ADU vs Garage Conversion for Rental Income: Bay Area Numbers

Two Ways to Turn Your Property Into an Income Source

Bay Area homeowners sitting on unused garage space or open lot area have a lucrative opportunity: build a rental unit. The two most popular paths are converting an existing garage into an ADU or constructing a new detached ADU from the ground up. Both generate meaningful rental income in a market where demand for housing far outpaces supply.

But the financial profile of each option looks very different. Upfront costs, monthly rental income, time to break even, property value impact, and construction timeline all vary significantly. This guide puts real Bay Area numbers side by side so you can make a confident decision.

The Numbers at a Glance

Factor	Garage Conversion	Detached ADU
Construction Cost	$100,000-$175,000	$250,000-$500,000+
Cost per Sq Ft	$150-$250	$300-$500
Monthly Rental Income	$1,800-$2,800	$2,500-$4,000
Annual Gross Income	$21,600-$33,600	$30,000-$48,000
Break-Even Period	4-6 years	8-11 years
Property Value Increase	15-25%	25-35%
Construction Timeline	3-6 months	8-14 months
Permit Timeline	4-8 weeks	8-16 weeks
Typical Unit Size	400-500 sqft	500-1,200 sqft

These figures reflect 2026 Bay Area market conditions. Premium cities like Palo Alto, Saratoga, and Los Altos trend toward the top of each range.

Garage Conversion: Lower Cost, Faster Returns

A garage conversion transforms your existing two-car or one-car garage into a livable rental unit. Because the foundation, walls, and roof are already in place, you skip the most expensive phases of construction. The project focuses on insulation, drywall, flooring, plumbing, electrical, HVAC, a bathroom, a kitchen or kitchenette, and finishing.

What It Costs

Bay Area garage conversions run $100,000-$175,000 in 2026. The range depends on your garage’s condition, the scope of finishes, and your city’s permit fees. A one-car garage conversion (250-400 sqft) falls at the lower end. A two-car garage (400-600 sqft) with mid-range to high-end finishes pushes toward $175,000.

Key cost components include:

• Insulation, drywall, and flooring: $15,000-$30,000
• Plumbing (kitchen + bathroom): $15,000-$25,000
• Electrical upgrade and panel: $8,000-$15,000
• HVAC installation: $5,000-$12,000
• Kitchen and bathroom finishes: $20,000-$45,000
• Permits and fees: $5,000-$15,000
• Garage door replacement (wall, window, or French doors): $3,000-$8,000

What It Earns

Garage conversion ADUs in the Bay Area rent for $1,800-$2,800 per month. The rate depends on your city, the unit’s square footage, finish quality, and whether you include a full kitchen or kitchenette.

At an average rent of $2,300/month and an average project cost of $135,000, a garage conversion generates roughly $27,600 in annual gross rental income. After accounting for vacancies (Bay Area ADU vacancy is extremely low, typically under 3%), insurance, and maintenance, net income averages $24,000-$25,000 per year.

Break-Even Timeline

With $24,000-$25,000 in net annual income on a $135,000 investment, a garage conversion breaks even in approximately 5-6 years. If your project comes in on the lower end at $100,000 and you achieve rents above $2,000/month, you could break even in as little as 4 years.

Detached ADU: Higher Investment, Higher Returns

A detached ADU is a purpose-built structure constructed from the ground up on your lot. This gives you full control over size (up to 1,200 sqft under California law), layout, ceiling height, finishes, and outdoor living space. Tenants value the privacy and independence of a standalone unit, which is why detached ADUs command the highest rents.

What It Costs

Detached ADU construction in the Bay Area runs $250,000-$500,000+ in 2026. The wide range reflects the difference between a modest 500 sqft studio and a high-end 1,200 sqft one- or two-bedroom unit. At $300-$500 per square foot, Bay Area detached ADUs are among the most expensive in California due to high labor costs, permit fees, and material pricing.

Key cost components include:

• Foundation and site work: $25,000-$50,000
• Framing and roofing: $40,000-$80,000
• Utility connections (water, sewer, electrical): $15,000-$35,000
• MEP (mechanical, electrical, plumbing): $35,000-$65,000
• Interior finishes: $40,000-$90,000
• Permits and fees: $8,000-$25,000
• Exterior and landscaping: $10,000-$30,000

What It Earns

Detached ADUs in the Bay Area rent for $2,500-$4,000 per month. The premium over garage conversions reflects the larger unit size, better construction quality, separate outdoor space, and greater tenant privacy. Two-bedroom detached ADUs in cities like Mountain View and Sunnyvale routinely command $3,500+/month.

At an average rent of $3,200/month and an average project cost of $375,000, a detached ADU generates roughly $38,400 in annual gross rental income. After vacancies, insurance, and maintenance, net income averages $34,000-$36,000 per year.

