Financing for an ADU addition to a multi-unit in Oakland?

[Daniel Savage]

I am looking to finance the construction of an ADU in Oakland. I own a duplex and there is an existing ~550sqf building that I am going to convert into an ADU. I haven't been able to find anything better than a personal loan because banks I've spoken with will not give financing for an ADU on a multi-unit property. Has anyone else overcome this hurdle?

[Dan H.]

Adding an ADU to a multiplex has quite a few items to consider. Many are related to financing. There is the issue you currently are encountering of obtaining financing to add the ADU. After adding the ADU, the property by rule does not qualify for conventional financing. Properties that do not qualify for conventional financing have a significantly reduced value that reflects the significantly worse terms of the financing. This will impact you not only when you go to sell, but when you go to re-finance. Historically the Oakland market has had good appreciation and investors often refinance in less than 5 years to extract equity. This is more likely if spending the money to add an ADU (I am intentionally not calling this a value add, it is likely a value subtract).

Be sure you understand the ramifications of adding an ADU to a multiplex. With the current financing rules, the effort involved (similar effort to a BRRRR) and the high costs of adding an ADU (especially if compared to the value they add to the property) many/most ADU additions are poor investments compared to other RE investment options.

Good luck