More and more people are constructing Accessory Dwelling Units (ADUs) for all sorts of reasons. They do so to house their family members, increase passive income through rentals, expand their living space, and so on.

To get the ball rolling, most people opt to finance their ADU construction. But how does one finance an ADU? Are there loan options available to help you fund your ADU construction? We discuss that and more in this article.

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The Rise of Accessory Dwelling Units

ADUs are a cost-effective method to alleviate the housing crisis and offer a flexible housing choice for a variety of individuals, from aging parents to college students, among other possible beneficiaries.

An ADU can do this by enabling homeowners to add living space to their current property without the need for a separate lot or even just a garage conversion. That way, you can have more space at a fraction of the cost.Still, ADUs might still be outside of one's pricing range, especially if you're a low-income family or individual. Thankfully, there are ways to finance an ADU.

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Top ADU Financing Options

So how does one finance an ADU construction? Here are the best ways that you can finance your ADU build.

Cash-out Refinancing

With cash-out refinancing, you borrow more money than the outstanding balance of your existing mortgage to obtain the difference in cash.

Refinancing is one of the best ADU financing options to help pay for the construction loan to build an ADU. You can get a lump sum of money to cover the building costs by tapping into the home equity lines of your house.

If you have a large fixed amount of equity in your house and want to make renovations or additions, most cash-out refinances may be advantageous.

Before making a choice, it's crucial to think about the ramifications and long-term expenses of cash-out ADU financing.

Home Equity Loans and Lines of Credit (HELOC)

The equity of a property can be used as security for some types of construction loans, such as home equity loans and lines of credit (HELOC). The credit line or home equity line may be used to help with the financing of the ADU's construction expenses.

You can utilize an equity line of credit to borrow a particular sum of money to cover the costs of building, and your home's equity will serve as security for the new loan or existing loan.

HELOCs, one of the financing options, which do not have high-interest rates than other types of lending options, can offer a flexible and cheap method to fund the building of an ADU

Renovation Loan (203K or Homestyle)

Homeowners can use renovation financing or RenoFi loans to fund their remodeling initiatives. The maximum loan amount under Fannie Mae Homestyle for detached ADU construction is $976,500.

The property’s worth with the ADU may be estimated to determine this lump sum payment. 85% of the future value of a primary residence and an investment property portfolio are often offered as part of a renovation loan.

Homeowners can combine renovation loans for real estate acquisition. Refinancing is an option for getting better terms or a different loan amount after construction.

Construction Loan

For many homeowners who have low home equity or a home value below $977,500, a home ADU loan may be a viable solution for financing an ADU construction project.

Construction finance can cover the first mortgage and construction costs, and once construction is complete, the finance can become a fixed-rate mortgage ARM that essentially refinances the primary mortgage, which you can later use to get rental income.

During the construction phase, typically, borrowers can only make interest rate payments on ADU loan amounts until renovation projects commence, without any principal payments. This is one of the loan options that are available for both property owners and rental properties.

Retirement Accounts

If you already have a sizeable amount put into retirement, you can consider taking out a lump sum from your retirement account. We highly recommend consulting with a CPA or tax expert to understand what tax liabilities come into play with this option.

Alternatively, you could also consider borrowing from your retirement account if allowed. Some retirement accounts let you borrow up to 50% of the total funds in your account.

We here at ADU.Works have partnered with a number of banks and lenders to find you the right financing option. Be sure to contact us for more information on how to find the right ADU loan that best works for you and your ADU goals.

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Top Reasons to Build an ADU (and Maximize Financing Options)

Why build an ADU and go through the trouble of financing? Here are some compelling reasons to go through the process.

Generate Rental Income

Creating an ADU could offer a special chance to make money through rentals. You might reap long-term financial gains and recoup the project cost of building by renting out the apartment in addition to earning passive income without the additional interest rates.

ADU rentals can also assist in addressing the rising need for affordable housing in many places. It's crucial to make sure that the ADU's rental revenue covers all of the expenses related to upkeep, such as utilities, increased property management, and necessary repairs.

You may decide if constructing an ADU is a practical choice for producing extra income by carefully analyzing the local rental market and the continuing expenses related to renting out the unit.

Provide Housing for Family Members

Another benefit of building an ADU is being able to house family members. An ADU can give a distinct living area while allowing for near closeness and simple care, whether it's for elderly parents, adult children, or other family members.

For families with several generations or those who require particular care, this is extremely useful. An ADU can offer financial advantages over the long run in addition to housing by raising the property's value.

Family members may have a cozy and secure place to live while still being close to their loved ones and friends by having an ADU built for them through garage conversion, for example.

Increase Property Value

Your property's value may rise if you build an ADU. Your house could be more appealing to potential purchasers because of the greater living space and rental revenue possibilities, which leads to increased property value for your investment overall.

