House Hacking In Denver With A Backyard ADU

What if your backyard could help pay your mortgage? In Denver, a well-planned accessory dwelling unit, often called a backyard cottage, can create dependable rental income or flexible space for family. You might be weighing costs, rules, and timing and wondering where to start. This guide walks you through feasibility, permitting, design, financing, and rentability so you can decide if an ADU fits your Denver house hacking plan. Let’s dive in.

What an ADU means in Denver

An accessory dwelling unit is a self-contained home on the same lot as your primary residence. In Denver, the policy is meant to add housing options and give owners more flexibility. You can live in the main house and rent the ADU, or live in the ADU and rent the main house.

As of November 2025, the City and County of Denver allows ADUs on many single-family lots that meet zoning rules. Always confirm current standards with Denver Development Services, since local rules and fee schedules change.

Can you build one on your lot?

Quick eligibility check

• Zoning: Many single-family districts allow one ADU per lot. Verify your zoning and any overlays that apply.
• Historic or overlay districts: Some neighborhoods and Landmark areas require design review or extra steps.
• HOA or deed restrictions: Rules may limit or prohibit ADUs, so check covenants before you design.

If you take one first step, call Denver Development Services to confirm eligibility, setbacks, and size limits for your specific lot.

Permits, rules, and timing

Zoning and design basics

Denver’s code governs how big your ADU can be, where it can sit on your lot, and how tall it can be. Detached backyard units must meet rear and side setbacks and a lower height than the main house. Size can be capped by square footage or a percentage of the primary home or lot.

Because the numbers vary by district, get written guidance for your address before you budget square footage. This avoids redesigns later.

Parking, utilities, and addresses

Some cities reduce or waive off-street parking for ADUs. Check Denver’s current parking rules and consider neighborhood expectations for street parking. Building an ADU triggers water, sewer, electrical, and gas requirements. You may need new meters, capacity checks, and connection fees with Denver Water and Xcel Energy. The City typically assigns a separate address for a detached ADU.

Owner occupancy and rentals

Owner-occupancy requirements can change. Confirm whether Denver requires you to live on site if you have an ADU. If you plan to list the unit as a short-term rental, you must meet Denver’s licensing, registration, and safety rules. Always verify eligibility for short-term use before you underwrite that strategy.

Permits, inspections, and fees

Expect a zoning review, building permit, and trade permits for electrical, plumbing, and mechanical work. Fees may include plan review, impact fees, and water or sewer tap fees. Inspections occur during construction and before occupancy to ensure building and life safety compliance.

Typical timeline

• Feasibility and design: 2 to 6 weeks
• Permitting and review: 4 to 12 or more weeks, longer if variances or historic review are needed
• Construction: 3 to 9 months, depending on type and site
• Total planning horizon: 6 to 12 months for many projects

Design choices for a backyard ADU

Detached backyard cottage

A new small home in the rear yard offers privacy and strong renter appeal. It provides a clear separation of systems and entrances. Costs are higher per square foot due to foundation, roof, and utility trenching.

Garage conversion

Converting an existing garage is often the fastest and most affordable path if the structure is sound. It can eliminate covered parking and may need creative site planning for cars.

Attached addition or basement suite

Attaching an ADU as an addition can share systems and reduce costs. Basement or lower-level conversions can also be cost-effective, but you must meet ceiling height, egress, and natural light standards for bedrooms and living spaces.

Size and layout tips

• Target 400 to 800 square feet for strong rentability without overbuilding.
• Include a full kitchen and in-unit laundry where feasible to maximize demand.
• Design for privacy with separate entrances and sound insulation.
• Consider single-level living and zero-step entries for multigenerational use.

Energy and comfort

You must meet energy code requirements. Efficient heating and cooling, strong insulation, and air sealing help comfort and reduce utility costs. Ask your utility providers about potential incentives for electrification or high-efficiency equipment.

Budget, costs, and financing

Line items to plan for

• Hard costs: framing, foundation, roof, windows, finishes, systems
• Soft costs: architecture, engineering, surveys, permits, utility fees, landscaping, addressing
• Contingency: 10 to 20 percent for unknowns or inflation
• Carrying costs: interest during construction and any loan fees

Detached units usually cost more per square foot than garage or basement conversions because of site work and utilities. Get at least three local bids and confirm recent ADU experience.

Financing paths

• Home equity: cash-out refinance or a HELOC can fund construction while preserving a low primary rate if applicable.
• Construction or renovation loans: short-term financing that converts to permanent. Requirements vary by lender.
• FHA 203(k) or similar: renovation programs may be options for buyers planning improvements, subject to program rules and owner-occupancy.
• Conventional loans: some lenders consider projected ADU rent in underwriting. Ask how they treat ADU income.
• Local programs: watch for ADU or affordability-focused loans via state or community partners.