Break-Even Timeline

With $34,000-$36,000 in net annual income on a $375,000 investment, a detached ADU breaks even in approximately 10-11 years through rental income alone. However, this calculation does not account for the significant property value increase. When you factor in the 25-35% property value boost, the effective return is substantially higher.

Property Value: The Hidden ROI

Rental income is only half the return equation. Both ADU types increase your property’s appraised value, but the impact differs.

Garage Conversions

A well-executed garage conversion adds 15-25% to your home’s market value. On a Bay Area home valued at $1.5 million, that translates to $225,000-$375,000 in added equity. The trade-off: you lose your enclosed parking, which some buyers view as a drawback. However, the income-producing unit typically more than offsets the parking loss in appraisals.

Detached ADUs

Detached ADUs add 25-35% to property value. According to a 2025 Federal Housing Finance Agency study, properties with ADUs appreciated 22% more than comparable properties without them. On that same $1.5 million Bay Area home, a detached ADU adds $375,000-$525,000 in value. Appraisers value purpose-built, standalone units higher because they function as fully independent homes with dedicated entrances, utilities, and outdoor space.

What This Means for Total ROI

When you combine rental income with property value increase, both options become strong investments:

• Garage conversion: $135K cost, $24K/year net income, plus $225K-$375K in property value. Total first-year ROI (including value added): 185-295%.
• Detached ADU: $375K cost, $35K/year net income, plus $375K-$525K in property value. Total first-year ROI (including value added): 109-149%.

The garage conversion wins on percentage return. The detached ADU wins on total dollars generated.

Timeline Comparison

Time is money, especially when you are waiting for rental income to start flowing.

Garage Conversion: 3-6 Months Total

• Permits: 4-8 weeks (faster because you are converting an existing structure)
• Construction: 8-16 weeks (no foundation, framing, or roofing needed)
• Total from start to tenant move-in: 3-6 months

Detached ADU: 8-14 Months Total

• Permits: 8-16 weeks (more complex site plan and utility review)
• Construction: 4-10 months (full build sequence from foundation to finishing)
• Total from start to tenant move-in: 8-14 months

The 5-8 month head start on rental income is a real financial advantage for garage conversions. At $2,300/month average rent, starting 6 months earlier puts $13,800 more in your pocket during the first year.

When Each Option Makes More Sense

Choose a Garage Conversion If:

• Your budget is under $200,000
• You want rental income as quickly as possible
• Your garage is structurally sound with a good foundation
• You do not need the enclosed parking
• You want the fastest break-even on your investment

Choose a Detached ADU If:

• You want to maximize long-term rental income and property value
• You have adequate lot space (at least 4-foot setbacks from side and rear property lines)
• You plan to hold the property for 10+ years
• You want full design flexibility, including ceiling height, layout, and finishes
• You want to keep your existing garage for storage or parking

Consider Both If:

California law allows multiple ADUs on a single lot. Some Bay Area homeowners convert their garage for immediate income, then build a detached ADU later as a second income stream. This phased approach spreads out the investment while doubling your rental revenue potential.

Bay Area Rental Demand: Why Both Options Work

The Bay Area’s rental market makes ADU investments especially attractive. With median home prices above $1.4 million and median rents for one-bedroom apartments exceeding $2,500/month in most cities, there is strong demand for smaller, more affordable rental units.

ADUs fill a critical gap in the housing supply. They offer tenants lower rents than traditional apartments while giving them a private, standalone living experience. Vacancy rates for Bay Area ADUs are extremely low, typically under 3%, because demand consistently outpaces supply.

Whether you choose a garage conversion or a detached ADU, you are investing in one of the country’s strongest rental markets.

How Custom Home Approaches Each Project

Custom Home’s two-phase design-build process works for both garage conversions and detached ADUs.

Phase 1 (Design): We assess your property, identify the best approach for your goals and budget, create 3D visualizations, and lock in pricing before construction begins. For garage conversions, this phase includes a structural evaluation to catch any issues early. For detached ADUs, it covers site planning, utility routing, and architectural design.

Phase 2 (Build): Construction follows the approved plans with no surprises. Garage conversions move quickly because the structure is already in place. Detached ADUs involve a full build sequence but benefit from the same detailed planning that prevents change orders, delays, and cost overruns.

Both project types are fully permitted and built to code. Custom Home handles the entire process from design through final inspection, so you have one point of contact from start to finish.

Next Steps

The best investment for your property depends on your lot, your garage condition, your budget, and your long-term plans. A site visit is the fastest way to get a clear answer.

Schedule a free consultation to discuss your rental income goals with Custom Home. We will evaluate your property, walk you through both options with realistic Bay Area numbers, and recommend the approach that fits your situation.