Maximize Existing Space

You can make the most of the space you already have on your property by adding an ADU. An ADU may convert space into a valuable living area, whether it is in your garden, basement, or garage conversions. You might need a construction loan for this.

Using existing space can help you avoid the need for expensive and time-consuming home additions or renovations while still significantly increasing the value of your house.

An ADU can also give you a special living area that you can rent out or utilize for your family, which has long-term financial and personal advantages.

By adding an ADU to your home, you can make the most of the space you already have and turn it into a practical, adaptable living space that suits your requirements.

Address Housing Shortages

The lack of housing in metropolitan areas can also are addressed with the aid of ADUs. ADUs can reduce market pressure by supplying more alternatives for cheap housing and by facilitating the search for accessible and affordable housing.

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Frequently Asked Questions (FAQs)

How do I finance an ADU in California?

In California, there are various financing options available for ADU construction. Homeowners can use their home equity to finance an ADU through cash-out refinancing or a Home Equity Line of Credit (HELOC).

ADUs are built with the help of traditional loans and renovation loans. Like the one offered by Fannie Mae Homestyle for a renovation project.

ADU building is supported and encouraged by many state and local government initiatives, including the ADU Grant Program and the Affordable Housing Sustainable Communities (AHSC) Program.

In some Californian communities, property tax reductions and other financial incentives may also be available to homeowners who construct ADU, sometimes with personal loans.

What is an ADU grant?

Accessory Dwelling Unit grants are financial incentives provided by certain municipalities or government organizations to promote the building of auxiliary dwelling units (ADUs).

These incentives can assist defray the price of planning, obtaining permits for, and constructing ADUs. For instance, the CalHFA ADU grant program provides qualifying homeowners who construct ADUs on their land with the assistance of up to $10,000 per unit (Please check their website to see the current status of the grant program).

You can use the funding to pay for a variety of expenses connected with constructing an ADU, such as architectural designs, permit fees, construction costs, or closing costs. The grants are normally provided after a competitive application procedure.

‍ADU grants are a means of promoting affordable housing and expanding the number of available homes in metropolitan areas.

Can I Apply for a Home Equity Loan for an ADU Construction?

Yes, property owners may qualify for a home equity loan to help pay for the building of an ADU on their land.

Homeowners can have borrowing power via a home equity loan, which lets them use much equity they have accumulated in their property as collateral.

Since it frequently has a cheaper interest rate and more lenient payback terms than other loan-based types, this might be a desirable choice for ADU financing.

The amount one can borrow, nevertheless, will depend on the lender's regulations as well as the amount of home equity.

The monthly payments will go up if a homeowner takes out a single loan, and if they are unable to pay it back, their property may be in danger.

How Do I Apply for a Cash-Out Refinance?

Homeowners will need to engage with a lender that provides this kind of original mortgage or first mortgage to apply for cash-out refinance and it depends on the borrowing power of the resident.

The application procedure normally entails completing an application, supplying supporting papers, such as income qualifications, tax returns, and credit reports, and going through a property appraisal.

After inspecting the application, the lender will decide how much home equity is available for ADU financing.

Homeowners should know that a cash-out refinance would raise their monthly payment for their first mortgage and perhaps lengthen the repayment time of the construction loan.

Consumers should compare the advantages of using home equity loans in their houses with the disadvantages of refinancing, such as closing expenses and origination fees.

Where Can ADUs Be Built?

ADUs were only recently legalized in a single residential zone in California and Oregon. New York is considering passing similar state legislation to California, especially in San Diego.

In the past five years, over 50 cities have implemented ADU ordinances as a way to alleviate the burden on homebuyers who are seeking to purchase a home.

These ordinances enable homeowners to add ADUs to their properties, providing an affordable housing option for renters and alleviating the housing crisis in these areas.

With the rising demand for affordable housing, more cities and states are considering legalizing ADUs to provide additional housing options to use as primary residences for people.

How Much Does It Cost To Build An ADU?

The upfront costs of constructing an ADU might vary based on several factors. Some of the key elements that might impact the price include the location, the kind of construction, and the size of the unit.

Building an ADU typically costs between $100,000 and $300,000. The price might change depending on the building materials employed as well as labor and design charges. You also have to consider the closing costs.

It's crucial to remember that adding an ADU can also raise the future value of your home, and you can take advantage of it if you ever decide to sell. You may get a more precise estimate of the cost of building an ADU by speaking with a certified builder.

If you're in California, good news! California Housing Finance Agency helps low and moderate-income individuals and families afford homes.

Can I Rent Out My ADU?

You can rent out your ADU to gain rental income, but it will rely on the zoning and building laws in your area. You cannot rent out ADUs for short-term rentals like Airbnb in several towns and states. This can help with your current mortgage or second mortgage.

It's crucial to confirm that you adhere to the rules and regulations that apply to renting out the apartment with your local zoning and construction authorities. You might occasionally need to get licenses or permissions to practice as a landlord.

