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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2011

In-Law Units Offer a Niche Opportunity

As secondary units gain popularity, you can provide a path to funding

A big shift in the type of properties you fund may be headed your way, if it hasn’t arrived already. Across the nation, real estate agents report a surge in prospective homeowners looking for properties big enough or flexible enough to house multiple generations. The most-flexible multigenerational setups are usually homes with second units — aka in-law suites, accessory dwelling units and granny flats, to name a few common nicknames.

One national real estate company, for example, reports more than a third of its agents have heard clients express a desire for homes with multigenerational potential. In addition, AARP — long at the forefront of elder housing research — reported that multigenerational households made up 5.3 percent of all households in 2008.

This trend reverses a century-long movement toward single-family residences. Moreover, it seems likely the surge in multigenerational households and second units will increase further. The following three demographic trends support this claim.

  1. Baby boomers, around 75 million strong in the U.S., are reaching retirement age at the same time many are caring for elderly parents or welcoming back adult children. Multigenerational households, preferably with private and soundproof in-law units, offer a perfect solution.
  2. Many immigrant populations have strong traditions of sharing a roof with elders. This is similar to American living arrangements in 1860 — before farm workers became factory workers.
  3. The stalled economy, a housing crash and widespread concerns about the viability of Social Security have led many people to wonder how they’ll provide for themselves as they age. Rental income from a second unit is a tangible and fairly predictable income stream, especially compared to ultra-low interest rates paid on most bank savings accounts.

Brokers, be nimble

Thanks to the recent and ongoing housing-market debacle, mortgage brokers must be particularly watchful these days. Tight money policies will persist for years to come, even as would-be homebuyers get more creative in finding the resources they need. Luckily, mortgages for properties intended to house several generations don’t need to be more complex than average single-family loans.

Then again, if several generations pool their resources and insist on multiple signatories on all mortgage documents, things can get tricky quickly. Likewise, joint tenancies and tenants-in-common will continue to be rare — mostly because banks dislike them — but could increase. This is especially true in rural areas where multiple structures already exist on a property or parcels are large enough to accommodate two dwellings.

Borrowers who hope to use rental income from a second unit on the same property to qualify for a mortgage also present special issues. Brokers and loan originators should stay current on which lenders accept these types of income streams. Communicate that information clearly — and often — to clients and referral partners.

In some geographic areas, private investors fund in-law units. Brokers can make themselves attractive to such lenders by marketing to these borrowers and gaining expertise about pertinent subject matters, such as zoning.


Just as lenders typically prefer the predictable paradigm of single-family dwellings, so do local zoning codes. Throughout the U.S., many of the codes still in existence were implemented in the 1950s and 1960s — or earlier. They reflect a nuclear-family model now considered outdated.

Shifting household dynamics have led to heavy criticism of these codes. Today, households are increasingly diverse and face mounting pressure to cut expenses or increase income — or both. In many cases, single parents seek tenants, and older parents wonder about moving in with their adult children.

Building secondary stand-alone homes or converting part of an existing dwelling into another residence offers a great solution. In addition, the trend toward urban infill likely will lead many cities to revisit zoning laws in the interest of self-preservation. After all, if people can’t afford to live in the city proper, they can always move away and take their property-tax dollars with them.

For all these reasons and more, the ability to fund in-law units and similar dwellings could serve you well.


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