Additional dwelling units can be a great addition to your home. They offer extra living space, potential rental income, and add to the value of your home. However, securing the capital needed to build one can be difficult if you don’t know where to look. That’s why we put together this quick guide on how to finance an ADU.
Know Your Costs
First, you need to determine your ADU costs. Every ADU will cost differently depending on the type of ADU and your design tastes. You can pay anywhere from $90,000 to more than $300,000.
To determine your costs, you need to create a budget for:
- Design and planning
- City fees
- Construction labor and material
- Finish materials
You can work with an ADU professional to ensure your budget is a good representation of what your costs will actually be.
Government Grants & Loans
Many states have created financial incentives to get people to build ADUs to combat the housing crisis. As a result, they often offer grants and unique loans that can help you fund your ADU development. If you are eligible for a grant, take it. That is money you don’t have to pay back.
Talk to your local government or an ADU professional about the grants and loans offered in your city/state.
Consider Other Loans
Besides government loans, there are other loans you can take out to finance your ADU. For example, home equity loans and HELOCs are the most common loans used for ADU development.
You can also do Cash-out refinancing, a personal line of credit, a construction loan, a renovation loan, or a chattel loan.
There are also CDFI (Community Development Financial Institution) or local partnership loan programs that allow you to qualify for loans using your projected income from renting out your ADU. The only catch is that once you get this loan, you have to rent out your ADU once it is built.
Other Finance Options
Another option for you to consider when figuring out how to finance your ADU is to simply use your cash savings. If you don’t have enough in your savings, you can also consider peer-to-peer lending.