It's also vital to keep in mind that the ADU's rental revenue might assist pay for the unit's construction expenses and possibly supplement your household income.

Do I Need To Hire A Contractor To Build An ADU?

Although it is feasible to construct an ADU on your own, it is advised that you work with a qualified contractor.

A contractor will have the knowledge and practical experience required to guarantee that the ADU is constructed by all applicable codes and regulations.

Also, they may offer helpful advice on design and materials, as well as guide you through the permitting and inspection processes.

Using a contractor can also assist you in avoiding costly errors that could occur if you try to construct an ADU on your own without the required expertise.

Ultimately, a key step in making sure your ADU is constructed professionally and safely is employing a certified contractor for a new or existing structure which you can pay for through ADU financing.

How's The Interest Rate for ADUs?

The lender, the borrower's creditworthiness, and other variables all affect the interest rate for an ADU. ADU loans often have somewhat higher interest rates than conventional mortgage loans since they are thought to be riskier overall.

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Final Thoughts

Accessory dwelling units (ADUs) offer both landowners and tenants an exciting opportunity. Adding an ADU to an existing building can provide a practical solution to alleviate the housing crisis in many places.

Although funding sources and laws might differ by state and local jurisdiction, homeowners must think about the advantages of constructing a granny flat. With a sufficient amount of borrowing power or a revolving line, you can finance an ADU.

ADUs are becoming more and more common, thus more states and localities may support this movement and promote its growth.

Are you in need of financing to build an Accessory Dwelling Unit (ADU) in California? Perhaps you should check out the CalHFA ADU award program!

ADU construction labor expenses can be partially offset by homeowners who meet the eligibility conditions by receiving financial aid of up to $40,000.

In addition to giving eligible homeowners a flexible and cheap housing alternative, this program aids in meeting California's expanding need for affordable housing.

This post will cover the CalHFA ADU grant program's eligibility conditions and application procedure so you may take advantage of this chance to create the ADU of your dreams.

News & Updates from CalFHA:
All funds for the Accessory Dwelling Unit Grant program were fully reserved as of March 1st 2023. We are keeping grant program information available to help borrowers and lenders as they continue to process grants in their pipeline.

What is the ADU Grant Program and Who is the Program For?

The California Housing Finance Agency (CalHFA) offers the ADU Grant Program to qualified homeowners who desire to construct an Accessory Dwelling Unit on their property.

The program is made to assist more people with defraying the high costs related to constructing an ADU, which is used as a flexible and cost-effective housing option for family members or tenants.

Owners of single-family homes in California who meet certain eligibility criteria, such as owning a primary residence, committing to renting the ADU to tenants for at least five years, and abiding by all relevant zoning and building standards, are eligible for the program.

ADU Grant Vs. ADU Loan

The ADU Grant Program is a financial aid program provided by the California Housing Finance Agency (CalHFA) that offers qualified homeowners who are taking advantage of up to $40,000 in grant funding to assist with the costs of establishing an ADU.

Grants, as opposed to construction loans, are not subject to repayment and do not accrue interest. Grant recipients must, however, agree to lease the ADU for a minimum of five years to renters with a moderate income level.

However, California homeowners can borrow money to pay for the building materials for the construction of an ADU with the help of an ADU loan. Banks, credit unions, and pre-approved lenders are just a few places from which these loans might be obtained.

While loans must be returned with interest over time, they may provide more flexibility than grants in terms of repayment terms, interest rates, and loan amounts.

The decision between an ADU Grant and an ADU Loan ultimately comes down to each homeowner's particular financial position and housing objectives.

The grant program may be the ideal choice for homeowners who fit the criteria for the CalHFA ADU Grant Program and are ready to adhere to the program's rental conditions.

ADU Loans might be a better option for those who don't fit the grant program criteria or want more flexibility in their financing choices.

How to Apply for the CalHFA ADU Grant Program

To apply for the CalHFA ADU Grant Program, qualified homeowners in California must first determine their eligibility, get pre-approval from a CalHFA-approved lender, identify a licensed contractor, then submit an application for the grant through the lender.

If the application is granted, they will be given funds. The ADU must be rented to qualified tenants for at least five years, and the homeowner must adhere to all zoning and building code requirements.

The homeowner must also own a primary house in California like the city of Santa Clara. As construction advances, grant money is distributed directly to the contractor in stages which provides up to $40,000 in financial support for ADU development.

ADU Grant Income Eligibility Limits

Applicants must confirm their eligibility by achieving the moderate-income criterion for their region, which is not based on household member income, before looking for an approved ADU lending institution.

The maximum borrower income in some areas of California can exceed $200,000, while the minimum income is currently $159,000 in other areas, such as several counties.

The income qualifying limitations for each region can be reviewed, with the maximum wage limit in southeast California being $300,000.Some consumers may find it confusing to learn that the ADU Grant Program requires a loan account to be eligible. However, there are differences between loans and grants, and it's critical to be aware of them.

