What are accessory dwelling units (ADU)?
An accessory dwelling unit is the legal term for a secondary apartment or house on an existing property. Accessory dwelling units aren’t allowed to be sold or bought separately but they are often used to create an additional income stream by renting the units out.
Benefits of adding accessory dwelling units
Investors understand that there are numerous benefits of adding accessory dwelling units to their property. Accessory dwelling units can help create numerous new streams of income if rented out, increase the profitability of investment properties, increase the property’s value, offer more privacy per unit than a shared home and allow extended families to be near one another while maintaining their privacy.
How much does an accessory dwelling unit cost?
The cost of an accessory dwelling unit is dependent on the following variables: the design, structure, materials, the type of energy and plumbing system that will be used, and whether it will be attached or detached to the existing house.
How to finance the construction of an accessory dwelling unit
Borrowers can finance an accessory dwelling unit using a home equity loan, home equity line of credit or a cash out refinance. A home equity loan provides the borrower with access to a certain amount of cash which is backed by the equity the borrower has built up in the existing property and is repaid with a fixed payment schedule. A home equity line of credit (HELOC) which like a home equity loan the line of credit is backed by the equity the borrower has built up in the existing property with a shorter term structured as a revolving line of credit. A cash-out refinance is where the lender will look at the current market value of the borrower’s property. The proceeds that the borrower will receive from the cash-out refinance way heavily on the properties outstanding mortgage balance. The net proceeds can then be used to pay for the construction of accessory dwelling units. It is important for the borrower to analyze the construction project and see which financing option is best for them.