Financing Your Accessory Dwelling Unit (ADU) or In-Law Suite: A Comprehensive Guide

Adding an Accessory Dwelling Unit (ADU) to your home or yard can be a smart investment that not only provides additional living space but also boosts the value of your property. This article explores the benefits, types, zoning laws, costs, financing options, and frequently asked questions about ADU housing. An ADU is a secondary type of housing unit on a single-family residential property. It can be a converted basement or garage, an additional cottage-like house in the backyard of your primary home, or even a converted garage attached to your primary house. ADUs come with their own kitchen, bathroom, and separate entrance and can be used as in-law suites for family members or as rental properties to generate income. There are several types of ADUs, including:

• Converted garage attached to your primary house
• Converted basement or attic inside your home
• Detached new construction dwelling, like a cottage home or granny flat in the yard
• Bump-out ADU, which is an additional space sharing a wall with your primary home
• ADU space built within your primary home

Zoning Laws and Permits: Building an ADU requires obtaining building and zoning permits. Laws vary by state and municipality, and some might restrict how you can use the ADU. It's crucial to check your local zoning laws and any rental restrictions before proceeding. For example, California offers an ADU grant program for up to $40,000 to help reimburse homeowners who build an ADU for low-to-moderate-income families. In 2023, the city of Phoenix, Arizona, amended its zoning laws to permit one ADU per single-family detached home but restricts homeowners from using any ADUs as short-term rentals.

Costs: The cost to build an ADU varies greatly depending on whether it's an attachment to your house, an upgrade to an area within your home, or an entirely new structure in your yard. Your expenses can range from tens of thousands of dollars for a small upgrade to more than $100,000 if it's a new structure or major renovation.

Financing Options: If you don't have a lot of cash on hand, there are ways to finance building an ADU. Some options include:

• ADU grant program: Some states, municipalities, and nonprofit organizations offer grants for building ADU housing.
• Construction loan or renovation loan: These are loans for building new structures or making major updates to your existing home. You'll apply for these loans with a mortgage lender.
• Mortgage refinance: If you've built up significant equity in your home, you could do a cash-out refinance and use the money to pay for the ADU.
• Home equity loan: This is another tool for tapping into your home equity, except it’s a type of second mortgage. You’ll receive a lump sum of money and pay it off over a predetermined period.
• Home equity line of credit (HELOC): A HELOC is another type of second mortgage, except you don’t receive your money in a lump sum. Instead, you have a draw period when you can take money as needed, and you only pay interest on the money you actually borrow.