Grants are given out for a specified sum that cannot be repaid, whereas loans must be fully repaid. CalHFA provides up to $40,000 on ADU subsidies, which must be fully repaid without the prospect of reimbursement from recipients.

Who is eligible for the grant?

Homeowners with modest or low incomes are welcome to apply for financial aid. For instance, in Orange County, a homeowner may make up to $850,000 a year and still be eligible for housing subsidies.

However, there are other limitations to be aware of. Qualifying homeowners are required to sign an affidavit attesting to their occupancy of the property and continued residence there throughout their employment.

This also applies to homeowners with multiple homes. The CalHFA ADU Grant Program excludes dwellings owned by corporations and investment properties.

What can I use the grant money for?

The ADU Grant Program offers funding to help with predevelopment, or "soft," costs including site preparation studies, architectural designs, soil tests, structural engineering, or energy reports.

You have the option of lowering the credit card interest rates if you decide to borrow from the ADU today. Because grant money cannot be used to pay for construction costs, applicants must look for alternative sources of funding for that part of their ADU project.

ADUs are more affordable options for qualifying homeowners wishing to enhance their living space or rental revenue thanks to the ADU Grant Program, which is intended to reduce some of the impact fees associated with installing one.

Frequently Asked Questions

How do I finance an ADU in California?

In California, there are various options to finance an ADU. Applying for the CalHFA ADU Grant Program, which offers up to $40,000 to pay predevelopment costs, is one choice.

Another choice is to obtain a construction loan, which can pay for the ADU's construction expenditures. A home equity loan or line of credit is another option for most homeowners who want to fund their ADU project.

Additionally, some local governments provide funding plans, especially for ADUs, such as the ADU Accelerator Program offered by the City of Los Angeles.

Before choosing the best method of financing their ADU project, homeowners should speak with a financial expert and consider all of their options before construction.

Is the ADU grant taxable?

Yes, Accessory Dwelling Units grants are taxable. Any grant or subsidy obtained to build or renovate a property is regarded as taxable income by the IRS.

ADU grant recipients must include the grant amount as additional income on their tax returns for the year they received the award, according to this rule.

However, the construction costs incurred in building or renovating the ADU can be tax deductible. To find out the tax repercussions of getting an ADU subsidy, homeowners should speak with a tax expert.

How do I get money to build an ADU in California?

ADU construction in California can be funded in several ways. To pay predevelopment costs, homeowners can apply for the CalHFA ADU Grant Program. For the money needed to construct the ADU, they can also obtain a construction loan to start the process.

The financing of an ADU project may be contemplated by homeowners using a home equity loan or line of credit. Some local governments also provide funding plans designed especially for ADUs.

To decide how to effectively fund their ADU project, homeowners should consider all of their alternatives and speak with a financial expert.

What is the limit to the ADU grant money?

The CalHFA ADU Grant Program has a $40,000 cap on the amount of ADU grants that may be awarded.

ADU predevelopment costs, such as site prep studies, architectural designs, soil tests, and structural engineering or energy assessments, can be covered by homeowners using this award.

Grant money, however, cannot be used to pay for construction expenses. To be eligible for the grant, homeowners must fulfill several criteria, such as income restrictions and occupancy requirements.

Additionally, they must use an authorized ADU financing institution to submit their grant application and start the application process.

How do I determine if I am eligible for the grant?

How do I determine if I am eligible for the grant?You must first satisfy the program's standards for income, property, and occupancy before you can find out if you qualify for the CalHFA ADU Grant Program.

The applicant must fulfill the locality's minimal income criteria, which varies by region, without help from a household member. Additionally, the property has to be the applicant's principal residence and be situated in California.

Additionally, the applicant must reside on the land while working there. Homeowners must apply for the grant through an authorized ADU lending institution and provide all required paperwork to qualify for their eligibility.

How much do pre-development costs?

Pre-development costs for an ADU might differ depending on a variety of variables, including the project's location, size, and complexity.

Site preparation studies, architectural designs, soil tests, structural engineering, and energy reports are a few examples of pre-development costs. The ADU grant program offers grants of up to $40,000 to aid with these pre-development expenses.

However, as construction costs cannot be covered by grants, homeowners might need to look into alternative forms of finance.

What is the application process for home equity loans?

To apply for a home equity loan for an ADU in your city, you will need to contact approved lenders and provide information about your income, credit score, and property value. Approved loan lenders will determine if you qualify and provide loan options.

Are there non-recurring closing costs for ADUs?

Yes, there are non-recurring closing costs for ADU homes, such as appraisal and inspection fees, that buyers must pay at the time of purchase.

Final Words: Start Your ADU Project with a CAlHFA Grant

The ADU Grant Program offered by CalHFA provides a great opportunity for California homeowners to build Accessory Dwelling Units (ADUs) on their property and potentially earn additional income.

