ADU Rental Income Guide: What Can You Charge in the Bay Area?

What Bay Area ADUs Actually Rent For in 2026

ADU rental income is one of the primary reasons Bay Area homeowners invest in accessory dwelling units. The region’s persistent housing shortage, high median incomes, and strong employment market create ideal conditions for ADU landlords. Vacancy rates for well-located ADUs hover near zero, and rents continue to climb 5-8% annually.

But the range of potential income is wide. A 400 sqft studio in East San Jose generates a very different return than a 1,000 sqft two-bedroom in Palo Alto. This guide provides the real numbers so you can estimate your rental income before breaking ground.

ADU Rental Rates by City

Rental rates across the Bay Area reflect each city’s median income levels, housing demand, and proximity to major employers. Here is what ADUs are renting for in 2026:

City	Studio (400-500 sqft)	1 Bedroom (500-700 sqft)	2 Bedroom (700-1,200 sqft)
Palo Alto	$2,500-$3,000	$3,200-$3,500	$3,800-$4,200
Cupertino	$2,400-$2,800	$3,000-$3,400	$3,500-$4,000
Mountain View	$2,400-$2,800	$3,000-$3,300	$3,500-$3,900
Sunnyvale	$2,300-$2,700	$2,800-$3,200	$3,300-$3,800
Los Gatos	$2,300-$2,700	$2,800-$3,100	$3,300-$3,700
Saratoga	$2,300-$2,700	$2,800-$3,100	$3,300-$3,700
Campbell	$2,200-$2,600	$2,600-$3,000	$3,100-$3,500
Redwood City	$2,200-$2,600	$2,600-$3,000	$3,100-$3,500
San Mateo	$2,200-$2,500	$2,500-$2,800	$3,000-$3,400
San Jose	$2,000-$2,500	$2,500-$3,000	$3,000-$3,500
Fremont	$2,000-$2,400	$2,400-$2,800	$2,900-$3,300
Milpitas	$2,000-$2,400	$2,400-$2,800	$2,900-$3,300

These figures reflect market-rate long-term rentals for well-maintained ADUs with modern finishes. Older or lower-quality units may rent at the bottom of these ranges or slightly below.

Factors That Affect Your ADU Rental Rate

1. Location and Neighborhood

Location is the single biggest factor. An ADU in Palo Alto near Stanford University or the downtown area can command $3,500+ for a one-bedroom. The same floor plan in South San Jose might rent for $2,500. Proximity to transit, tech campuses, downtown areas, and good school districts all push rents higher.

2. Unit Size and Layout

Bigger ADUs command higher absolute rents, but smaller units deliver better rent per square foot. A 500 sqft one-bedroom in Sunnyvale renting for $2,800/month generates $5.60 per sqft. A 1,000 sqft two-bedroom in the same city renting for $3,500 generates $3.50 per sqft. If your primary goal is maximizing return on investment, a well-designed one-bedroom or large studio is often the most efficient play.

3. Finish Quality

Tenants paying $2,500+ per month expect a certain standard. Key features that justify premium rents include:

• Quartz or stone countertops (not laminate)
• Modern cabinetry with soft-close hardware
• In-unit washer/dryer (adds $100-$200/month to the rental rate)
• Central HVAC or mini-split heating and cooling
• Quality flooring such as luxury vinyl plank or hardwood-look tile
• Good natural light through well-placed windows and glass doors

Investing an extra $20,000-$40,000 in mid-range to high-end finishes can add $200-$400/month to your rental income. Over 10 years, that upgrade pays for itself several times over.

4. Private Entrance and Outdoor Space

ADUs with a dedicated entrance, separate address, and some private outdoor space (even a small patio) rent for more than units that share walkways with the main home. Tenants value independence and privacy. A private entrance alone can justify $100-$200/month more in rent.

5. Parking

Bay Area parking is a constant challenge. If your ADU includes a dedicated parking spot, especially a covered one, you can charge $100-$200/month more than comparable units without parking. If the ADU replaces a garage, consider adding a carport or driveway pad to preserve parking availability for your tenant.

6. Utilities and Amenities

Including utilities (water, trash, internet) simplifies the rental arrangement and appeals to tenants willing to pay a slightly higher all-in rent. Some ADU landlords include high-speed internet and basic utilities, then set the rent $150-$250 higher to cover those costs. This reduces turnover because tenants appreciate the simplicity.

Annual Rental Income Projections

Here is what your ADU could generate annually, based on the city-level data above:

ADU Type	Low Estimate (Annual)	Mid Estimate (Annual)	High Estimate (Annual)
Studio	$24,000	$30,000	$36,000
1 Bedroom	$30,000	$36,000	$42,000
2 Bedroom	$36,000	$42,000	$50,400

Low estimates reflect cities like Fremont and Milpitas with standard finishes. High estimates reflect premium cities like Palo Alto and Cupertino with upgraded finishes and amenities. Most Bay Area ADU owners land somewhere in the mid range.