Always engage a lender early to align scope, budget, and loan requirements with your timeline.

Insurance, taxes, and HOAs

Notify your insurer before you rent the unit. You may need landlord coverage and higher liability limits, especially if you consider short-term rentals. Expect your property taxes to increase with added livable square footage. If you have an HOA or recorded covenants, confirm approval steps and any restrictions before design work.

Underwriting rent and cashflow

Long-term vs short-term strategy

Long-term rentals typically offer steadier income and lower operating complexity. Short-term rentals can produce higher gross revenue but require licensing, furnishings, frequent turnover, and stricter compliance. In Denver, short-term rentals are regulated, so verify licensing and eligibility before assuming nightly rates.

How to comp rents and budget

Compare your planned ADU to similar studios or one-bedrooms in your micro-neighborhood. Use a conservative vacancy rate, for example 5 to 10 percent for long-term rentals, and include property management if you do not plan to self-manage. Build a reserve for maintenance and a cushion for utility costs if you will carry any portion of tenant utilities.

A simple approach is to start with projected monthly rent, subtract vacancy, management, utilities you cover, maintenance reserves, insurance and tax changes, then compare to your loan payments. This gives you an estimated net impact on your monthly housing cost.

What returns can look like

Returns depend on cost, rent, and financing. Many owners plan for a moderate cash-on-cash return at the outset, then improve performance by optimizing utilities and operations over time. Avoid over-improving finishes beyond what neighborhood rents support.

Common pitfalls and how to avoid them

• Skipping early checks for overlays, historic review, or HOA rules.
• Underestimating utilities, trenching, or water and sewer connection fees.
• Ignoring parking expectations that affect tenant demand and neighbor relations.
• Starting a garage conversion without structural review or a soil test for new foundations.
• Assuming short-term rental eligibility without confirming licensing.
• Overbuilding square footage or finishes relative to local rents, which can harm ROI.

Your step-by-step next moves

1. Call Denver Development Services to confirm your lot’s ADU eligibility, setbacks, and size limits.
2. Check historic district status and any HOA or deed restrictions in writing.
3. Contact Denver Water and Xcel Energy about potential meter upgrades, capacity, and connection fees.
4. Sketch a right-sized program, then hire an architect or design-build firm with ADU experience.
5. Collect at least three contractor bids and check references specifically for ADU projects.
6. Run conservative rent comps and underwriting for your micro-neighborhood.
7. Meet with a lender to review financing options and how they treat projected ADU income.
8. Consult a CPA and insurance agent to structure taxes and coverage correctly.
9. Set a 10 to 20 percent contingency and allow schedule buffer before selecting a start date.

As of November 2025, Denver’s ADU standards, fees, and licensing rules can update. Before you invest, verify current requirements with the City and County of Denver’s Development Services and the applicable utility providers.

If you want a sounding board on feasibility, neighborhood rentability, or how an ADU could support your broader buying or selling plans, let’s talk. Book a consultation with Ryan Haarer for local guidance, data-backed strategy, and a plan tailored to your goals.

FAQs

Can I build an ADU on my Denver lot?

• Check your zoning, any overlays or historic status, and HOA or deed restrictions, then confirm eligibility with Denver Development Services for your specific address.

How big can my ADU be and where can it go?

• Size, height, and setbacks vary by zoning district; detached units typically sit in the rear yard and must meet rear and side yard setbacks, so verify the numbers for your lot.

What permits and inspections will I need for a Denver ADU?

• Expect zoning review, building and trade permits, required utility approvals, and inspections for building, electrical, plumbing, and mechanical before occupancy.

How much does a backyard ADU cost in Denver?

• Costs vary by type and finishes; detached units cost more per square foot than conversions, and you should budget hard costs, soft costs, and a 10 to 20 percent contingency.

How long will an ADU take from start to finish?

• Many projects take 6 to 12 months including 2 to 6 weeks for design, 4 to 12 or more weeks for permitting, and 3 to 9 months for construction depending on scope.

Can I rent my ADU on Airbnb or other short-term platforms in Denver?

• Short-term rentals are regulated; you must meet the City’s licensing, registration, and safety rules and verify that your property is eligible before planning that strategy.

How much rent can I expect from a Denver ADU?

• Use micro-neighborhood comps for similar studio or one-bedroom units, then apply vacancy, management, and operating costs to estimate net income conservatively.

Do I need separate water or electric meters for an ADU?

• Utility requirements vary; Denver Water and Xcel Energy may require new or upgraded meters and capacity checks, with related connection fees.

Will adding an ADU raise my property taxes?

• Yes, increasing livable area usually increases assessed value and property taxes; confirm with the Denver Assessor’s guidance.

What financing options can fund an ADU in Denver?

• Owners often use a HELOC, cash-out refinance, construction-to-permanent loan, or renovation loan programs; consult lenders early to match financing to your scope.