With the ability to receive up to $40,000 in grant funds, homeowners can offset the costs associated with building an ADU and help address California's housing shortage. However, it is important to carefully review the program guidelines and eligibility requirements before applying.

Hopefully, this guide on the application process helps you out in your journey to start your ADU project. By going through the process religiously and working with approved contractors, homeowners can successfully take advantage of the ADU Grant Program and make a positive impact on their community.

Conclusion

With the inflating cost of living and the demand for affordable housing in desirable and urban areas such as California, people don't have much of an option but to adjust.Local property owners are aging and eventually need to start a business, so building and renting out their ADUs for extra income is an easy option. On the other hand, multi-generational families with tighter budgets can get decent and affordable housing options at the same time.ADUs are more affordable and much easier to build and maintain. They're modern, stylish, and sustainable, making them a great alternative for housing and a way to solve many of today's most prevalent real estate issues in expensive cities around the United States.What do you think? Let us know! We'd love to hear your thoughts on this.

We're passionate about building ADUs and love what it does for families and individuals across the Bay area and beyond. We believe that ADUs can help solve the current housing crisis and we're more than committed to being a part of that solution.

What is an Accessory Dwelling Unit (ADU)?

An accessory dwelling unit is a secondary unit to an existing home that people use as backyard homes, guest rooms, storage spaces, rental properties, and so on.

They can either be attached to a primary residence or added to a backyard. In some cases, you can also have a basement or garage conversion, adding more space to your property.

Most commonly, an accessory dwelling unit serves as a residential building. However, they can also be used for other reasons, including guest housing, rental properties, offices, studios, storage rooms, and so on.

Why You Should Own a Bay Area ADU

Building an ADU in the Bar area is a stellar idea for all sorts of reasons. Here are just some of the multitudes an ADU brings.

ADUs raise your property value
Expand your property’s living space
They declutter your main house
They're more affordable than primary homes
Give your growing family enough space to live comfortably
Provide more housing to the people in the region
Encourage multi-generational living and keep loved ones close
Reduce housing costs
Practice sustainable living
Have more space for all your stuff

What You Can Do With Your ADU

Wondering what you can do with your own ADU? Here are some of the common use-cases for ADUs.

Accommodate aging parents or other family members
Rent out your ADU long-term
Turn it into an AirBnb for extra income
Turn your unit into a guest house
Create a detached office space
Use it for storage
Create a caretaker's quarters
Turn it into a music studio
House adult children who are job hunting or are in between careers
Live in it while you're doing a house remodelling project on your primary residence
Create a backyard cottage

About ADU.Works

We are an ADU construction company that's out to change people's lives by building accessory dwelling units that are cost efficient to the owner, without compromising on quality. Our construction services stand out because of the innovative construction techniques we use.

We started ADU.Works with the goal of becoming one of the preferred ADU builders amongst families and communities in the East Bay area and the rest of California

Many of us live in accessory dwelling units ourselves. That's how much we believe in ADUs. But as we looked around, we found that many ADUs on the market were too pricey or didn't have the features we wanted.

Plus, the building process and customer service weren't as good as they should be.

Construction times were longer than expected.

Customers had to obtain permits themselves.

We wanted to improve things, so we put together an ADU builder team with lots of experience in construction, project management, design, surveying, restoration, and engineering top create the most beautiful and affordable ADUs in the Bay Area and the rest of the state of California.

You may see a lot of prefab ADU builders out there... We are not one of them. We use the best technology possible to come up with quality PRE-ENGINEERED ADUs that have beautiful interior finishes and cost-effective designs.

Our Guarantee to You

As an ADU builder out to provide the best ADU services, we commit to help you:

Build an ADU in the Bay area that will be beautiful and cost-effective

Provide only the best client service

Use only reliable and quality materials

Adhere to sustainable practices

Use our expertise to build ADUs that maximize your property space

Find the most cost-effective plan possible

What Makes Us and Our Units Different

We don't like to brag, except when we're talking about our amazing team. We truly believe we have the best ADU builders in the Bay area. We know what it takes to make reliable and beautiful ADUs for our clients.

Everyone from the project manager to the structural engineers behind your new ADU will provide our best work that we can provide to Bay area residents and homeowners.

Our ADUs are designed to blend seamlessly with your existing property and are built to the highest standards of quality and energy efficiency. We use only the quality materials and construction techniques, so you can be sure your ADU will stand the test of time.

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Check Out Our ADU Models

The Maverick 392

392 sq. ft. One Bedroom | 1 Bath Detached | 28' x 14' x 15

The Maverick 504

504 sq. ft. Two Bedrooms | 1 Bath Detached | 36' x 14' x 15

The Maverick 748

748 sq. ft. Two Beds | 2 Baths | Detached | 34' x 24' x 15

Our ADU Building Process

01 Visit/Call

Meet with our team for a full showroom tour focusing on ADU design, build materials, and construction processes. Get to see our SIPs, Helical Piles, inclusion and more. This process helps you visualize and decide what accessory dwelling unit model works best for you.

