The Definitive Guide to Financing Your ADU in California in 2024

Are you planning to finance an ADU in California? This blog covers crucial aspects, from the basics to identifying tailored financing options for your project's success.

Planning to build an Accessory Dwelling Unit in the Golden State?

Building in California involves a maze of considerations, from understanding ADU basics to navigating tailored financing solutions.

What Is an Accessory Dwelling Unit?

ADUs, also known as Granny Flats or Casitas, are additional living spaces on the same property as the primary residence. They usually have their own kitchens, bathrooms, and bedrooms and are used as guest houses, rentals, home offices, etc.

ADUs have become increasingly popular due to housing shortages and their many advantages. For instance, several government programs in California were initiated to boost ADU construction statewide as they have been proven to be a practical solution to California's housing crisis and rising real estate costs.

If you want to learn more about ADUs in California, read our full blog, “What is an ADU? Understanding Accessory Dwelling Units?”.

ADU Requirements in California

Feasibility and Permits

Municipalities establish zoning ordinances and building codes to regulate land usage and development within their administration, which means that regulations may differ between cities and counties, which is why it is crucial for you to check your zone’s regulations.

Here's a breakdown of key aspects related to ADU zoning and regulations that are taken into consideration:

1. Zoning Classification: This refers to the specific category or designation assigned to areas of land by local authorities, dictating how the land can be used or developed, including whether ADUs are permitted and any restrictions. Usually, ADUs are often classified as R1 (residential).?
2. Size: The regulations for the size of accessory dwelling units (ADUs) specify the maximum allowable square footage or dimensions for construction. California's permitted size for a unit is 1,200 square feet or less.
3. Setbacks: By law, specific space requirements exist when building an ADU. The setback should be between 0 to 4 feet from the lot line for the sides and rear of your property. However, your city's code determines the regulations for setbacks at the front and along the street.
4. Building Height: Zoning codes commonly define the maximum height allowed for ADUs, including the main structure and any additional stories or levels. There have been new amendments to the height regulations in bills AB2221 and SB897 that took effect in 2023. Now, depending on the category, you can build ADUs up to 16, 18, or even 25 feet.
5. Historic Districts: If your property is in a landmark district, additional regulations may be applied to preserve the area's historic character.
6. Use and Occupancy: Zoning regulations can specify how ADUs can be used. They may allow ADUs for family members, short-term or long-term rentals, or other uses. Compliance with these use restrictions is crucial to avoid legal issues.
7. Permitting Process: ADU projects often require permits and approvals from local government authorities. This process includes submitting detailed plans, undergoing inspections, and paying permit fees.

Looking to build an ADU, but wondering if it's feasible? Read our complete guide on “How To Build An ADU." Our guide has everything from Accessory Dwelling Unit basics to more complex topics such as the construction process.

How Much Does It Cost to Build an ADU in California?

Building an ADU in California may range from $50,000 to $300,000+ on average.?

The cost of constructing your ADU can fluctuate based on several factors, such as:

• Unit size: The unit sizes can range from 300 sq ft to 1,200 sq ft spread over two levels.?
• Location: Location significantly impacts ADU construction costs, encompassing regulations, land characteristics, permit fees, labor/material expenses, and utilities.
• Type: The different ADU types are detached, attached, JADU, garage conversion, over-the-garage conversion, and basement conversion. Price can vary depending on the type of ADU you choose to construct.?

Other factors to consider are the complexity of the design if built from the ground up, as well as the current costs of local materials and labor.

How to finance your ADU?

You may feel overwhelmed by the various financing options available for building Accessory Dwelling Units (ADUs), that's why financing an ADU project involves exploring different paths and strategies.

You can leverage your home equity or choose unconventional methods to secure the ideal financial route for your ADU endeavor.

The following section provides insights and alternative approaches to help you navigate the financial journey of building an ADU. Delve into the information provided and uncover the diverse strategies available to finance your project.

Types of Loans

Numerous options are available to finance your ADU project, each offering unique advantages and considerations, from secured loans like mortgages and construction loans to unsecured alternatives such as personal loans.?

Read on to explore a range of financing methods tailored for ADUs to make your Accessory Dwelling Unit financing journey smoother and to make the most out of your money and assets.

Secured Loans

Secured loans require providing collateral, typically your house, as part of the borrowing agreement; if you can't repay the loan, the lender can take possession of the asset to cover the outstanding amount. These loans typically have lower interest rates due to the reduced risk for the lender

Below is a list of loans that are secured:

