Thinking about adding a backyard apartment or converting your basement to earn rental income? You’re not alone. Many Bloomington homeowners are exploring accessory dwelling units, or ADUs, as a way to create flexible space and steady cash flow. This guide walks you through the rules to confirm, the permits to plan for, and the numbers to run so you can decide if an ADU pencils out for you. Let’s dive in.
What an ADU is and how rules work
An ADU is a smaller, independent residence on the same lot as your main home. It could be a basement apartment, an attached addition, a garage conversion, or a detached cottage. In Bloomington, three layers of rules shape what you can build and rent: city zoning and ordinances, the Minnesota State Building Code, and applicable county or state health and housing laws.
City zoning determines if and where ADUs are allowed, how large they can be, where they sit on your lot, and how many parking spaces you may need. The building code covers safety and construction standards, like egress, smoke and CO alarms, and permits. County and state rules can apply to septic and wells, and landlord-tenant law governs how you lease and manage the unit.
Check Bloomington zoning first
Before you sketch plans, confirm your property’s zoning and whether ADUs are allowed in that district. Ask the Planning Division about any owner-occupancy rules, size caps, and design standards. Verify which ADU types are allowed, such as basement conversions, attached additions, garage conversions, or detached cottages.
Also ask about parking requirements, setbacks, and lot coverage limits, which matter most for detached units. If your home is in a special or historic district, there may be extra design or placement rules. If short-term rentals interest you, confirm whether accessory units can be offered for short stays or if they must be leased long term.
Building code and safety basics
Expect Minnesota State Building Code requirements for any ADU project. Common items include proper bedroom egress, safe stairs and handrails, minimum ceiling heights, and adequate light and ventilation. You will need smoke and carbon monoxide alarms and appropriate fire separation if the unit shares walls with the main home.
Mechanical, plumbing, and electrical systems must meet code, whether shared or separate. If your property uses a septic system, a capacity review may be required and upgrades may be needed if you add bedrooms. Plan to pull building, electrical, plumbing, and mechanical permits, and schedule inspections throughout construction.
Rental licensing and inspections
Many Minnesota cities require rental registration or licensing before leasing a unit. Confirm with Bloomington if your ADU must be licensed as a rental and whether an inspection is required prior to occupancy. Inspections typically check for smoke and CO detectors, egress, electrical safety, heating, and secure exits.
Federal and state housing rules also apply when you rent. If your structure was built before 1978, follow lead-based paint disclosure and renovation rules. Review Minnesota landlord-tenant guidance for deposits, required disclosures, and notice timelines so your lease and processes are compliant. Fair housing laws apply to your marketing and screening.
Utilities, addressing, and mail
Ask the city and utilities how detached ADUs are addressed and how emergency services and mail delivery work. Clarify whether you can or must install separate meters for electricity, gas, or water and sewer. Utility choices affect project cost and how you split bills with a tenant.
Parking, setbacks, and design notes
If you plan a detached unit, confirm setbacks from property lines, maximum height, and lot coverage. Ask whether a separate exterior entrance is required for internal ADUs. Some cities require architectural compatibility between the main home and ADU, so verify exterior materials and lighting standards early.
Estimating costs in the Twin Cities
ADU costs vary widely based on scope and site conditions. In general, interior conversions tend to cost less than garage conversions, which often cost less than additions, while new detached cottages can be the most expensive. Key drivers include unit size, foundation work, kitchen and bath buildout, utility connections, and finish level.
Plan for soft costs like design and engineering, permit and utility fees, and financing costs. Always get multiple local contractor bids and include a 10 to 20 percent contingency for surprises, especially in older homes. The most accurate budget will come from detailed plans and local quotes.
How to price expected rent
Start with a scan of long-term rental comps for studios to two-bedroom units in Bloomington and nearby suburbs. Compare size, bedroom count, in-unit laundry, parking, and location. Adjust for amenities and seasonality to land on a realistic monthly rent.
Use a conservative vacancy factor of 5 to 10 percent for your model. If you are considering short-term rentals, verify legality first, then compare projected nightly rates and occupancy. Your ADU’s design and features will directly influence achievable rent.
ROI formulas you can use
Understanding a few simple metrics helps you test scenarios.
- Gross Rent Multiplier: total project cost divided by annual gross rent. Lower is better but ignores expenses.
- Gross Rental Yield: annual gross rent divided by total project cost, times 100. It shows simple return before expenses.
- Net Operating Income: annual gross rent minus operating expenses like insurance, property tax increases, maintenance, management, utilities you pay, and vacancy.
- Cap Rate: NOI divided by total project cost. Investors compare this to other opportunities.
- Cash-on-Cash Return: annual pre-tax cash flow divided by cash invested. This accounts for financing and out-of-pocket funds.