02 Cost-Estimate

Talk to our project managers to finalize your desired specs, and we'll create a free and quick cost estimate using our state-of-the-art cost estimator. We'll also confirm your qualification for our ADUs using our `QCT powered by Canibuild.

03 Site Visit

Our team will check your property and conduct comprehensive permit research based on current building codes in accordance to Bay Area laws and ordinances. We'll examine your utility tie-in points and check for any additional site-specific work that may be required.

04 Build Agreement

We provide you with a build agreement for your Bay Area ADU building project. This agreement will contain contract specifications for your chosen configuration, such as, square footage, inclusions, site work, permits required, build materials, interior finishes, payment terms, timeline, and others.

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Types of ADU Buildings for the San Francisco Bay Area

So what kind of ADUs can your ADU builder create for you? Here are a few of the most common.

Detached ADU

Build ADUs that stand completely on their own. A detached ADU can be a backyard ADU or any other structure where the living space doesn’t share a wall or roof with the primary home.

Garage Conversion

Turn an existing garage into a beautiful attached garage conversion ADU. Garage conversions are a great way to maximize unused garages.

Attached ADU

Build attached ADUs to expand your current living space. An attached ADU will share at least one wall and a roof with your primary house.

Basement Conversion

Do you have an unused or underutilized basement in your house? Turn that into a living space you can house family members in or rent for extra income.

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Places in California We Serve

San Francisco
San Jose
Oakland
Marin

East Bay
San Jose
Silicon Valley
And More

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Are You Ready to Expand Your Living Space with a Beautiful ADU?

Talk to us today and we’d love to help you get your ADU construction well underway!

All across the country, ADUs have become more and more popular in recent years. You’ve probably heard a friend or two rave about them already at this point. As property prices skyrocket across many urban areas and cities, these affordable, reliable, and beautiful homes have become the preferred housing choice for people across California and beyond.

But what are accessory dwelling units, and how are they different from a regular house? How much does it cost to build ADUs? And what are the pros and cons of this option? We answer those questions in this exhaustive guide to ADUs and all the nuances that surround them.

ADU Definition: What is an Accessory Dwelling Unit?

An accessory dwelling unit (ADU) is a smaller secondary unit or manufactured home (legally classified as real property) built in the same lot as the homeowner’s primary house, often a single-family property.

The State of California defines ADUs as "attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons and is located on a lot with a proposed or existing primary residence." ADUs are also called granny flats, accessory apartments, in-law units, secondary suites, backyard cottages, or secondary units.

Accessory dwelling units provide additional living spaces for young or elderly family members who need support and help low to mid-income households save resources. In many cases, ADU owners might also use their units as additional space that serves as a guest house, studio, storage, or office space.

They’re also great investments, as you can rent them out. Many aspiring property investors often turn a basement or garage into an ADU and rent it out for passive income. And because they’re relatively cheaper to build, you can offer these homes at lower rates and still make a decent profit. These are just some examples of ways to build wealth through ADUs.

People have recently been inclined to acquire this form of housing in many cities in the United States, especially in California, where real estate prices have soared tremendously. This is mainly because an ADU is relatively more affordable than other traditional forms of single-family home construction.

Moreover, an ADU provides full amenities and meets safety and building codes and local jurisdiction requirements. All this provides comfort and supplies affordable housing to communities across the country.

Understanding an Accessory Dwelling Unit (ADU)

What's the Difference Between Primary Dwelling and Accessory Dwelling?

An accessory dwelling unit is different from the primary dwelling space because it is usually smaller than the primary residential unit. ADU owners choose to build these homes detached or attached to the primary one as these can be used for rental housing or to house elderly parents or adult children.

The regulations to build a primary home and ADU are also different. Regulations for ADU construction vary across cities and counties. However, there are generally limitations to the size and height of an accessory unit. They must also be on the same parcel as the primary dwelling and cannot exist independently.

How Much Does it Cost to Build Accessory Dwelling Units?

The cost of building an accessory dwelling unit depends on the size and proposed design. These depend on zonal regulations, geotechnical site conditions, and fire hazard zones, among other local requirements. Other factors that affect your ADU’s price are the proposed building system, materials and finishes, and licensed contractors.

Many cities have already placed local zoning regulations that support and permit ADUs. So, before considering building one, check with your local jurisdiction.
Building unregulated or unpermitted ADUs may affect other projects on your premises due to penalties and violations with the jurisdiction, potentially affecting the process of selling your home in the future.

Overview of ADU types

Not all ADUs are the same. They differ depending on where it is built and located with respect to the primary home. Here are the different examples and types of accessory dwelling units:

Detached Units

Detached ADUs are separate from the primary home. These ADUs do not share any walls with the primary dwelling and include converted structures that are detached or newly constructed. It is usually built in the backyard and has its own kitchen, toilet, bath, and living area.

