Funding for ADU in backyard of Primary Residence

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Funding for ADU in backyard of Primary Residence

Brook Alexander
Los Angeles, CA · Member since 2020 · 1 post · 2 votes

Hey everybody! This is my first posting in here. I'm hoping to get a couple different perspectives on a particular strategy, so I'm looking forward to any and all advice offered! My wife and I are looking into building and ADU in the backyard of our southern Cali home. We briefly considered selling our house and using the profits to buy a multi family property, but figured it'd be best to stay and build a unit instead (it's a HUGE backyard). We got a quote for about 175k- 200k for a 700 sq ft unit to be built. We DEFINITELY don't have that money lol, we have equity in our house but not enough to cover that amount, and we looked into hard money lending, but all of the lenders I came across don't offer lending on owner occupied residences.

Any other creative ideas on who/where/how to get funding for our ADU project?? Thanks in advance everyone. Might be a stupid question, but maybe there's an option I haven't come across yet and someone out there has an answer!

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Kevin Purvis
Developer · Orange County, CA · Member since 2020 · 42 posts · 23 votes
5y

Hi Brook,

I have built ADUs in SoCal (most in the inland empire).  that price is normal for stick built.  Have you considered attaching a manufactured home?  Most renters (or even buyers). it wouldn't be able to tell the difference if you have decent upgrades.  And you save maybe 30 to 50% on the cost.

You'll also find that many banks are not really willing to lend on this.  however you will be able to get a cash out refi after this is all over.  if you are in a higher cost area like Los Angeles you should easily be able to get hard money lending for this.  you can demonstrate the debt service coverage ratio pretty easily.  you will need okay credit and maybe 20% of the cost of the build in cash in order to attract lenders.  

there are also ADU builders who will finance directly with you. I've never used them but I've heard of one called United. and they're in Los Angeles. maybe check them out and see if it works for you.

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  • Nicholas Field
    Investor · Las Vegas & British Columbia · Member since 2016 · 96 posts · 21 votes
    5y

    Yeah, that's a little more challenging. Do you know the after construction value of the property? 

    You'll probably get more going to your current mortgage company and asking for a home construction loan. But the numbers will need to make sense and you'll need to be able to service the extra $1000/m in payments. 

    Present two exit strategies when talking to the banks. Show "keep it and rent it" analysis and show sell the whole thing analysis. 

    Once construction is complete it'll be easier to turn it over into a long term financing deal. 

    1Reply
  • Kevin Purvis
    Developer · Orange County, CA · Member since 2020 · 42 posts · 23 votes
    5y

    Hi Brook,

    I have built ADUs in SoCal (most in the inland empire).  that price is normal for stick built.  Have you considered attaching a manufactured home?  Most renters (or even buyers). it wouldn't be able to tell the difference if you have decent upgrades.  And you save maybe 30 to 50% on the cost.

    You'll also find that many banks are not really willing to lend on this.  however you will be able to get a cash out refi after this is all over.  if you are in a higher cost area like Los Angeles you should easily be able to get hard money lending for this.  you can demonstrate the debt service coverage ratio pretty easily.  you will need okay credit and maybe 20% of the cost of the build in cash in order to attract lenders.  

    there are also ADU builders who will finance directly with you. I've never used them but I've heard of one called United. and they're in Los Angeles. maybe check them out and see if it works for you.

    4Reply
  • Payton Chung
    Developer · DC & NC · Member since 2019 · 113 posts · 95 votes
    5y

    [Link Removed by Moderators]

    As Nicholas mentioned, the lower-equity options are probably going to be construction loans; "renovation loans" may have better terms, since they're conforming single-close residential mortgages (Fannie's HomeStyle or Freddie's equivalent, ChoiceRenovation). 

    Point and Hometap also do ADU financing via "shared appreciation" -- they buy a share of your future home equity, which increases by adding an ADU. I think you can stack it with a HEL/HELOC/cash-out refi.

