considering adding ADU's - will this affect my current loan?

[David Isham]

I live in a 3 unit building and I have discovered it is possible to add two ADUs (Accessory Dwelling Units) to my property in California. I currently have a $1MM loan @ 2.25% fixed for 30 years so this is a keeper for a lifetime of a loan. If I add 2 additional ADU's my understanding is that this moves the property into a commercial 5 unit classification. What would that do to my existing loan if I did add 2 ADUs? And what if I just added 1 ADU to bring it up to only 4 units? Does my existing lender care that I added these 2 units? I would finance these units myself (about $400k each) so no loan required and I don't plan to ever refi. Each ADU would bring in at least $5k per month if I did Airbnb so it would be a big win for me. I don't want to mess with my existing loan however so I am not sure how to move forward.

[Dan H.]

Quote from @David Isham:

I live in a 3 unit building and I have discovered it is possible to add two ADUs (Accessory Dwelling Units) to my property in California. I currently have a $1MM loan @ 2.25% fixed for 30 years so this is a keeper for a lifetime of a loan. If I add 2 additional ADU's my understanding is that this moves the property into a commercial 5 unit classification. What would that do to my existing loan if I did add 2 ADUs? And what if I just added 1 ADU to bring it up to only 4 units? Does my existing lender care that I added these 2 units? I would finance these units myself (about $400k each) so no loan required and I don't plan to ever refi. Each ADU would bring in at least $5k per month if I did Airbnb so it would be a big win for me. I don't want to mess with my existing loan however so I am not sure how to move forward.

 In virtually all areas of CA ADUs cannot legally be rented as STRs.  Check your location regulations.

You current loan should be fine.

Current Freddie/Fannie rules do not allow multiplexes with ADUs. I have seen mixed enforcement on this. If it is enforced, the F/F loan is unavailable even if you add only one ADU. This would negatively impact the value and require alternate financing such as DSCR loan. Check with your favorite, trusted lender.

In most markets ADUs are being valued less than hand off ADU addition costs. This means they are a negative value add.

Self financing the ADUs at $400k each is not using the leverage that is one of the biggest advantages of real estate investing.  The return generated by all sources is magnified with leverage.

To be blunt, $400k for $5k rent without leverage would not produce the type of return I seek from my RE investments.  I suggest you rethink not using any financing for the ADUs.  

Good luck