ADU Financing in California: All Available Options

Jul 18, 2022 | ADU

Once you have done your research about the different types and ways to use ADUs, it is time to figure out how you will finance one. Building an additional dwelling unit is more costly than most people realize, even though it is considered an affordable housing option. Finding the initial capital to cover all the costs can be difficult if you do not know what is available to you.

As time has progressed, ADUs have become more attainable for everyday people with new laws, grants, and loans being put into place. Although there are not many loans specifically for ADUs, there are still quite a few options for you to consider. Read on to find out the costs associated with building an ADU and how you can finance one.


How Much Does an ADU Cost?

Before we dive into how to finance your ADU, we need to address ADU costs. Many homeowners are unaware of how expensive ADUs can be, even the most affordable ones. Since ADUs are like building a smaller scaled home, there are a lot of steps that go into achieving a fully constructed unit.


ADU Types Have Different Costs

The first thing you need to be aware of when building an ADU yourself is that some types of ADUs are more affordable than others. Undergoing a garage conversion will be much less expensive than constructing a new detached ADU. That is, if the garage structure is in good condition, otherwise it could be more expensive than new construction. Be sure to take into account the shape your garage is in before deciding that a conversion is your most affordable option.

You also need to consider the size of your ADUJADUs can be less expensive than ADUs because they have less requirement to build them.


Main ADU Development Costs

The four main cost categories of building an ADU are:

  • Design and planning
  • City fees
  • Construction labor and material
  • Finish materials

Each of these categories has sub-costs within them. Every category but city fees are controllable by you and your design tastes. You can save money on designing, planning, construction, and finish materials if you go for a more affordable, simple ADU.

It is also important to remember that you need to budget for ADU appliances and furniture. We often encourage people to think about what appliances and furniture they want during the design phase. This ensures everything fits perfectly together in a space-saving way once the ADU is built.


ADU Total Cost Averages

On average, you can expect to pay:

Main Cost Category Average Price Range
Design And Planning $6,000 – $14,000
City Fees $3,000 – $11,000
Construction Labor and Materials $175 – $300 / Sqf
Finish Materials $50 – $75/Sqf

To give you an idea of what your total costs could be, for a new construction 499-square foot unit, you can expect to pay about $161,700 – $201,125. For a 2 car garage conversion, you can expect to pay about $90,000 – $119,000.

Where you fall in the range is dependent upon:

  • City fees
  • Design type
  • Location of build
  • The proximity of utility connections
  • Size of project

To determine a more accurate idea of how much your rough construction ADU will cost, you can use this ADU cost calculator.

Not many people have at least $90,000 laying around for a simple garage conversion. Luckily though, there are many options to finance your ADU construction that we have laid out for you below.


Local Government Grants and Loans

Many states have created financial incentives for building ADUs to combat the housing crisis. They offer various grants and loan programs to make development easier for middle-class homeowners.

For example, The California Health and Safety Code (HSC), Section 65583(c)(7) requires cities and counties to develop plans to promote the development of additional dwelling units to rent out to low-to-moderate income households. From this, the CalHFA’s ADU grant program was created, which gives homeowners up to $40,000 for ADU pre-construction costs.

Los Angeles also launched an initiative called the Accessory Dwelling Unit Standard Plan Program that expedites the permitting process and makes it less expensive by offering pre-approved plans. This is not a financing option perse, but something to keep in mind to save yourself money during your development so that you don’t need to come up with as much money.

To learn more about your local government’s grants, loans, and programs, speak with an ADU professional in your area. These could save you a lot of money on your ADU project.


Home Equity Loans & HELOCs

The most common way that people finance their ADUs is with Home Equity Loans or HELOCs.

Home Equity Loan is a consumer loan that allows you to borrow against the equity of your home. Generally, you need to own at least 10-20% of your home and have your property deemed valuable enough for the loan. This type of loan provides you with a fixed amount of cash with a fixed repayment schedule. 

Home Equity Line of Credit (HELOC) is very similar to Home Equity loans except, instead of a fixed cash amount, they utilize revolving lines of credit with shorter repayment terms. 

Both are backed by the equity you own in your home. Remember, as with any loan, there will be interest payments. If you don’t pay, the collateral is your home. So be sure you can pay back the loan whether it be through renting out your ADU or other means.

When deciding which loan type to use, take into consideration your project timeline and how the cash outlay is going to impact you. Although both are great options for financing an ADU, one type will work better than the other based on your specific situation.


Cash-Out Refinancing

If you are looking to change mortgage providers, get a lower interest rate on your mortgage, or consolidate your new ADU project expenses into an existing home loan, cash-out refinancing might be the best option for you.

Cash-out refinancing replaces your current mortgage loan with a bigger loan. You will get a lump sum payment that is repaid over time with your monthly mortgage payment. 

