Refinancing to create an ADU

[James Tiu]

Hello BP! Special thanks to Chris Mason, I am using your template to create an accurate description of what I want.

Your goals and story: My goal is to cash out refinance my duplex. The issues that keep arising when I contact lenders is that the property is currently an investment property, which means 70% LTV vs. 80% LTV owner occupied. Both units are being rented. I plan to create an ADU and live in it with the capital from the cash out refinance. I would like to get 80% LTV on the refinance because I plan to owner occupy property post renovation. 2018 the duplex was appraised for $650k for my refinance from FHA to conventional loan. I imagine it could assess for $700k now. I have $420k balance on the loan. I would be able to cash out $35-$70k on 70% LTV and $650k appraisal.

Type of property: Multi-family: duplex

Location of property: San Diego, CA 92105

Purpose of financing: Refinance to cash out as much equity/capital to build ADU

Type of financing sought: Cash out refinance or Homestyle renovation loan

Current or prior ownership of real estate: I have another duplex with my Father. We finished a renovation and addition and he plans to carry the loan by himself.

Occupancy: Currently an investment property but would like to create an ADU to owner-occupy property.

Value of property at present and/or your offer price: $650k

After repair value: I imagine after building a 1200 square foot ADU the property would appraise close to $1million

Anticipated or actual appraisal issues: no, yes (what?)

Current rents per month: $1700/month and $1800/month

Fair market rents per month: Same as above

Down payment or equity: N/a

Source of down payment funds, if applicable: N/a

Income Source: Hourly W2

Gross monthly income (optional): $12-13k

Monthly debt obligations appearing on credit report, plus (if applicable) personal rent and alimony/child support/etc: $600-700/month

FICO: 700+

Credit issues: None

Additional details: I would like a cash out refinance of 80% LTV so I can owner occupy the property. This would give me capital of approximately $100k to work with on creating the ADU. I realize I can get a Homestyle renovation loan but I do not want to hire a contractor. I plan to build the ADU as an owner-builder. I can subcontract work that I cannot complete on my own, and that is where the capital would be useful.

Let me know if what I plan to do is feasible through the eyes of a lender. Thank you for taking the time to read and understand my situation. 

[Brian Larson]

@James Tiu - Thanks for sharing.  I look forward to hearing more about your project and process.  2 things to consider...

1. ADU costs seem a bit low. Prefab units can often times cost $200K and stick built are even more. Are you planning to self-build to save costs?

2. ADU construction does not always have the appraised return people expect. This is mostly due to the way appraisers handle the property. Just keep in mind that you might have to "fight" a bit for the new valuation at the end of the construction process.