Most people who call us because they are interested in building an accessory dwelling such as a backyard cottage or granny unit start with the question, “How much does a small house cost to build?” When people hear the answer, their next question is, “Why? I thought it’d be less expensive.”
Then come the following thoughts:
1. “My friend told me that houses can be built for $100/sqft”
For years people have heard a general rule of thumb that houses can be built for $100 per square foot. They think that if a 3000 sqft house costs $300,000 to build, a 500sqft house should cost $50,000 to build. But this just isn’t true.
The $100/sqft number can be accurate, but the size of the house has to be large enough to take advantage of economies of scale. Generally, the bigger the house is, the less expensive it is to build it per square foot. The smaller the house is, the more expensive it is to build per square foot. You’re going to have to build a 2500sqft+ house to be able to hit that $100/sqft number.
Also, when a builder says they can build a house for $100/sqft, they are generally only talking about the costs to build, and not factoring in design or permitting costs. These costs alone are often over 20% of the project.
And finally, the cost per square foot can change dramatically based on the location of the project. For example, Bay Area building costs can be as much as $250/sqft for a 2500sqft home and $300-$400/sqft for a small home. And as home prices continue to increase around the country, the cost of building increases as well.
2. “I just want a simple house.”
That’s great. But even a simple house is a complex project that takes time and money. And they’re all typically built using the same process:
a) Figure out what you can build in your city or county.
b) Work with an architect to draw up the size, look, and shape in a “schematic” design.
c) Submit the design to the planning department to get planning permits.
d) Once you have the planning permit, have the architect draw up construction documents for a building permit. This often requires two or three engineers such as structural, soils and civil.
e) Determine all the “finishes” which include appliances, faucets and fixtures, materials, tile, paint colors, landscaping, utilities etc..
f) Work with a builder to prepare the land, pour a foundation, frame the house, enclose the house, hook up water/electric/sewer, and install finishes.
Whether you build something 500sqft or 5000sqft, all of these steps are taken.
3. “I’m thinking a prefab house because it’s easier.”
This is rarely true. Buying a home that is built somewhere else is a great idea and it can save time on design fees, but it still needs to meet your city and county codes and then be permitted. Then it needs to be shipped to your location, and if that location is in an urban setting, you’re looking at significant costs to shut down streets and possibly hire a crane to lift the unit into your backyard. Once it arrives you will have paid for the same foundation and water/electric/sewer hookups that you would need with a stick-built home. By the time all of this adds up, you’re looking at a similar price to building a custom house. And while you don’t have to spend time designing prefab, you still have to spend all the time getting permits. And most importantly, a custom home allows you to design something specific to your needs and the lot in which it will reside.
4. “My uncle is a handyman and can build a small house for me for cheap.”
The best way to save money is to do the work yourself. It will take you a long time and you will make mistakes, but it can be an amazing and fun experience. Just be really careful because construction is the definition of back-breaking labor. If you have a relative who is willing to work for cost and no markup, that’s great. Projects like these usually take longer because there’s less incentive for speed, and quality can be compromised so we recommend looking at other examples of their work first.
5. “A builder I know says he can build a 500sqft house for $50,000.”
Be very careful with this scenario. Permits alone can cost $15,000. When you get a bid from a builder, make sure they give you a price for every line item that will go into the house, from permitting, to design, to construction, to cleanup. At New Avenue, our process requires that our partner builders fill out a 200+ line spec sheet with every single piece of building a house so no one can say the dreaded phrase, “We didn’t talk about having a (insert whatever you like here such as “sewer line”) for the house. That will be an extra $15,000.”
6. “Where do you get your information about building small houses?”
After working with many architects and builders on over 70 projects, we have a very unique data set that shows exactly what every component of building a house costs. For example, we can easily pull up a 360sqft house project that we managed and show that the foundation cost $10,775. We can then pull up another sheet that shows a 700sqft house with $7,000 of siding, but inform people that the owner wanted HardiePlank and if they want cedar shingles it will cost more.
7. “Can you give me a sample breakdown of costs to build a small house?”
This is our specialty. Let’s say you wanted to build a 400sqft house in the San Francisco Bay Area where things are more expensive than other parts of the country. We would start by showing you what a similar, recent, project we worked on cost, including every single detail, and then adapt it to meet your needs. Here’s a shortened example:
- Initial Assessment: $2,500
- Design Fees: $5,880
- Construction Documents: $5,400
- Engineering: $4,500
- City Fees: $5,620
- Survey: $2,300
- Design Administration: $3,400
Total Design and Permit Costs: $29,600
- General Contractor Start Fees: $3,400
- Demolition: $2,100
- Site Prep: $7,100
- Foundation: $11,975
- Framing & Carpentry: $23,700
- Insulation & Moisture Protection: $14,500
- Windows & Doors: $6,489
- Finishes: $14,825
- Plumbing: $13,900
- Heating and Ventilation: $3,400
- Electrical: $5,300
- Construction Admin Fees: $15,100
Total Construction: $121,789
Total Project Cost: $151,389
8. “Can spending $150,000 still give me a good return on investment?”
And this is very important.
Many of our clients who rent their accessory units use home equity loans with monthly payments that are half of what their rental income is so they are making money from the first day they rent their house.
And if you really want a return from renting, many people choose to downsize and move into their accessory unit while renting out their main house, bringing in even more rental income.
Also, by creating a second unit for your child or your parents you can avoid paying for many of the expenses of living separately such as rent to live elsewhere, maintenance and taxes of owning two homes, or the high costs of assisted living.
All in all, building an accessory unit like a backyard cottage or granny flat can be a great investment. While the reality is a bit more complex than some of the misinformation found on the internet, it can still be a very smart idea for both rental income and multigenerational living.
Learn more about getting a return from building a small house!