How to finance an ADU?

Question

Hello. My primary residence has a large backyard that can easily fit an ADU. Based on some online calculators I used, I can probably get a HELOC of about $150k in 3 years time. It could cost up to $450k to build the ADU. What options do I have to get the necessary financing to fund the rest of the construction? I live in Poway, Ca which is part of San Diego county.

Thank you!

Hui Xue · Answer

I have build an ADU that was attached. If unattached, I would consider look into panel build or modular to save on time and $.

Nick Belsky · Answer

@David Yee

Please be sure to get it permitted.  I have ran into several issues where my clients did not property permit the ADU and the lenders won't allow the income when financing... one rejected the loan altogether.  Just be diligent.

Cheers!

Hui Xue · Answer

Hi David,

I also live in San Diego, and the construction cost for ADU I am getting is $200/SF.   I think the $450 may be high?

Carlos Ptriawan · Answer

Problem with ADU is appraisal valuation is typically 0.5 of cost to build the traditional ADU.That can be offsetted if you have free ADU (like I have) or build using container ADU.

Dave Skow · Answer

@David Yee  thanks   1) that sounds like a  very  expensive  ADU   2)  what ltv/ cltv   calulation are you  using for the  150K heloc in 3  yr  projection ?  ?  are you  using  a projected  apprecaition for this calcuation  3) do you have any other  proeprty you can  leverage ?  4) retirement account loan ?  Family loan ?  5)  Check with some ADU  construction type firms for  financing options   6) good luck

Dan H. · Answer

Poway allows 1400’ ADU.  At that cost I hope it is 1400’.

I think you will find it challenging to obtain financing because even though Poway PSF is very high the appraisal associated with ADUs often are not assigning the same value to the ADU footage as the primary.  This implies in most cases only ADUs that leverage existing structure (garage, workshop, etc) make financial sense.  Your ADU is likely to add less value than its cost.  by the way I live in north poway.  My appraisal from Dec 2021 gave assigned value $620 PSF.  It would be higher now. Mostly that is land value, but it does give you a reference point.

Good Luck

Ben Einspahr · Answer

@David Yee, some advise for decreasing that building costs of the ADU:

-Decrease the sqft. I have heard that an 800sqft ADU can cost almost double than a 500 sqft ADU. 800 sqft ADU will not bring in double the income a 500 sqft ADU will

-What does the shape look like? Keeping it very simple and square will decrease your costs as well. Every additional angle adds cost

-Good rule of thumb. Aim for same price per sqft as your current home value.

I know this did not directly answer your question but hope that it helps point you in the right direction.Ill DM some more resources.

Best of luck

Chris Seveney · Answer

@David Yee

If you can only get about $150k for $450k then you will need to come up with the cash, because you won’t have full coverage equity in the property chances are slim to get financed for it

Tony Ngo · Answer

Most ADU allow likely about 1200 sqft (at least in my area of San Gabriel Valley).  If it cost you about $450K to build that size of ADU then it's about $375 sqft.  Have you call around to compare the price is correct.  Most people would likely use HELOC to finance part of cost of ADU along with their saving.  If your total HELOC is not enough to cover project then you will likely need hard money.  However, be sure the collect rent is enough cover it.

If your existing loan is not in lower 3% bracket, you may consider do cash out refinance help get more cash out to build or uou may call around for construction loan too.

Justin R. · Answer

@David Yee geez for 450k I wold want that ADU to gross at least $3500 a month in CA. I know that wasn’t your question, but that’s a lot of capital or debt for an ADU.

To answer your question, in order, refinance (unless you have golden handcuffs 4% or below interest), heloc, second mortgage, private money. None of these are ideal in this high interest market. Just make sure you are aware of your interest rate ceilings, positive cash flow, and increase your property value by at least 110% of that cost.

How to finance an ADU?

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