Funding Your ADU – Financing Options and Strategies | ADU Adventures EP005

ADU Adventures – Funding Your ADU: Financing Options and Strategies

Wondering how to finance an ADU? In this episode of ADU Adventures: Building in Your Backyard, host James Parks breaks down the most common ways homeowners pay for their ADUs—without the financial jargon.

In this episode, we cover:
✔ How to assess your budget and plan for unexpected costs
✔ Financing options like HELOCs, home equity loans, and cash-out refinancing
✔ What homeowners need to consider before taking out a loan
✔ A real-life success story from the Lopez family, who used rental income to pay off their ADU financing

Whether you’re building a backyard cottage for family or a rental ADU for extra income, understanding your financing options is the key to starting your project with confidence.

Need expert guidance? Acton ADU partners with trusted ADU lenders who specialize in flexible financing solutions. Visit ActonADU.com or call (408) 369-1103 for a free consultation.

Intro and Outro music

Acton ADU Sponsorship Midroll

Acton ADU – The Home of the Build-Ready ADU, Serving Homeowners for Over 35 Years

With over 35 years of experience and 5-star reviews that speak for themselves, Acton ADU is the leading expert in Accessory Dwelling Units (ADUs) in the San Francisco Bay Area. Based locally in Campbell, California, we proudly serve homeowners in over 20 cities—from Redwood City to San Jose and as far south as Gilroy.

We specialize in high-quality, traditionally built backyard homes, providing turnkey ADU solutions that save time and money without sacrificing quality. As the home of the Build-Ready ADU, we offer fully curated, pre-designed ADU Packages designed for multi-generational living and long-term property investment. Whether you're considering a mother-in-law suite, casita, or granny flat, our team ensures a seamless, stress-free experience from design and permitting to construction and warranty.

Why Homeowners Choose Acton ADU:

• Locally based in Campbell, CA – serving over 20 cities from Redwood City to Gilroy
• Over 35 years of expertise in building high-quality ADUs
• Build-Ready ADUs – pre-approved, expertly designed backyard homes for faster approvals and lower costs
• Custom ADU solutions – tailored to fit your property and lifestyle
• 5-star reviews...

Chapters

• 1:03 Episode Introduction
• 2:21 Understanding Real ADU Costs
• 5:45 Common Financing Options
• 7:52 The Lopez Family Success Story
• 8:55 Key Takeaways & Episode Closing

Transcript

Speaker 0: 0:32

Hello and welcome to ADU Adventures, building in your Backyard. I'm James, your host, and today we're talking about one of the biggest questions homeowners ask when thinking about building an ADU how do I actually pay for it? Now, before we get into the financing options, I want to set your expectations. I'm no lender, I'm no financier or moneymaker. I'm just your friendly neighborhood ADU guy. I'm not here to tell you what an ADU costs, because the reality is, costs vary widely based on your property location and the choices you make. My role here isn't to tell you the best financial decision for your situation because, honestly, that depends a lot on your own personal factors. But what I can do is walk you through the most common ways homeowners finance ADUs, explain them in plain English and share a real story of how homeowners like yourself are successfully financing their projects. So today we're going to cover a few things the different financing options available to ADU projects, how to assess your budget realistically before getting started, what homeowners need to consider before taking out a loan or using home equity, and I'll share a story about successful ADU financing and what that looks like. So if you've ever wondered, how do people actually afford to build an ADU and how do they pay for it. Stick around, because we're about to break it all down. Before we start talking about finance, though, let's talk about the real cost of an ADU. Now, I know I said I wasn't going to say how much an ADU costs, but I can provide a little insight as to how you can go about it Now. One of the biggest mistakes homeowners make is assuming they can get a quick estimate and move forward based on that, but the reality is every property is different, and the cost of an ADU isn't just about the structure itself. It's about your property, the city regulations and the challenges unique to building on your property. Here are a few things that directly impact the cost of an ADU. The type of ADU can impact your costs Detached, attached garage, conversion, basement, adu or JADU.

