Author Topic: how would you finance to build an Accessory Dwelling Unit (ADU)?  (Read 455 times)

clarkfan1979

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In March 2018, the county of Kauai announced that they will be encouraging homeowners to build ADU's on their property to address the housing shortage for long-term residents. There is a 5-year deadline on this announcement and will expire March 2023. Due to the housing shortage, the deadline will most likely be extended, but there is no guarantee that it will be extended. The maximum size ADU you can build is 2 bed/1 bath and 800 sq. ft. This would currently rent for $2200/month.

I think the material would cost 75K and labor cost about 100K. I think I could save around 25K in labor with me doing some of the labor myself. Then I need another 25K to upgrade from cesspool to septic, so I'm all in at 175-200K, depending on how much work I do myself. I think the timeline would be 12-18 months, depending on how I finance it. I think my debt obligation will go up by $1,000 to $1,200, but that should be covered by the $2200/month in rent.

How would you finance this deal? Pros and Cons? What typically has the lowest rates and terms?

1) Home equity line of credit?
2) Construction loan from a local bank?
3) Refinance a rental property?
4) Anything I'm missing?

Thanks.




sammybiker

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #1 on: June 03, 2019, 02:50:53 PM »
@clarkfan1979

I think on paper, a construction loan would be probably the best path forward with competitive rates and if you don't want to refi/put a LOC on a rental property.

That said, you'll have to be aware of the terms of the bank - they may make you pick from a list of their qualified contractors, aka, sky high priced.  But if you have a contractor you like, you may be able to get them on the approved list.

If it were me, I'd probably go with a line of credit on an existing property, even if I'm paying a couple % higher in APR, for the following reasons:

1)  I would be essentially working with cash and could negotiate better cash rates with contractors and not have to deal with the bank for inspections, draws, their qualified contractors, etc.

2)  I could do more work myself - an 800 sq/ft 2/1 could be finished out yourself easily in a couple weeks and even sooner with some unskilled labor help.  Paint, flooring, vanity/toilet installs, kitchen cabinets/sinks if you're so inclined, basic lighting/fixture installation. 

3)  I would be encouraged to pay down a LOC faster.

4)  LOC cost almost nothing to open up vs a refi/construction loan will have closing costs of approx. $3-6k+ based on a 200k loan (of course will vary based on your bank/relationship/market).

Hope this helps.  This sounds like a great opportunity to build some equity and cashflow.
« Last Edit: June 04, 2019, 10:26:48 AM by sammybiker »

Another Reader

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #2 on: June 03, 2019, 04:58:44 PM »
Agree with sammybiker and would do what he suggests.  Thinking of adding an ADU here in Silly Valley, but costs are much higher and I'm not doing the work.  Still thinking as a result.

RavensBrew

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #3 on: June 03, 2019, 07:08:28 PM »
I had one built 2 years ago. I refinanced the main property with a rehab loan. It was a bit of a pain with that particular loan but there are now more products to get financing for ADUs as they become more ubiquitous. In Portland it cost right at about 200k to have it built. We couldn't do any of the labor ourselves due to the requirements of the loan but the truth is I would rather have it done quick and right than fool around with it myself. We moved into the ADU and rent out the big house which covers our mortgage (including the financing of the ADU) and we also pull around 400 a month as well.

BicycleB

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #4 on: June 04, 2019, 06:05:14 PM »
Wow! A "1% rule" opportunity in costly Hawaii!

Pardon my sidebar. If I had any financing wisdom, I'd offer it.

You're already in good hands with SammyBiker, but you knew that. Fwiw, @clarkfan1979, you yourself are one of the people whose real estate posts I love to read - they're informative and interesting. Good luck with your ADU.

PS. Is it possible that enough other people will build ADUs that the rent will go down?
« Last Edit: June 04, 2019, 06:06:56 PM by BicycleB »

bacchi

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #5 on: June 04, 2019, 10:31:49 PM »
I did a cash-out refi on the main house. I then found a contractor who let me do some of the work myself.

Like RavensBrew, we live in the back and rent out the front, which covers the mortgage and property taxes.

spartana

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #6 on: June 04, 2019, 11:01:01 PM »
Wow! A "1% rule" opportunity in costly Hawaii!

Pardon my sidebar. If I had any financing wisdom, I'd offer it.

You're already in good hands with SammyBiker, but you knew that. Fwiw, @clarkfan1979, you yourself are one of the people whose real estate posts I love to read - they're informative and interesting. Good luck with your ADU.

PS. Is it possible that enough other people will build ADUs that the rent will go down?
I wondered this too as a ton of ADUs and big expansion (or razing and building a giant 4000 sf house and an 800 sf ADU) is a pretty common thing happening in my old hood. But from seeing how ADUs in many places around here and further out in LA have done over the last few decades, I'd say rental prices won't decrease at all unless there is a big or long lasting recession. And in some ways that may make small ADUs, expansions and large shared houses more appealing.

clarkfan1979

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Re: how would you finance to build an Accessory Dwelling Unit (ADU)?
« Reply #7 on: June 05, 2019, 12:09:16 PM »
Wow! A "1% rule" opportunity in costly Hawaii!

Pardon my sidebar. If I had any financing wisdom, I'd offer it.

You're already in good hands with SammyBiker, but you knew that. Fwiw, @clarkfan1979, you yourself are one of the people whose real estate posts I love to read - they're informative and interesting. Good luck with your ADU.

PS. Is it possible that enough other people will build ADUs that the rent will go down?

Thank you for the encouragement. I will try to continue to post. I'm on summer break right now, so I have more time available at the moment.

To answer your question. By encouraging the construction of ADU's, I think the county is trying to "slow down" the dramatic increase in housing costs on Kauai. Considering the scarcity of land and the lack of opportunity for developers to build large scale communities, I can't really see a situation in which so many ADU's are built that rent goes down.

It's not really the 1% rule because I would be ignoring the price of the land. My total lot size is .39 acres and worth about 450K. The total amount of space that I have planned to dedicate to the ADU is probably .13 acres. As a result, the land it sits on is probably worth about 150K. Because the land is already purchased, the deal looks more attractive.