What if your backyard could help pay your mortgage? In Phoenix, many homeowners and buyers are exploring accessory dwelling units as a practical way to offset housing costs and build long-term wealth. If you want rental income without giving up your own space, an ADU house hack can be a smart path.
In this guide, you’ll learn how ADUs work in Phoenix, what to check before you build, ways to finance construction, and how to operate the unit as a rental. You will also get a simple checklist to move from idea to action with confidence. Let’s dive in.
What house hacking with ADUs means
House hacking means you live in your primary home while earning rental income from another unit on the same property. With an ADU, that second unit could be:
- A detached backyard cottage
- An attached addition with a separate entrance
- A garage conversion
- An interior conversion such as a suite
Common approaches include renting the ADU to a long-term tenant, using it as a short-term rental if allowed, or living in the ADU and renting the main home. The right model depends on your property, your cash flow goals, and local rules.
Why Phoenix is a good fit
Phoenix has a mix of older neighborhoods, diverse lot sizes, and steady renter demand over time. Many single-family parcels can accommodate a small, well-placed unit. Your success will still come down to zoning, utility hookups, and the permitting path for your specific address.
If you are near Scottsdale, Tempe, or other nearby cities, confirm rules for that municipality, since requirements can differ from the City of Phoenix.
Check local rules first
Before you sketch plans, verify what your lot allows. Key items to confirm for properties in Phoenix or unincorporated Maricopa County include:
- Zoning and eligibility. Confirm if an ADU is permitted for your zoning and whether lot-size minimums apply.
- Owner occupancy. Some areas require the owner to live on site when an ADU exists.
- Size, height, and placement. Check maximum square footage, height limits, and required setbacks.
- Parking. Learn whether off-street parking is required or if exemptions apply.
- Utilities. Ask about water and sewer connection rules, whether separate meters are allowed, and potential impact fees.
- Building code and inspections. Your ADU must meet building, electrical, plumbing, and mechanical codes and pass inspections.
- Short-term rental rules. Many cities require registration or permits for STRs and may have special limits for ADUs. Verify before planning an Airbnb setup.
- HOA covenants. Private HOA or deed restrictions can override what the city allows.
Your authoritative contacts are the City of Phoenix Planning and Development Department for properties inside the city and Maricopa County Planning and Development for unincorporated areas.
Financing your ADU
Your financing path will depend on whether you are buying a home with an existing ADU or adding one after you close.
- Buying a home that already has an ADU. Many conventional lenders, as well as FHA and VA options, can finance properties with ADUs if the home meets program standards. Underwriting and rental income treatment vary by lender.
- Adding an ADU after purchase. Owners often use a HELOC, a cash-out refinance, a renovation or construction loan, or a portfolio lender. Some lenders offer a single construction-to-permanent loan, while others require separate phases.
- Using rental income to qualify. Lenders may count a portion of documented ADU rent if you have a lease in place and the program allows it. Policies differ, so consult lenders early.
Appraisals consider quality, access, and comparable sales. If there are few comps, valuation can be more complex. Plan for a thoughtful conversation with your lender and appraiser about the unit’s features and market rent.
Taxes and insurance basics
- Rental income is taxable. Keep detailed records of income and allowable expenses. IRS Publication 527 outlines residential rental property rules.
- Property taxes may increase. Adding livable square footage commonly raises assessed value. Check with the Maricopa County Assessor and a tax advisor.
- Short-term rental taxes. STR use can trigger separate registration and tax requirements.
- Insurance. Notify your insurer about the ADU and rental activity. You may need landlord coverage or a liability umbrella. STR coverage is different from long-term rental coverage.
Budgeting and costs in Phoenix
ADU costs vary by size, finishes, and site conditions. Plan for these major categories:
- Design and permits. Architectural plans, engineering as needed, permit and impact fees.
- Site work. Grading, foundation, drainage, and any retaining needs.
- Utilities. Water and sewer connections, trenching, electrical service upgrades, HVAC.
- Structure and finishes. Framing, roofing, insulation, windows, doors, cabinets, and flooring.
- Systems. Plumbing, electrical, HVAC, and water heater.
- Safety and egress. Smoke and carbon monoxide detectors and code-compliant exits.
Garage conversions tend to cost less than detached new builds because you can reuse the structure. Detached ADUs typically cost more due to foundations and separate utility runs. Align finishes with local rent expectations, and include a 10 to 20 percent contingency for surprises.
