Adding a rental unit to your property is one of the most powerful ways to build income and long-term wealth from a single-family home. In Denver, two of the most common paths are building an Accessory Dwelling Unit (ADU) (detached or attached cottage, garage conversion, or even a granny unit) or converting/finishing a basement apartment. Both can pay off — but they’re very different projects with different costs, timelines, risks, and returns.

Below is a practical, Denver-specific guide to help homeowners decide which is likely the better investment for their property and goals.

Quick headline summary

• Basement apartment → usually lower upfront cost, faster to market, higher short-term ROI (shorter payback), but may have lower rent and more shared systems/less privacy. Egress, light, and code compliance are major issues.
• ADU → typically higher build cost and longer permitting/construction, but can command higher rent, offer a separate entrance/private utilities, and give more long-term flexibility/value (guest house, multigenerational living, or higher rent if marketed as a standalone unit).
• In Denver ADUs are now allowed more widely citywide, but they still require building/zoning and sewer/drain permits and pre-application reviews.

Legal & permitting — the Denver specifics you must know

• ADUs in Denver: The City updated zoning to allow ADUs across many residential zones (a citywide measure passed in late 2024). That significantly expanded where ADUs are permitted. ADU projects still require zoning review, building permits, and sewer/use & drainage permits (SUDP) and a pre-application design review. Expect a formal pre-application meeting for most ADU projects.
• Basement apartments as ADUs: A basement apartment can qualify as an ADU under Denver’s definitions, but it must meet the same dwelling-unit requirements (kitchen, sleeping, bathroom) and the building/housing code (egress, natural light, fire safety). Basement units commonly trip up on egress/window requirements and ceiling height.
• Permit timeline: Permitting and plan review times have been a pain point historically, though the city reports improvements in review times recently. Still, plan reviews + permitting + inspections can add months; many ADU projects see permitting take multiple months (3–9 months is common for ADU permitting in many markets). Factor permitting into your timeline and budget.

Cost: what to expect in Denver (realistic ranges)

(These are market averages and examples — every project is different.)

ADU build costs (Denver metro):

• Broadly reported ranges put typical ADU builds anywhere from roughly $160k–$320k+ depending on size, whether detached or attached, foundation/work required, finishes, and site utilities. Smaller studio/500 sq ft ADUs can be lower; well-finished 700–800 sq ft ADUs trend toward the high end.

Basement finishing / basement apartment costs (Denver):

• Finishing an existing basement into a livable rental unit commonly ranges from roughly $40–$120 per sq ft depending on scope (simple finish vs full bath + kitchen + egress upgrades). Typical Colorado/Denver writeups show mid-range projects running $65–$105/sq ft or totals in the tens of thousands for a typical basement.

Bottom line on cost: ADUs are usually multiple times the cost of a basement conversion, but they also have different use cases and income potential.

Income potential & simple ROI math (illustrative examples — we show the arithmetic)

Below are illustrative calculations that show how cost + rent + operating expenses translate to NOI, cap rate, and payback years. These are examples. Use them to think, not to guarantee outcomes.

Assumptions used in examples

• Operating expense ratio (taxes, insurance, maintenance, vacancy, management): 30–35% typical for small rental units unless you self-manage.
• Rent assumptions use local Denver averages as a guide; market rents vary by neighborhood and unit type. Recent data shows 1-bed monthly averages in Denver roughly in the $1,700–$1,900 range and a renter-friendly market with rising vacancy in 2025—so pricing will be local and dynamic.

Representative example — ADU

• Build cost (example): $250,000
• Rent (example): $2,000 / month → $24,000 / year
• Operating expenses (35%): NOI = $24,000 × (1 − 0.35) = $15,600 / year
• Cap rate = $15,600 / $250,000 = 6.24%
• Simple payback = $250,000 / $15,600 ≈ 16.0 years

Representative example — Basement apartment

• Finish cost (example): $75,000
• Rent (example): $1,600 / month → $19,200 / year
• Operating expenses (30%): NOI = $19,200 × (1 − 0.30) = $13,440 / year
• Cap rate = $13,440 / $75,000 = 17.92%
• Simple payback = $75,000 / $13,440 ≈ 5.6 years

We used conservative expense ratios and rounded amounts so the math is easy to follow. These results show why basement conversions often show a much faster payback — lower cost + respectable rent = stronger short-term ROI. ADUs tend to be longer payback but can be strategically valuable for higher rents, standalone utility, resale value, and flexibility.