    0Reply
  • Pavan Sandhu
    Developer · Sacramento, CA · Member since 2016 · 464 posts · 143 votes
    5y

    @Brook Alexander what you are experiencing is what every homeowner does the first time they start digging into building an ADU on your property. The quote you got is common and probably more on the low end in terms of most traditional ADU quotes. BUT it's really all dependant on you and your property. Each situation is unique. There are plenty of creative ways to cut costs and get to your end goal. Which sounds like would be to get an accessory dwelling unit on your property so you can rent that space out to eliminate or significantly reduce your mortgage. IN terms of financing options for ADUs, there are only 3 options available. It's refinancing your first to take some cash out, taking out a second mortgage or some personal source. Most mortgage lenders will not lend unless it fits the traditional box. Still hard to justify the ARV of a property with an ADU vs without, in most conventional loan situations at least...

    0Reply
  • Matthew PorcaroBusiness Member
    Lender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
    5y

    You can refinance your home with a 203k or homestyle loan, and finance the ADU addition that way. It will obviously bring up your mortgage payment each month, but you can assess that vs. how much you will be receiving in rent.
    With rates so low right now, it still might work out!

    The 203k Way
    WebsiteView Page
    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Brook Alexander:

    Hey everybody! This is my first posting in here. I'm hoping to get a couple different perspectives on a particular strategy, so I'm looking forward to any and all advice offered! My wife and I are looking into building and ADU in the backyard of our southern Cali home. We briefly considered selling our house and using the profits to buy a multi family property, but figured it'd be best to stay and build a unit instead (it's a HUGE backyard). We got a quote for about 175k- 200k for a 700 sq ft unit to be built. We DEFINITELY don't have that money lol, we have equity in our house but not enough to cover that amount, and we looked into hard money lending, but all of the lenders I came across don't offer lending on owner occupied residences.

    Any other creative ideas on who/where/how to get funding for our ADU project?? Thanks in advance everyone. Might be a stupid question, but maybe there's an option I haven't come across yet and someone out there has an answer!

    I build ADU's for both clients and myself. Your $200k bid for 750sf may be slightly high but not outrageous as it depends on the site, how long the sewer connection run to the street is, design factors and many other factors. I am working on one now for a client that is about $170k including design, including the build out and including the new long driveway for a 750sf ADU.

    As to financing, utilizing home equity line of credit, a cash out home refi, contractor financing options, personal lines of credit, etc are all options available to you. The trick is finding the one or a combo of multiple options that work best where the numbers pencil out.

    Podcast Guest on Show #130
    2Reply
  • Pavan Sandhu
    Developer · Sacramento, CA · Member since 2016 · 464 posts · 143 votes
    5y

    @Will Barnard wow those are some great numbers. in LA right?

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    5y
    Originally posted by @Pavan Sandhu:

    @Will Barnard wow those are some great numbers. in LA right?

     Yes, in LA. More specifically, in the San Fernando Valley as well as North East LA (near Dodger Stadium) is where most of my projects have been.

    Podcast Guest on Show #130
    0Reply
  • Jose Leanos
    Rental Property Investor · Long Beach, CA · Member since 2020 · 17 posts · 5 votes
    5y

    @Brook Alexander

    Hi Brook, I was actually in your same exact shoes a few months ago. I had my home for sale and the whole nine yards.

    Have you considered working on your ADU by pieces? I just finished a cash out refinance on my home in Long Beach, CA and to get the ADU plans alone has taken about 5 weeks. I still have to wait approximately another 4 months for the city to approve the plans and then I have to go through the construction process still. That said if you are building from the ground up that could add even more time to your process which would allow you to save to pay off contractors. If you are converting the existing garage you might find that working in pieces could allow you to make progress while also motivating you to save to finish up. You should look up realtor Hektor Castillo in LA. He was able to convert his garage for under 40k which is a bit extreme but lays it all out on YouTube.

    Anyways hope this helps.

    1Reply
  • Randall Demary
    Woodland, CA · Member since 2021 · 18 posts · 5 votes
    5y

    So my wife and I are a few months farther down the same road. What we ended up opting for was buying a new construction with a JADU already built in. This wasn't really the way we wanted to go, but in the end it made the most sense. A lot of builders are including Jr ADUs now and the plans are super popular, not just as rentals, but for lots of reasons. We were able to secure a larger lot that has plenty of room for a future detached ADU down the road once the rent from the JADU has us better positioned financially. Food for thought.

    1Reply
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