Attached Units

Some ADUs are attached to the primary home. They’re usually an addition or expansion to the primary home for dwelling or storage. However, they’re built so that it is still a separate space.

Interior Conversion

Interior conversion ADUs, are also called Internal ADUs. These units convert a portion of the primary home into a separate living space. Areas that may not be used by the homeowners, such as a basement or attic, can be converted into additional living space.

Garage Conversion ADU

A garage conversion is a type of ADU that transforms the garage into an alternative dwelling space. Instead of housing a car, a garage can be turned into an ADU that one can use as a bungalow, mini-apartment, or any other dwelling space.

Financing Options for ADU Construction

Several financing options are available when constructing ADUs. One of the most popular would be through a housing renovation loan. Due to its growing popularity in California, other financing options are specially designed to build ADUs.

Here are some financing options you can consider if you’re in California:

CalHFA ADU Grant

A CalHFA ADU Grant is the state's Housing Finance Agency grant program that gives you up to $40,000 that you can use to pay for costs associated with your ADU. The best part about this financing option is that it’s not a loan, meaning you don’t have to worry about interest rates or payments.

‍Check out this article we wrote about the CalHFA ADU Grant to learn more about this financing option.

Cash-out Refinancing

Cash-out refinancing involves refinancing your first mortgage to access some of the home equity you’ve already built up through time. You can use those funds to then fund your construction.

Renovation Financing

By taking out a renovation loan, you’ll be able to access a predetermined amount based on the equity of your primary home.

Home Equity Loans

A home equity loan is essentially a second mortgage. You can use this to access a portion of your home equity to take out a lump sum that you can use to pay for your ADU. On average, a lender can allow you up to 85% of your home’s value minus the outstanding first mortgage to a maximum of $150,000.

Pros and Cons of ADU

Pros

Here are some of the advantages that make ADUS one of the most preferred housing choices among property owners.

Additional income potential through renting

Homeowners who wish to gain additional income may collect rent fees from tenants but more relevant, it is a way of providing affordable housing options to the community. Checking the average prices for rent in your area may be beneficial to ensure that the rental fees you collect can serve as a great return on your investment.

Opportunity for multi-generational living

ADUs let you house family members who might need greater support, such as elderly parents or grandparents. These spaces allow bigger households to live near each other while maintaining autonomy and privacy.

Increase in property value

Having ADUs became popular as they tend to add value to properties, making it better with property appraisal when homeowners choose to sell the property. Homeowners shall still consult with real estate professionals to know how much value an ADU could bring to the premises.

Unseparated Families

In residential areas across California, households are commonly split to fit budget constraints. Some members are forced to live in affordable within-state or out-of-state neighborhoods However, as the adoption of ADU housing grows and local jurisdictions promote ADUs, families no longer have to be separated.
Moreover, the savings from cheaper mortgages or rent gives them more financial wiggle room to cover other expenses. No more scrimping on groceries or missing out on utility bills just to cover housing bills. This benefit greatly improves people’s quality of life.

Freedom to Live and Move

Despite being on the same premises as a single-family or multi-family home, an ADU shall have its own permanent and independent provisions for living. Residents of accessory dwelling units have their kitchen, sleeping quarters, and other amenities, so they have full freedom to live comfortably.

Cons

Like any other housing option, ADUs have their own sets of challenges. Here are some challenges that you should be aware of so you’re fully prepared for all scenarios.

Zoning and permit requirements

Various zoning and permit requirements may limit how a certain ADU is built and used. These vary from state to state, so it is recommended to check with your local city or state’s authorities before building an ADU.

Increase in property taxes and other expenses

When building such, property tax also increases, which may reduce earnings from a total potential rental income. If you’re planning to rent out an ADU, you’ll also have certain maintenance costs. However, you can use some of the rental income to pay for those expenses.

Challenges with construction

There are many issues related to construction that can hold your building project back, such as weather, financing approval, safety code approval, seismic zones, and so on. But the biggest construction pain point is construction quality. Not all ADU builders provide the same quality work.
That’s why it’s highly crucial to find quality builders who effectively manage building projects without wasting your resources and time. That’s why we take so much pride in our team at ADU.Works— they’re committed to managing construction projects across California. To work with us, feel free to contact us today.

Frequently Asked Questions (FAQs)

What's the difference between an ADU and a “Tiny House”?

Tiny houses have gained popularity in recent years, and while they may be closely related to ADUs, there may be differences. Tiny homes can be just as expensive as ADUs, so the value isn’t always a differentiating factor. The main differences are mobility and allowed square footage.

You can move a tiny house around sometimes, whereas ADUs are always fixed structures. Most tiny homes have wheels and can be transported from one place to another.

Secondly, tiny homes often have a smaller allowed square footage, normally capped at 400 square feet. An ADU, however, can be as big as 1,200 square feet depending on local codes, making them a better option for larger families or those who want bigger spaces at a lesser cost.