To qualify, your lender will look at the current appraisal value of your home and the principal value remaining on your current mortgage. If your home’s value has substantially increased, you may be eligible to refinance it for the current appraisal value. Then you can get cash out based on your new equity balance.

This option is particularly attractive to homeowners if interest rates have dropped since they took out their initial loan. This is because the overall bill you will have to pay back will increase, but the lower interest rates mitigate some of the costs. As a result, the money you take out now will be more valuable, especially if you are using it to make improvements to your home.

However, it is important to remember that you will be putting yourself in more debt with a bigger mortgage. Be sure to talk with your lender to determine if this option will work best for you.


Personal Line of Credit

If you do not have enough equity in your home, you can consider utilizing a personal line of credit. This option does not provide as much money as the options listed above, and has higher interest rates, but is a viable option for you to consider.

A personal line of credit is very similar to a credit card. It is a revolving line of credit that allows you to draw funds up to a certain limit.

This line of credit is great for long-term projects (like ADU development) for people with good credit and regular income streams. It is quite flexible with no specific repayment amounts or lump sums.


Construction Or Renovation Loan

Another great option is a construction or renovation loan. These loans work by having an appraiser assess the current value of your property and the expected value of your property once the ADU is built by looking at construction plans and other factors. The bank will then give you a certain percentage of the expected difference (up to 95% of the expected increase of the property value) over a period of time for you to construct the ADU.

Usually, banks will only disburse money after inspectors certify your progress during each step of ADU development. We should also note that not all banks offer these types of loans, so you will need to research your different options.


Chattel Loan

A chattel loan is a personal property loan applied for by the owner-occupant that is not the owner of the land where the additional dwelling unit is being built. This type of loan is great for family members or friends who plan on purchasing, building, and living in an ADU on someone else’s property. Often this occurs when parents age and need to live closer to their children so that their kids may care for them without having to move directly in with them.

If you are looking to build on a family member’s property, you may want to talk to your lender about the steps needed to be approved for a chattel loan.


CDFI/ Local Partnership Loan Programs

A CDFI (Community Development Financial Institution) or local partnership loan program allows you to use your projected rental income towards the qualifying income for the loan. If you are someone who is limited by their current income, this can be a great way to expand your loan eligibility. The only catch is that you have to rent out your ADU once it is built. Talk with your bank or an ADU professional to see if this loan program is right for you.


Peer-To-Peer Lending

If you are looking for a more non-traditional lending option, you should consider peer-to-peer lending opportunities. A variety of innovative models have begun to pop up for the financing of residential property, providing homeowners with new alternatives besides borrowing from a bank.

Websites like Point and PeerStreet make it easier for homeowners to sell equity in their homes in exchange for cash for renovation projects. They also make it easier for you to invest in other people’s ADU development.


Cash Savings

If you have saved up over the years to build your ADU, you might be able to pay for it out of pocket instead of taking out a loan. This is not possible for most homeowners but is a viable option to finance your ADU.

We do recommend saving up enough money to cover at least design, feasibility, and permitting costs. The more you save up, the less you have to pay interest on when you take out a loan.


Deciding How You’ll Finance Your ADU

We listed some of the main ways to finance your ADU, but how do you know which one is right for you? Home Equity Loans or HELOCs might be the most popular, but they may not be the best option for your financial situation. How do you know though?

The best way to decide how to finance your additional dwelling unit is to talk to an ADU professional or a lender familiar with ADUs. Often, an ADU professional will be able to point you toward a trustworthy lender familiar with ADU development.

Be sure to communicate effectively with the lender about all aspects of your project and financial situation. Make sure they know why you are building the ADU. Whether it be to increase property value, to acquire extra passive income, or to create living space for family and friends, they need to know. They should also be made aware of how much your projected costs are, the expected time frame of the construction, and the service providers (architects, contractors, etc.) that you plan to hire for the project.

To determine the best financing option for you, lenders will look at:

  • Assets
  • Credit history
  • Expected income generation
  • The expected value of the property improvements
  • Home equity
  • Income
  • Value of expected savings for the family (i.e., save on nursing care expenses by moving elderly family member onto the property)

The more organized and upfront about your situation you are, the easier it will be to secure financing for your project.


Working With an ADU Professional

The best way to know about all your ADU financing options is to talk with an ADU professional. Here at Levi Design Build, we have been developing in California ADUs since they were first allowed. We are very knowledgeable about state and local grant and loan programs, along with other traditional and non-traditional financing options.

You can contact us for a free consultation where we will help navigate you through planning,  permits and regulations. After, we will have an advisory meeting to help you create the scope of work necessary to get a good idea of how much your project will cost. From there, we can help you determine the best path to finance your ADU.

ADUs are growing in popularity and can be a great addition to your property. Let us help make your ADU dreams a reality with our expert, full-service design and build team.