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With the affordability crisis stinging American pocketbooks and small landlords struggling to maintain cash flow amid high interest rates and property prices, the push for more housing is gaining traction on both sides of the aisle.
This has resulted in a quiet revolution amongst lawmakers, who have proposed sweeping zoning changes across 21 states that could enable roughly 173,000 additional homes every year, according to a new report by the American Enterprise Institute.
“Things are getting worse, and that’s why states are stepping in,” the report’s author, Ed Pinto, told Homes.com. “When you require half-acre lots where they’re not needed, you’re keeping people from owning a home.”
The proposals cover all residential housing types from condos to small multifamily properties, creating opportunities for owner-occupant and mom-and-pop investors alike.
Increased Housing Shortage and Zoning Reform: The Ideal Couple
Last week, White House economists stated that the country was short by 10 million homes, far exceeding previous estimates. The housing shortage has driven up rents, while higher interest rates and construction costs have deterred sellers from listing their homes and builders from building new properties.
The new proposals aim to add the so-called “missing middle”-type properties to the housing equation, which, according to a 2023 op-ed in the New York Daily News, republished on the AEI website, “includes two- and three-family homes which young families can afford through rental income that helps pay the mortgage. It should include ‘accessory dwelling units’—the ‘granny flats’ which allow older homeowners to move to a smaller place while staying in the town they know. The garages of raised ranch homes can become new apartments.”
In Connecticut, a new bill under consideration, nicknamed the “Golden Girls bill” after the classic 1980s sitcom, would let homeowners rent up to three bedrooms in their single-family homes without requiring local government approval. It’s aimed at empty nesters or older people who are looking to utilize their homes better.
The conversion of single-family homes to duplexes, triplexes, or townhomes, and the legalization of the construction of small multifamily homes where single-family zoning previously prevailed, represent a huge game changer for investors—the opportunity to “supersize” their rental portfolios without having to find new properties.
Following Minneapolis’ Example
Changing zoning laws to allow more housing is hardly a novel concept. Minneapolis was a pioneer, allowing greater downtown and transit corridor density, eliminating parking requirements, and enabling accessory dwelling unit (ADU) construction. One headline-grabbing change was ending single-family zoning, allowing two- and three-unit homes to be built in every neighborhood.
Alex Horowitz, director of housing policy initiatives at Pew, told NPR in 2024, after the changes were implemented:
“We saw Minneapolis add 12% to its housing stock in just that five-year period [between 2017 and 2022], far more than other cities. The zoning reforms made apartments feasible. They made them less expensive to build. And they were saying yes when builders submitted applications to build apartment buildings. So they got a lot of new housing in a short period of time.”
Minneapolis’ success was quickly followed by Oregon in 2019 and California in the early 2020s.
The Play for Real Estate Investors
More units mean greater potential for profits. Depending on the jurisdiction, owners of single-family dwellings now have the option to either convert them into small multi-unit apartment buildings by adding kitchens and bathrooms or to add ADUs.
Additionally, rezoning a lot from single-family to multifamily increases land value, resulting in a windfall gain for the owner.
Investors looking for cash-flow opportunities can now target larger, older single-family homes with an eye toward renovating them and converting them into multi-unit homes. For example, in areas that allow ADUs and additional units, a large three-story house with room for an ADU could potentially be transformed into four separate units. Thus, purchasing four such properties could result in 16 units of cash flow, exponentially increasing profits.
Red Tape Still Exists
Although zoning changes represent a big breakthrough for owner-occupants looking to offset their housing costs and investors looking to maximize cash flow, as this op-ed from Governing.com explains, permits and approvals still fall to city building departments, and bottlenecks are common.
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“Zoning reform is real, widespread, and necessary—but not sufficient on its own,” author Deborah Myerson, founder and principal of Myerson Consulting, writes. “The question is no longer whether a jurisdiction has reformed its zoning code. It’s whether those reforms are actually producing more housing.”
An Investment Gold Rush Has Residents Worried
The NIMBY movement (Not In My Back Yard) has been characterized as consisting of affluent homeowners in single-family-zoned areas who are vocally resistant to zoning changes that would allow greater housing density, including multifamily housing, to encroach on their neighborhoods and devalue their property. In many cases, prominent politicians have jumped into the fray.
“It would erode local control, diminish community input on planning and zoning, and disproportionately impact low-resource neighborhoods,” Calmatters reported Los Angeles Mayor Karen Bass as saying when urging California Governor Gavin Newsom to veto California’s zoning changes to boost housing.
ADUs are thought to be a part of 20% of all new California home construction. To date, state laws have enabled the construction of over 35,000 new ADUs since 2016. However, local homeowner groups have complained that mandating higher housing levels would reshape suburban-style neighborhoods.
The Cost of Scaling Up for Investors
For many investors, scaling their portfolio with ADUs comes down to one main question: How much does it cost? According to lender CIVIC, typical ADUs cost between $180,000 and over $300,000, depending on location. The easiest way to finance them, if you don’t have the cash, is to use the equity in your home or investment and take out a loan or line of credit.
Loans for non-owner-occupied ADUs can be difficult to arrange with traditional lenders, according to CIVIC, though LoopNet notes that ADUs can also be financed through FHA renovation loans, portfolio loans, and commercial real estate (CRE) loans.
Final Thoughts
Adding units sounds good in theory, but as with any construction project, overruns can be costly, especially when structural changes and new plumbing are factored in. Landlords will have to make a calculation based on potential cash flow versus the cost of construction and tax benefits.
Building an ADU into a preexisting structure, such as a garage or a basement conversion, is generally cheaper to build but may not generate as much rental income or appreciation as a completely detached ADU.
Currently, as new zoning laws are being implemented, there still seems to be a disconnect in some circumstances between state ADU laws and local zoning restrictions. If you plan to build an ADU, ensuring everyone is on the same page before the first nail is hammered is imperative to keeping costs down.
