoint Appraisals to tackle this very question. If you’re considering building an ADU, read on – this post might save you a lot of time, money, and frustration!
What Is an ADU, and Why Are They So Popular?
Before we dive in, let’s clarify what we mean by an ADU. An Accessory Dwelling Unit is a separate, self-contained living space on the same lot as a main residence. This could be:
- A laneway house (a small home built in the backyard with access to a laneway)
- A garden suite (similar to a laneway house but without laneway access)
- A coach house (a converted garage or structure above one)
With Toronto’s rising housing costs and new zoning rules making ADUs easier to build, many homeowners are exploring this option. But is it worth the investment?
How Do Appraisers Determine the Value of an ADU?
David explained that appraisers use three primary methods to determine a home’s value:
- Direct Comparison Approach – The most common method, where appraisers compare the property to recent sales of similar homes in the area.
- Cost Approach – Adding up the value of individual components like the home, land, landscaping, and, of course, the ADU.
- Income Approach – Evaluating the potential rental income an ADU could generate.
The direct comparison approach is the go-to method for appraisers in the residential market. But here’s the challenge: ADUs are still relatively rare in Toronto, which makes it tricky to find accurate comparisons.
Will an ADU Always Increase My Home’s Value?
Short answer? Yes, but… there are important caveats.
While adding an ADU typically increases property value, the amount it adds depends on several factors:
- Market demand: Not all buyers want an extra home in the backyard. While many see it as a rental opportunity, others may see it as a maintenance burden.
- Comparable sales: If there aren’t many ADUs in your area, it can be harder for appraisers to determine their precise value.
- Bank appraisals: Some lenders don’t include ADUs in their valuation or limit how they’re factored in. For example, a bank might appraise the property as if the ADU doesn’t exist—which can impact financing.
David also mentioned the paired sales analysis method, where two nearly identical homes are compared—one with an ADU and one without. The difference in sale price helps determine how much value the ADU adds. This method is useful when there’s enough market data available.
What About Financing? Will a Bank Recognize the Value of My ADU?
Here’s where things get tricky. As a mortgage broker, I’ve seen firsthand how lenders handle ADUs differently:
- Some banks completely ignore the ADU in the appraisal.
- Others only include the square footage in the main house’s value.
- A few will use comparable ADU sales to determine fair market value.
This inconsistency means that if you’re financing the construction of an ADU with the expectation that it will immediately increase your home’s value, you need to talk to your mortgage broker first. Otherwise, you might not get the financing you expect!
What About Rental Income?
One of the biggest advantages of an ADU is rental potential. A two-bedroom ADU in Toronto can fetch a strong monthly rent, making homeownership more affordable. Many homeowners use ADUs to:
- Generate passive income
- Offset their mortgage costs
- Provide housing for family members (aging parents, adult children, etc.)
Even if an ADU doesn’t immediately raise your appraised value by the full cost of construction, the rental income can significantly improve your financial situation.
Is Building an ADU a Good Investment?
If you’re considering building an ADU, ask yourself:
✅ Do I have the financing in place, even if the bank doesn’t recognize the full value upfront? ✅ Will I rent it out, or is it for personal use? ✅ Am I in a neighborhood where buyers value ADUs? ✅ Can I afford the construction costs while waiting for the market to catch up?
In my experience, ADUs are a fantastic long-term investment, especially as Toronto continues to evolve. While the appraisal and financing process still has some hurdles, the demand for additional housing is only growing.
Final Thoughts: Should You Build an ADU?
David and I both agree—ADUs add value to your home, but it’s not always a straightforward process. They offer financial and functional benefits, but getting the right financing and understanding how appraisals work is critical.
If you’re thinking about adding an ADU to your property and need help with financing options, let’s chat! As a mortgage broker with nearly two decades of experience, I can help you navigate the process and find the right solution for your needs.
📩 Have questions? Get in touch with me today!
Special thanks to David Wenger from Ridgepoint Appraisals for sharing his expertise! If you need an appraisal, you can reach him at info@ridgepointappraisals.com.
