Building an ADU / detached home on one lot, help!

[Zachary Jamison]

I’ve found myself in somewhat of a predicament with no clear answer on how to move forward. 

Background:

Purchased a home in the San Diego area using a VA loan in 2016. Purchase price was 470k, the outstanding balance on the loan is 440k with a 3.5% interest rate. I lived there for the first year and change to satisfy the VA owner occupancy requirements but have since moved and rent a condo in a more desirable neighborhood. The home is currently leased for a year at an amount that pays my mortgage exactly (2650)

Situation:

I bought the house with the intention of subdividing the lot and building a second home on the property. a lot of the investigative work and planning with the city has been done by the previous owner but is outdated. All those documents belong to me now (tentative parcel map etc). It seems to me like it would make more sense to build a large detached ADU on the property and and rent out both units. I'd be maximizing my space and creating a good amount of cash flow without all the crazy requirements to physically divide a lot. It is zoned accordingly and all the preliminary conversations with the city, the ADU project looks like it would be a go barring any extreme unforeseen issues. Construction estimates have been 350-400k. The new home would be a 1200sqft 3bed/2bath and I expect to be able to rent it for about 3,000-3,100. The problem is I'm not sure how to finance it. Right now I expect the property to appraise around 550k as is. Since I am not in an OO situation, the broker said I wouldn't be able to actually pull any cash out and refinance. If I want to just straight up refinance into a conventional loan, that too would cost me 15k.

I know I’m missing a ton of information. I’m just looking for some creative ways to finance this project and start making some cash flow before moving on to other investments. Thanks in advance.