Design and build steps
- Confirm feasibility. A site plan or feasibility study will help you confirm setbacks, easements, and placement options.
- Plan privacy and access. Consider sightlines, outdoor space, and a logical entry that respects both households.
- Check utilities. You may need panel upgrades or new service runs. Separate meters may or may not be allowed by the utility.
- Addressing and occupancy. Some ADUs receive a separate address or unit number. You will need inspections and a certificate of occupancy before renting.
- Hire licensed pros. Work with Arizona Registrar of Contractors licensed professionals and use written contracts. If you act as an owner-builder, understand how that affects financing and resale.
Renting your ADU
If you plan to self-manage, build a simple system for screening, maintenance, and rent collection. If you prefer less involvement, a property manager can handle marketing, screening, leases, and coordination.
- Tenant screening and leases. Follow fair housing laws and use a written lease that clarifies utilities, parking, and maintenance.
- Maintenance. Budget for turnover, repairs, pest control, and landscaping.
- Safety and habitability. Equip the unit with required detectors and egress. Keep it compliant and well maintained.
Short-term vs long-term rentals
Short-term rentals can offer higher gross income in some neighborhoods, but they come with registration, tax, and compliance requirements, as well as different insurance needs. Long-term rentals offer more predictable income and simpler operations.
Before you choose, review current city STR rules for your address and compare expected net income after expenses and time commitment.
How ADUs affect resale
An ADU can attract more buyers who value flexibility, multigenerational living, or rental income. Appraisers consider market rent, quality, and comparable sales when determining value. Keep a documentation package for resale that includes permits, final inspections, utility details, and any rental history. This makes underwriting and appraisal smoother for the next buyer.
Risks and pitfalls to avoid
- Zoning or HOA prohibitions that block ADUs.
- Underestimating total costs, especially utilities and site work.
- Financing hurdles if a lender will not count rent or will not finance the project type.
- Appraisal uncertainty when there are few local comps.
- Higher property taxes and insurance costs than expected.
- Neighborhood opposition or permitting delays.
- Tenant risk, including vacancy or nonpayment.
- STR rule changes that impact income plans.
Phoenix house-hack checklist
- Verify zoning, setbacks, and ADU allowances for your parcel.
- Review HOA covenants or deed restrictions.
- Order a site feasibility review to map placement and utilities.
- Get two to three contractor estimates with scope, schedule, and permits.
- Speak with local lenders about financing and rental income treatment.
- Consult a CPA about income, depreciation, and property tax impacts.
- Research neighborhood rents and any short-term rental rules.
- Pull permits before construction and choose licensed contractors.
- Create a tenant screening process and lease template compliant with Arizona law.
- Set aside reserves for repairs, vacancies, insurance, and tax increases.
Your next step
If you want an income-focused strategy that fits your Phoenix or Scottsdale property, the right planning makes all the difference. A clear feasibility check, realistic budget, and upfront conversations with lenders and contractors will set you up for success. When you are ready to identify ADU-friendly lots, evaluate rent potential, or position a home with an ADU for top-dollar resale, connect with a local advisor who understands both the neighborhood and the numbers.
Have questions or want a property-by-property assessment? Reach out to Lauren Inglese for consultative, data-informed guidance.
FAQs
Can I build an ADU on my Phoenix lot?
- It depends on zoning, lot size, setbacks, and any HOA rules, so confirm with the City of Phoenix or Maricopa County and review your covenants.
Do I need to live on the property if I add an ADU?
- Some areas require owner occupancy when an ADU exists, so verify the rule that applies to your specific address before planning.
How much will an ADU cost to build?
- Costs vary by size, finishes, and utility hookups; garage conversions tend to cost less than detached units, so get local contractor estimates and include contingency.
Can I use ADU rent to qualify for a mortgage?
- Many lenders may count a portion of documented ADU rent if a lease is in place and program rules allow it, so speak with lenders early about requirements.
Will my property taxes go up after adding an ADU?
- Adding livable square footage commonly increases assessed value, so expect a possible tax increase and confirm with the Maricopa County Assessor.
Can I run the ADU as a short-term rental in Phoenix?
- Possibly, but Phoenix and nearby cities have registration, tax, and compliance rules for STRs, so confirm current ordinances before you proceed.
Do I need separate utility meters for the ADU?
- Policies vary by city and utility provider; some owners keep a single meter, while others install separate meters if allowed.
