It’s not often that a local municipality offers to chip in hundreds of thousands of dollars to help you generate rental income.
That’s what’s happening in New York City, where every day homeowners have the opportunity to become small-scale landlords by receiving up to $395,000 from the city to add a backyard cottage, basement apartment, attic conversion, or similar accessory/ancillary dwelling unit (ADU).
NYC’s $395,000 ADU Offer: What It Really Means For Landlords
Known as the Plus One ADU Program, up to $395,000 is available to each qualifying owner-occupant who wishes to install an ADU on their property, through a mix of grants and forgivable loans.
A city test run in 2023-2024 resulted in more than 1,300 submissions within two weeks before applications closed. The relaunched fund is now capitalized and accepting applications from one-to-four-family homeowners who live on-site, are current on their mortgages and taxes, and have no open building code violations or properties in FEMA flood zones.
Mayor Mamdani said in a statement:
“One of the solutions to the housing crisis can be found in our backyards, our attics, or our basements—in an Ancillary Dwelling Unit. That’s why our administration is making it easier and more affordable to build an ADU through a library of preapproved plans and new financing options. By making it easier for New Yorkers to turn their homes into an extra place for a loved one or a little more income, we’re allowing our city to grow while keeping the character of the neighborhoods we love.”
According to the city’s ADU for You website, the funds can be used for construction and technical assistance related to design, permitting, and financing. Easing the process is the Pre-Approved Plan Library, which offers a selection of designs that have already passed an initial Department of Buildings code compliance review. The list includes 11 ADUs ranging from a 280-square-foot studio to a 785-square-foot two-bedroom residence.
ADUs as a Countrywide Wealth-Building Tool
New York is not the only place that views ADUs as a fix for the housing crisis. State and local governments across the country have been changing zoning rules and offering incentives for ADUs to increase housing supply while also allowing homeowners to generate rental income.
The New York Times reported:
- Fairfax County, Virginia, relaxed its ADU rules as part of a 2021 zoning overhaul.
- In Seattle, relaxing ADU regulations in 2019 allowed two ADUs per lot, removed owner-occupancy and parking mandates, and spaced the rise of three-unit “ADU compounds,” increasing density in a cost-effective way.
ADU regulations in other states include:
- California: Cities are required to allow ADUs in most residential zones, with 60-day approval windows and no owner-occupancy mandates for most units. In addition, there are limited impact fees for units under 750 square feet, with reduced marking mandates near transit.
- Oregon: State law allows at least one ADU on most urban single-family lots; Portland’s code allows up to two ADUs and commonly three-unit set-ups per lot with defined height/size caps and no owner-occupancy requirements.
- Washington: Recent laws require cities to permit attached and detached ADUs, limit parking and impact fees, and largely eliminate owner-occupancy requirements.
- Maine: ADUs on single-family lots should have a minimum size of around 190 square feet. More than one ADU, or a multifamily ADU, is permitted, with no additional parking requirements beyond those for the primary home.
- Maryland: The 2025 Small Houses Act forces covered counties and Baltimore City to legalize ADUs on single-family lots by late 2026, capping them at 75% of the main home’s size and preventing HOAs and cities from imposing blanket bans.
- Colorado: Many metro jurisdictions must allow at least one ADU on detached single-unit lots, with local codes setting size, height, and design details, with no outright prohibitions in those areas.
- Massachusetts and Connecticut: Both states have laws encouraging or requiring local ADU ordinances, but each city or town sets its own rules on size limits, unit counts, and owner-occupancy mandates.
ADUs and Short-Term Rentals
Although most ADU programs are geared toward family housing or long-term rentals, rules for short-term rentals vary widely from one state or city to another, meaning that homeowners and landlords could both benefit from hosting guests in their ADU if their location allows it.
Some jurisdictions are revisiting short-term rental rules. In Washington, D.C., Mayor Muriel Bowser recently introduced the Short-Term Rental Regulation Amendment Act of 2026, which would allow tenants to operate short-term rentals at their primary residence if the unit is not rent-stabilized and the lease does not prohibit hosting.
For landlords, it could provide a way for responsible long-term tenants to bring in extra income. However, from an outside perspective, it also seems fraught with problems, especially the “special event” license, which would allow tenants to rent out their units during major events without being present.
Should the amendment act pass, an analysis by AirROI, a data and policy site focused on STRs, estimates that more than 112,000 renter households in D.C. could theoretically be eligible to host if the bill passes. The number will depend heavily on landlord policies and lease terms.
The only way for landlords to benefit from this would be to include a profit-sharing component in the lease with their primary tenant, with STR payments going through the landlord. On the face of it, it seems highly problematic.
Final Thoughts
New York City has made headlines for offering a substantial incentive to homeowners to build ADUs. However, many other states have been on board the ADU bandwagon for quite some time, allowing them to be built alongside rental properties, too, which is clearly a huge benefit for landlords.
However, even in cities and states that allow ADUs only on owner-occupied homes, it is a great way for would-be landlords to start their investment journey. If they purchase a four-unit property with an FHA loan and add an ADU, they would essentially have four units of rental income (the owner’s unit would be the fifth) to put down a 3.5% down payment. If those units are in New York City, they would also have up to an additional $395,000 to help them get started.
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