Accessory dwelling units have already changed the market of affordable housing forever, and right now, they are influencing the working world. With a rising number of homeowners who transform their ADUs into a place to start a new home-made business, the question of correct management of rental income, construction loans, and insurance cost is pivotal in the planning of future income.
In this article, we would like to shed some light on the topical question and clarify moments like correct business analysis and profit management among property owners.
Not only does having a business involving an accessory dwelling unit bring money, but also it carries some expenses that you should be aware of. Hence, careful planning of future expenses and approximate budget is crucial to the functioning and development of your business. Let's take a look at some of the most important parts of your budget.
Before you start the business, it is important to outline the initial expenses, including equipment, supplies, and licenses. In addition to this, pay attention to marketing expenses if you want to promote your business. Check whether you have everything necessary for your employees to work for you at the beginning.
Having an accessory dwelling unit as a place for your home-based business means you will have to pay for regular utilities like electricity, water, or heating. Don't forget about keeping software up-to-date as well as regular maintenance.
Your business activities cannot exist without proper insurance, according to the respectful department of your city. It will protect your assets from possible risks, and you will be able to spend resources more confidently without worrying that everything will go down the drain one day.
However, you can always hire special managers who will keep an eye on your property and find specialists who will have it fixed or obtain necessary permits and substitute obsolete furniture, for example.
Having a business directly connected with your private property has certain implications to it, and one of them is the question of tracking income and expenses.
First and foremost, you should separate business and personal finances so they would not interfere with each other. It will make the tracking process much easier and more effective. Next, try to make records of everything related to the business. You can do it by using a simple notebook or taking advantage of spreadsheets on the Internet. Also, you can always consult with a professional accountant who will surely share a piece of advice concerning financial statements or accounts payable.
In the previous paragraph, we have already mentioned that the separation of finances is important for homeowners with an ADU business. By doing so, it will be clear to you where your personal finances end, and business ones start. Hence, you will be able to finance your property easier and fund different improvements concerning your ADU.
The following steps can help you separate finances:
These steps can make the distinction clear for you, and you will get as much as possible from your granny flat without unnecessary headaches concerning transactions, mortgage loans, or the specific needs of the workers.
The tax deduction is not a swindle of some sort but a legal way to get extra cash from your property. The understanding of deductions leads to the possibility of maximizing tax savings which will eventually let your business flourish.
Home office deduction can be applied to cases when customers use space inside ADUs that they use for their business (which is totally your case). You will be able to deduct a portion of your expenses, like mortgage loans or utilities. If your ADU is not that modern and needs a renovation soon, you can show a project and reduce the cost of renovation of your accessory dwelling unit. Another way to support your business with some extra cash is to deduct money spent on insurance or any other policies that you have specifically for your business.
To achieve success in your business, it is essential that you understand how much money you get and from which source. Moreover, the correct understanding of such facts can lead to the further development of your business, which can look like increased production rates, another construction loan for a new building project, or other options involving cash.
One way to track your finances is to take advantage of a variety of accounting software or spreadsheets. This allows you to get access to info concerning the health and value of your home-based business and see potential issues more clearly. Also, it is not always necessary to reinvest the money back into your property; you can create a special emergency fund that would protect your accessory dwelling unit in case of any unexpected expenses. Last but not least, you should always understand the priority of how you are going to spend cash. For example, sometimes, it is better to pay off your construction loans or mortgages instead of reconstructing your house.
The financial projections are the process of figuring out the income that can help homeowners make informed decisions concerning future development and additional projects that they can create with it. To create one, it is vital to consider certain elements of your business.
Check the following elements that can help you find out the financial projections:
Remember that in order for these projections to work correctly, it is important to revisit them every now and then and update them according to the current situation.
Keeping documents concerning finances in good condition helps you omit the possibility of any problems with the law. Moreover, it gives you a better picture of your business as a whole. But how to maintain accurate financial records?
First, you need to organize and categorize all info connected with the financial side of your business. Keep all receipts, invoices, or bank statements in one place. Next, you need to reconcile your bank accounts with financial records. This way, you will notice mistakes or fraudulent activities from your contractors. Also, don't forget to keep records compliant with tax regulations. Research the tax legislation in your city and the rules working for your business to avoid possible pitfalls.
With the rising number of homeowners using their accessory dwelling units as a place for home-based business, there has also been an increase in the number of clear and convenient accounting software. These programs already support a huge number of consumers, so perhaps it is high time for you to pick up this practice.
The process of using accounting software has the following benefits:
Homeowners are able to completely mitigate the possibility of any mistakes concerning manual calculations or data entry, as this software will do everything for them.
The whole process will take much less time as accounting software is able to automate and complete repetitive tasks in which you would spend extra time.
All your data is stored in secure cloud storage, which means that your financial information is safely protected and accessible on request.
Even though accounting programs may cost some cash, the value that they provide will repay any expenses.
Good homeowners have to constantly keep an eye on their property and its performance so they can achieve financial goals constantly and without breaks. However, building a monitoring system for an amateur may be difficult, but we are here to help you.
First, you should establish Key Performance Indicators. They combine financial metrics that are relevant to the development of your business, including revenue growth rate or gross profit margin. Next, you should track your income and control your expenses. To do so, it is important to optimize expenses by negotiating better deals with your lender or trying to stay within your limits. Also, it is vital to get professional advice sporadically to seek an opportunity to refinance your mortgage loans or get cash-out refinance.
Every lender and investor that provides you with funds and resources should understand where their investment goes. Hence, you should understand how to create financial reports to underline your advantages and hide flaws.
To achieve it, you should include relevant info like an income statement, balance sheet, and statement of shareholders' equity. You can add value to your report by including comprehensive notes and explanations. Also, think about adding visuals to your report to show how much of a construction loan is paid or how big your other mortgage will be.
As we have said in the text, an ADU allows you to create a home-based business and get certain benefits. However, other families use a construction loan to build an ADU to get rental income from finding tenants for this affordable housing. Moreover, building an ADU increases the total value of the same lot where they have a main house and gives an opportunity to accommodate relatives in it. So, perhaps getting credit for a property that will generate cash for you is not a bad deal.
On the market, there are many ADUs that have different costs and values and take different amounts of time to complete. Overall, it depends on your needs and finance. The cheapest option is the attached ADU that will be placed attached to the main house. Other types of accessory dwelling units include detached ADUs, junior ADUs, or conversions. The building of each one requires different mortgage and finance, and they mostly differ in their relation to the main house, so pick wisely!
To get cash for the construction, you can find a lender that will provide you with the necessary funds. Also, you can work with a bank and ask for a mortgage. To understand how much finance you need, ask for an appraisal from a professional. Perhaps, even getting a home equity loan will be enough credit for your needs.