Why do people build ADUs?

People build ADUs for various reasons depending on their needs, zonal regulations, and resources. One reason among homeowners is the need for additional space. At the same time, another could be their desire to live with other relatives, such as elderly parents or adult children and their families.

On the other hand, this housing option can also serve as an additional stream of additional income as it can serve as a rental property. Having an ADU increases property value while ensuring housing affordability both for the homeowners and the renter at the same time.

As demand for affordable housing increases, building ADUs may provide affordable housing solutions making it a win for both homeowners and renters.

Can I build an ADU on my property?

Some restrictions in the State of California determine who can build an ADU. Fortunately, zoning laws and local government regulations in the state are less restrictive than in other states. The owner of the property must live on the property. In California, you’re allowed to build a maximum of two ADUs.

How big can I make my ADU?

The size of ADUs may vary from state to state as zoning regulations indicate how big one can build their ADUs. Other factors you need to consider are things like the easements, set backs and available space.

It’s best to work with an ADU builder to do a feasibility study before deciding on how big you want it to be. A good contractor will also help you get a good cost estimate, so you know if a certain size fits your budget.

Does an ADU require a kitchen?

That mostly depends on where you live. Some cities require it while others do not. You can consult a local housing or community development administration representative. Many regional entities permit ADUs that do not require a kitchen.

In places where ADU ordinances require a kitchen, it must have cabinets, a countertop, a sink with running water, and a stove or stove hookup.

Final Thoughts

With limited housing options in recent years, an ADU may be the perfect solution as it provides more affordable options for homeowners and renters alike. Building an ADU on your property has its pros and cons, which is why talking to experts is still recommended.

If you are considering building an ADU, study your jurisdiction, zoning regulations, resources, and intentions to ensure that making one can give you value for your money. Or you can choose to talk to expert ADU builders who provide an end-to-end process for aspiring owners.

Overall, ADUs are a great housing solution for communities in California and other cities across America. They provide quality homes at a fraction of the price of traditional single-family units.

If you’re planning to own an accessory dwelling unit, reach out to us and see how you can get started. We’d love to help you build and own your very own cost-effective and beautiful ADU!

ADU Financing: How to Finance Your ADU

by ADU.Works

March 20, 2023

ADU Financing: How to Finance Your ADU

by ADU.Works

March 20, 2023

Table of Contents

The Rise of Accessory Dwelling Units

Top ADU Financing Options

Cash-out Refinancing

Home Equity Loans and Lines of Credit (HELOC)

Renovation Loan (203K or Homestyle)

Construction Loan

Retirement Accounts

Top Reasons to Build an ADU (and Maximize Financing Options)

Generate Rental Income

Provide Housing for Family Members

Increase Property Value

Maximize Existing Space

Address Housing Shortages

Frequently Asked Questions (FAQs)

How do I finance an ADU in California?

What is an ADU grant?

Can I Apply for a Home Equity Loan for an ADU Construction?

How Do I Apply for a Cash-Out Refinance?

Where Can ADUs Be Built?

How Much Does It Cost To Build An ADU?

Can I Rent Out My ADU?

Do I Need To Hire A Contractor To Build An ADU?

How's The Interest Rate for ADUs?

Final Thoughts

What is the ADU Grant Program and Who is the Program For?

ADU Grant Vs. ADU Loan

How to Apply for the CalHFA ADU Grant Program

ADU Grant Income Eligibility Limits

Who is eligible for the grant?

What can I use the grant money for?

Frequently Asked Questions

How do I finance an ADU in California?

Is the ADU grant taxable?

How do I get money to build an ADU in California?

What is the limit to the ADU grant money?

How do I determine if I am eligible for the grant?

How much do pre-development costs?

What is the application process for home equity loans?

Are there non-recurring closing costs for ADUs?

Final Words: Start Your ADU Project with a CAlHFA Grant

Conclusion

What is an Accessory Dwelling Unit (ADU)?

Why You Should Own a Bay Area ADU

What You Can Do With Your ADU

About ADU.Works

Our Guarantee to You

What Makes Us and Our Units Different

Check Out Our ADU Models

The Maverick 392

The Maverick 504

The Maverick 748

Our ADU Building Process

01

Visit/Call

02

Cost-Estimate

03

Site Visit

04

Build Agreement

Types of ADU Buildings for the San Francisco Bay Area

Check Out More Resources

Places in California We Serve

Are You Ready to Expand Your Living Space with a Beautiful ADU?

ADU Definition: What is an Accessory Dwelling Unit?

Understanding an Accessory Dwelling Unit (ADU)

What's the Difference Between Primary Dwelling and Accessory Dwelling?

How Much Does it Cost to Build Accessory Dwelling Units?

Overview of ADU types

Detached Units

Attached Units

Interior Conversion

Garage Conversion ADU