Landlord Responsibilities and Ongoing Costs

Rental income is not pure profit. Plan for these ongoing costs as an ADU landlord:

• Property management: 8-10% of monthly rent if you hire a manager, or your own time if self-managing
• Maintenance and repairs: Budget 1-2% of the ADU’s construction cost per year ($3,000-$6,000 for a typical unit)
• Insurance: Landlord insurance adds roughly $500-$1,000/year beyond your existing homeowner policy
• Vacancy: Even in the Bay Area, plan for 2-4 weeks of vacancy per year during tenant transitions
• Property taxes: The ADU adds 1-1.5% of its assessed construction value annually (roughly $3,000-$5,000 for most units)

After subtracting these costs, net rental income typically runs 70-85% of gross rent. For a one-bedroom renting at $3,000/month ($36,000/year), expect net income of $25,000-$30,000 per year.

Tax Implications of ADU Rental Income

ADU rental income is taxable at both the federal and California state level. You must report all rental income on Schedule E of your federal return. However, several deductions can significantly reduce your tax liability:

• Depreciation. Residential rental property depreciates over 27.5 years. If your ADU cost $350,000 to build, you can deduct roughly $12,700 per year in depreciation, a substantial offset against rental income.
• Mortgage interest. If you financed the ADU with a home equity loan, HELOC, or construction loan, the interest is deductible against rental income.
• Repairs and maintenance. All repair costs, appliance replacements, and maintenance expenses are deductible.
• Property management fees. If you hire a property manager, their fees are fully deductible.
• Utilities. Any utilities you pay on behalf of the tenant are deductible.
• Insurance. Landlord insurance premiums are deductible.

One important note: Proposition 13 protects your main home from reassessment when you add an ADU. The property tax increase applies only to the new construction value, not to your entire property. For a $350,000 ADU, the additional annual property tax is approximately $3,500-$4,200.

Consult a CPA who specializes in rental properties. ADU tax strategy involves nuances around passive income rules, depreciation recapture, and state-specific deductions that vary based on your overall income and tax situation.

AB 1033: The ADU Condo Conversion Option

California’s AB 1033, which took effect January 1, 2024, allows homeowners to sell their ADU separately from the primary residence as a condominium. This creates a second exit strategy beyond collecting rent. Instead of holding the unit as a rental, you could build, sell, and capture the equity in one transaction.

Here is what you need to know:

• Local opt-in required. Cities must proactively adopt AB 1033 for it to apply. San Jose was among the first Bay Area cities to opt in (June 2024). San Diego and Santa Monica have also adopted it. Other cities are evaluating the policy.
• Condominium map required. You must create a condo subdivision map, which involves a surveyor and legal process.
• Lienholder consent. Every lender on the property must approve the condo conversion in writing.
• HOA formation. You must establish a homeowners association to manage shared maintenance of the property’s exterior and common areas.
• Market potential. A well-built two-bedroom ADU in a premium Bay Area city could sell for $500,000-$800,000+ as a condo, potentially exceeding the construction cost by a wide margin.

AB 1033 is still new, and the first condo conversion in California was completed in August 2025. As more cities adopt the ordinance and the process matures, this pathway could become a significant wealth-building tool for Bay Area homeowners.

How to Maximize Your ADU Rental Income

Based on the data, here are the most effective strategies for maximizing rental income:

1. Build the right size. One-bedroom units (500-700 sqft) offer the best balance of construction cost and rental income. They appeal to the largest tenant pool: working professionals and couples.

2. Invest in finishes that matter. Quartz countertops, modern cabinetry, and in-unit laundry are the three upgrades that most consistently increase rental rates. Skip the luxury fixtures and focus on durability and aesthetics.

3. Include a private entrance. Separate access is non-negotiable for commanding top rents. It also reduces friction between you and your tenant.

4. Provide parking. Even one dedicated spot adds $100-$200/month and dramatically reduces vacancy time.

5. Design for energy efficiency. Mini-split HVAC systems, good insulation, and LED lighting reduce your tenant’s utility costs. If you include utilities in the rent, these features protect your margins.

6. Price correctly from day one. Overpricing by $200/month can cost you two months of vacancy, a net loss of $4,000+ in the first year. Research comparable ADU and apartment listings in your specific neighborhood using Zillow, Craigslist, and Apartments.com.

What Custom Home Delivers for ADU Investors

Custom Home’s two-phase design-build process is specifically designed for homeowners building ADUs as investments. During Phase 1 (Design), we analyze your lot, local rental comparables, and target tenant profile to design an ADU that maximizes your return. We provide a complete 3D visualization, engineered plans, and an itemized budget before you commit to construction.

In Phase 2 (Build), the price is locked in. No surprises, no change orders eating into your projected ROI. Our clients consistently achieve top-of-market rents because the design, finishes, and layout are optimized for the Bay Area rental market from day one.

Next Steps

If you are evaluating an ADU as an investment, the first step is understanding your property’s rental income potential. We will assess your lot, provide a cost estimate, and show you projected rental income specific to your city and neighborhood.

Contact Custom Home for a free ADU consultation to start planning your investment.