Speaker 0: 2:31

Each has different structural and permitting requirements that can affect the cost. You should also consider that whenever you're building a structure and have to tap into your main home, just like with an addition, you may discover things in your house that need to be repaired. So attaching an ADU or converting a garage or a basement or building a JADU inside your home can open up a whole can of worms regarding what costs could creep up that you didn't expect in the beginning of your project. There's also site conditions. Things like soil quality, grading, access to utilities and even tree removal can significantly impact your construction budget. And of course, there's local permitting and impact fees. Those vary depending on your city, jurisdiction, neighborhood, and they can be a major factor in your project's overall cost if you happen to be located in a very specific area or discover something that you didn't know you'd have to pay for later on. And then the simple things like the size of your ADU or the materials and the finishes, a basic ADU versus a high-end ADU versus a custom ADU versus a high-end ADU versus a custom ADU versus a build-ready or pre-approved ADU.

Speaker 0: 3:40

And there's something that doesn't get talked about enough unexpected costs. We talked a little bit about that with JADUs and garage conversions, but the reality is every construction project, whether it's an ADU or a remodel, comes with some surprises. A good rule of thumb is to set aside a contingency budget, usually around 10% of the total project cost, to cover anything unexpected. What's great is that Professional companies and ADU specialists generally try to bake in this contingency so that you don't have to over-budget your project. The key takeaway here you need a clear budget before you start looking at financing. If you go into the process with only a rough estimate, you might find yourself scrambling later when costs start to add up or having difficulty actually creating a relationship with a lender. Alright, but let's say you've done your research. You have a good sense of what your ADU will cost. Now how do you actually pay for it?

Speaker 0: 5:22

There are a few ways homeowners finance their ADUs, and each one comes with pros and cons. Let's go through them one by one so you can understand how they work. On a very basic level Home equity line of credit or a HELOC. A HELOC is one of the most common, if not the most common, ways homeowners finance ADUs in California, because it lets you borrow against the equity you've already built up in your own home. Think of it a little bit like a credit card that's tied to your house. You're approved for a set amount, but you only borrow what you actually need for an ADU. This is great because construction costs happen in phases and you can pull money as you go rather than taking out a lump sum all at once.

Speaker 0: 6:02

Pros potentially lower interest rates than personal loan. Only pay interest on what you use, and the flexibility to borrow is needed. Cons your home is used as collateral and there could be variable interest rates. Your payments can change over time. A home equity loan is similar to a HELOC, but instead of a flexible credit line, you get a lump sum all at once. This is a better option if you already know exactly how much the ADU will cost, because you get a lump sum up front and can make fixed monthly payments. Pros fixed interest rates your payment won't change. You also have predictable monthly payments. Cons it's less flexible. You can't borrow more later if the costs increase and it can require significant home equity.

Speaker 0: 6:47

There's also cash out refinancing. Cash out refinance you replace your current mortgage with a new, larger mortgage and the difference comes to you in cash to fund your ADU. This can be a good option if interest rates are low or if you're planning to stay in your home for a long time. Pros include it can provide a large amount for the project, may lower your mortgage rate if rates have dropped. And cons it does reset your mortgage term. You're starting over, in effect, and closing costs can be significant.

Speaker 0: 7:17

There's a story about a family that we worked with. I'll say that they're the Lopez family and they'd been thinking about an ADU for years. They wanted a long-term rental unit to create passive income, but weren't sure how to pay for it. At first they considered a cash out refinance, but after speaking with a financial advisor and an ADU specialist, they realized a HELOC was probably the better option for them. Why their mortgage-inc why, you may ask? Well, their mortgage interest rate was already super low and refinancing would have increased their overall costs. Instead, a HELOC allowed them to borrow only what they needed as they needed it, which meant they weren't paying interest on unused funds. Fast forward five years and here's the kicker the rental income from the ADU completely paid off that loan. Now they own a fully paid off ADU that generates passive income every month. And there you have it.

Speaker 0: 8:09

If today's episode got you thinking about financing your ADU, acton ADU is here to help. We've been serving homeowners for over 35 years and have several financing partners. We understand that clear financial plans are just as important as a great design. If you want to explore your financing options, do visit actonaducom slash podcast or give us a call for a free consultation. Anyway, hope you enjoyed today's podcast. Next time we'll be talking about how to pick the right builder and what to look for in a partner. Thanks for listening and good luck on your radio journey.