- Payback Period: cash invested divided by annual net cash flow.
Example pro forma to stress test
The numbers below are illustrative. Replace them with local bids and rent comps to test your own plan.
- Project cost: $120,000 for a detached ADU
- Expected gross monthly rent: $1,200, or $14,400 per year
- Vacancy allowance at 7 percent: effective rent $13,392
- Operating expenses at 35 percent of effective rent: $4,687
- Net Operating Income: $8,705
- Cap rate: $8,705 divided by $120,000 equals 7.3 percent
- If financed at 80 percent loan-to-value with annual debt service of about $6,000, pre-tax cash flow is $2,705
- If total cash invested is $30,000, cash-on-cash return is 9.0 percent
Small changes in rent, costs, or financing can move the result a lot. Build a base case and then adjust rent and cost assumptions to see your break-even points.
Taxes, value, and financing
Adding an ADU typically increases your assessed value, which can increase property taxes. Check with the assessor for likely impact. Rental income is taxable, and you may be able to deduct expenses, depreciation, and interest. A local CPA can help you plan.
Compare financing options such as a HELOC, cash-out refinance, renovation or construction loan, or a second mortgage. Interest rates and terms change cash flow, so model several scenarios before you commit.
Step-by-step planning checklist
Use this quick path to a compliant, rentable ADU:
- Early feasibility
- Contact Bloomington Planning to confirm ADU eligibility for your zoning, parking, setbacks, and any overlays.
- Talk with Inspections about required permits and review timelines.
- Check site and utility constraints, including septic capacity, drainage, easements, and tree protection.
- Clarify address assignment and metering options, especially for detached units.
- Design and scope
- Choose unit type: basement conversion, garage conversion, attached addition, or detached cottage.
- Plan egress, private or shared entrances, kitchen and bath layout, and mechanical systems.
- Confirm energy code and life-safety details to avoid redesigns during review.
- Permits and inspections
- Submit full drawings for building, electrical, plumbing, and mechanical permits.
- Schedule foundation, rough-in, insulation, and final inspections.
- Complete rental registration or licensing before move-in if required.
- Leasing setup
- Draft a lease that follows Minnesota law and required disclosures, including lead-based paint for pre-1978 structures.
- Decide on self-management or a property manager and budget for marketing, screening, and repairs.
- Set vacancy and maintenance reserves to protect cash flow.
- Financing and risk
- Get pre-approval and compare loan options tied to your timeline and budget.
- Update your insurance to cover a rental unit or add a landlord endorsement.
- Collect multiple contractor bids and include a contingency of 10 to 20 percent.
Common pitfalls and how to avoid them
- Designing before zoning confirmation. Always confirm ADU eligibility, size, and parking first to avoid rework.
- Underestimating utilities. Utility trenching, sewer connections, and panel upgrades can surprise your budget.
- Skipping code details. Egress windows, fire separation, and ceiling heights can be costly to correct late.
- Ignoring licensing. Renting without required registration or inspection can delay income.
- Overly optimistic rents. Use comps and apply a vacancy factor to avoid cash flow shortfalls.
Is an ADU a good fit for you?
If you want long-term flexibility, a separate space for family, and potential rental income, an ADU can be a smart improvement. Success comes from getting zoning clarity early, building to code, and modeling your finances with conservative assumptions. With a solid plan and the right team, an ADU can support your lifestyle and your bottom line.
If you would like local input on rental comps and resale considerations in Bloomington and nearby suburbs, reach out to the The Steve Schmitz Team. We can help you weigh neighborhood demand, buyer preferences, and long-term value so you move forward with confidence.
FAQs
Are ADUs allowed in Bloomington single-family zones?
- It depends on your property’s zoning and any local conditions. Confirm eligibility, size limits, and parking with the City of Bloomington Planning Division.
Do I need permits to build or convert an ADU in Bloomington?
- Yes. Converting or creating a dwelling requires building, electrical, plumbing, and mechanical permits, along with inspections under the Minnesota State Building Code.
Can I rent a new ADU short term in Bloomington?
- Short-term rental rules can differ from long-term rentals and may include extra limits or licensing. Confirm current Bloomington rules before planning nightly stays.
What inspections are required before leasing an ADU?
- Many cities require rental registration or licensing and an inspection for safety items like smoke and CO detectors, egress, and heating. Verify Bloomington’s specific process and schedule.
How much rent can I expect from a Bloomington ADU?
- Price rent using local comps for 0 to 2 bedroom units, adjusting for size, amenities, and location, then apply a 5 to 10 percent vacancy factor for a conservative estimate.
Will an ADU increase my property taxes in Hennepin County?
- Adding an ADU usually increases assessed value, which can raise property taxes. Check with the assessor’s office for likely impact based on your scope and plans.