• HELOC: A Home Equity Line of Credit (HELOC) is a type of revolving credit that uses your home as collateral. The lender provides a line of credit to draw funds from, up to a specific limit whenever you need, using your home as security. This type of loan usually has variable interest rates, which consist of two periods - a draw period where you can access funds and a repayment period where you need to pay back what you borrowed along with the interest.
• Home Equity Loan: A Home Equity Loan allows homeowners to borrow against their home's equity. These loans have fixed interest rates and repayment schedules, allowing borrowers to receive a lump sum upfront and pay it back through installments. The main difference between this loan and a HELOC is how you access the funds and repay the borrowed amount.
• Cash-Out Refinance: A Cash-Out Refinance is a type of mortgage refinancing that enables you to take out a new loan greater than your existing mortgage and receive the difference in cash. You replace your current mortgage with a new one with a higher amount and keep the additional funds.?
• Construction Loan: Financing the construction of a new property, like an Accessory Dwelling Unit, is possible through a Construction Loan! Unlike a traditional mortgage for purchasing an already-built home, a Construction Loan provides funds in stages or "draws" throughout the construction process. These loans generally have variable interest rates during construction and typically require interest-only payments. After completion, homeowners can convert to a traditional mortgage or pay it off using alternate financing options.
• Renovation Loan (203K or Homestyle): Renovation loans, like FHA 203(k) or Fannie Mae Homestyle, fund the purchase/refinance of a home and its renovations. It's a single mortgage, making borrowing simple. These loans are ideal for those buying a fixer-upper or renovating an existing property. Guidelines, documentation, and inspections ensure approved renovations.

Unsecured Loans

Unsecured loans do not require collateral from the borrower. Instead, the borrower's creditworthiness, financial history, income, and ability to repay the loan are the sole determining factors for these loans.

These types of loans include personal loans, credit cards, and certain student loans. Although they typically have higher interest rates, unsecured loans provide flexibility and accessibility for various personal and financial needs. For instance, they can consolidate debt, cover unexpected expenses, fund projects such as home improvements, or construct an ADU.

ADU Assistance Programs

ADU Assistance Programs are initiatives or programs offered by various government agencies, nonprofits, or local organizations to support homeowners in constructing or converting Accessory Dwelling Units (ADUs). These programs encourage ADU development by providing homeowners with financial assistance, incentives, or guidance. Examples are California's famous ADU Grant Program and the SDHC's ADU Finance Program.

Less Traditional Forms of ADU Financing

• Cash or Personal Savings:

Financing an ADU using personal savings or liquid assets is an unconventional yet effective way to finance an Accessory Dwelling Unit. This method avoids loans, interest, and approval procedures by utilizing available funds and providing instant financial support for construction without incurring additional debt.

• Retirement Accounts:

Retirement accounts offer an unconventional yet potential source for ADU financing. Utilizing funds from 401(k)s, IRAs, or pensions could provide capital for construction. However, this option may carry tax implications or impact long-term savings, requiring careful consideration before tapping into retirement savings for ADU funding. Be sure to consult with your tax professional before considering.

Keep on reading if you want to know more financing options to avoid or consider, such as retirement accounts, before starting your project.

Financing Options to Avoid

Navigating the complexity of ADU financing means assessing the beneficial options and recognizing which paths to avoid, as some existent alternatives might involve risks or not align optimally with your ADU project.?

• PACE:

The first financing option to avoid is PACE (Property Assessed Clean Energy) Loans.??

Although they were initially intended for energy-efficient home improvements, using PACE Loans for ADU construction can have some disadvantages, such as repayments to property taxes, which can create complications during future property transactions and sometimes result in difficulties when attempting to sell the property.

• Credit Cards:

When financing ADUs, you must be careful if you consider credit cards an option. Even though they provide speedy and easy access to funds, high-interest rates can cause a significant rise in the total project cost. Depending solely on credit cards for financing may result in accumulating a considerable amount of debt, which makes it an unfavorable choice for your overall long-term finances.??

Understanding these less advisable options is essential for making informed decisions about your construction project. By avoiding potential pitfalls, you can better navigate the financial landscape and choose the most suitable financing avenues for your ADU endeavor.

Making the right decision

Deciding on the ideal financing option for you and your Accessory Dwelling Unit project requires a thoughtful and thorough analysis of your financial circumstances, goals, and project's vision and purpose. So, where to start? You can begin by evaluating your available savings, credit score, and debts to better grasp your financial standing.?

Understanding your economic health gives insight into how much you can afford to borrow and repay comfortably.

Next, consider the specifics of your ADU project. The project's size, scope, and estimated cost are crucial factors in determining the appropriate financing option. Keep in mind that larger projects are better suited for secured loans like Construction Loans or Home Equity options, while smaller projects can be managed with unsecured loans or personal savings.

Evaluating the many terms and conditions of any options mentioned above is essential, as some might be more flexible than others or have stricter criteria, for example. You must also compare the interest rates, potential risks, fees, etc.

Last but not least, always consult with a professional specializing in ADU financing, as their knowledge and expertise can provide invaluable insights, help you navigate the complexities of your financing journey, and suggest the best option for you.?

Build your ADU with Multitaskr

Multitaskr is an all-in-one contractor in South California dedicated to streamlining the ADU construction process and providing customized financing solutions!

At Multitaskr, we assure you a smooth journey, guiding you through financing choices that align with your long-term financial objectives, guaranteeing that your ADU serves your immediate goals and integrates seamlessly with your broader financial plans.

If you're interested in the many financial solutions we offer, contact one of our experts for more details, and get ready to kickstart your project today!