Phase 3
Budget & Finance
- Estimate your project budget
- Understand the types of financing available
- Know how an ADU might impact your property tax assessment and home value
Your budget is one of the most important parts of your ADU project. You will need to balance design with what you can afford, but also consider potential rental income. Assess your finances early on, after you’ve learned what you can build (Learning the Rules) and before you hire and start working with a design team (Design).
Timeline
Budgeting is part of the planning phase, which typically takes 1-3 months. Most ADU projects take 12-18 months to complete, but some extend to 24 months or more.
Budget & Finance
Step-by-Step
Keep in mind: Keep in mind that initial cost estimates are likely to change as you move through the process, and you won’t know what it will truly cost until you talk to a professional. Current workforce and supply chain disruptions are causing prices to fluctuate more quickly than usual. Check with a tax or financial advisor before you begin your project.
Step 1
Estimate Your Project Cost
If you haven’t already, now is the time to estimate your project costs.
Balancing your design ideas with your budget is one of the most important aspects of your ADU project. A larger or higher-end ADU will likely go for more rent and may result in a larger loan. But if you wish to rent it at an affordable rent, you may need to compromise on size and/or design.
A rough placeholder to use is $260-300 per square foot, including construction and other costs (design, fees, etc.). The actual number can vary and depends on many factors.
Keep in mind that your initial estimate is likely to change and you won’t know the specifics until you talk to your professional team (designer, contractor, etc.).
step 2
Assess Financing Options
Many homeowners use a mix of options to finance their ADU, like their own savings and assets, funds from family, and/or loans. It is strongly recommended that you do not begin construction without your financing plan in place. Be sure to factor in potential rental income since it will be a source for repaying any loans.
Financing options
You can use assets like cash or stocks to pay for some or all construction costs. You can also withdraw retirement savings, but this should be considered with caution.
This can benefit everyone if the person lending gets a higher interest rate and the person borrowing pays less than they would on the market. Another option is planning for friends or family to live in the ADU – they live rent free in exchange for contributing money for construction. In either case, you should come to a formal agreement and have a lawyer prepare a contract, not just with a handshake.
Your equity in your home is the portion of your home’s value that you own outright. It is calculated by subtracting your current mortgage balance(s) from the value of your home. Homeowners with sufficient equity in their homes (at least 15-20%) can take out a second loan or line of credit. Banks will typically offer a loan that is 90% of the equity a person has in their property.
If you think you may want to borrow, you’ll need to figure out how large a loan you qualify for (and feel comfortable with). Banks usually require two things: equity from your home and enough income to make payments. A good option is to call a mortgage broker and/or a bank, explain that you are considering building an ADU, and ask about loan options. Brokers and lenders consider it a normal question and will be happy to talk. There is no obligation and no cost for an initial conversation.
If you are planning to buy a house and build an ADU, the Federal National Mortgage Association’s (Fannie Mae) Homestyle loan program may be a good fit for your project. The Homestyle loan allows you to finance both the purchase of a home and the costs of remodeling, building an ADU, or converting your garage in one single loan.
See Casita Coalition’s ADU Finance Guide for Homeowners for more details on financing options and our ADU Worksheets for questions to help you decide a financing strategy.
Tools and Resources
FAQs
Find answers to the most frequently asked questions about ADU budgeting and financing.
In general, it is helpful to avoid having a fixed budget total in your head as you explore your options.The cost to build an ADU typically ranges from $30,000 for a simple interior conversion JADU, to $400,000+ for a large detached ADU with high-end finishes on a hillside lot. Cost per square foot is a good way to estimate, though this too can range — a very rough placeholder for you to use is $275 per square foot for construction (“hard costs”) and design and fees (“soft costs”), depending on your design and the materials you chose.
Many homeowners use a mix of options to finance their ADU, including savings, funds from family, and/or loans. It is strongly recommended that your financing is in place before construction starts. Be sure to factor in potential rental income since that will help you repay loans. See Casita Coalition’s ADU Finance Guide for Homeowners for more details on financing options and our Worksheets (LINK) for questions to help you decide a financing strategy.
If you have equity in your home, a cash-out refinance or home equity loan/line of credit (HELOC) might work for you. Financing is typically unavailable for homeowners with lower income and insufficient home equity, but the California Housing Finance Agency (Cal HFA) ADU Program has provided grants of up to $40,000 to qualified homeowners – check their website for the most up-to-date information.
Adding an ADU will likely affect your property taxes and the resale value of your home. However, your primary house will not be reassessed, and your property taxes will only increase based on the added value of your ADU. For example, if you build an ADU that adds $150,000 to your property value, and your tax rate is 1%, your taxes will increase by 1% x $150,000, or $1,500 per year.
Building a JADU will have a significantly smaller impact on assessed value. In some cases, your taxes will not increase at all. Home sharing will also not increase the assessed value of your home. Generally, garage conversions will not raise your tax bill as much as new construction, but they will also not add as much value.
Each property will require a one-on-one analysis to determine the added value of an ADU, so contact the El Dorado County Assessor’s Office once you have an idea of your plan. They will be able to provide you with a rough estimate of tax implications.
Adding an ADU may impact your income taxes as well. This can be rather complicated, and it’s best to discuss these with a tax advisor.
No.
JADUs: You’ll need to record in a deed restriction for the property that the JADU cannot be sold separately from the primary home.
ADUs: El Dorado County does not require a deed restriction for ADUs. Placerville requires a deed restriction stipulating that the ADU can’t be sold separately from the primary residence. See more information here.
Rental income is a major benefit of having an ADU or JADU on your property – for many people, it supplements their fixed income and provides an opportunity to grow their savings. Remember, short-term rentals are prohibited.
Make sure to consider potential income when planning the finances for your project.
Construction costs for your ADU will vary significantly depending on personal preferences, site conditions, location, and many other factors.
Size: Despite what many think, smaller ADUs may cost almost the same as larger ones. Many costs like foundation, kitchen and bathroom work only increase slightly for larger ADUs. Kitchen costs will range from $25,000–$50,000 with each bathroom ranging from $15,000–$25,000.
Type: New construction, both detached and attached, tend to be the most expensive. Garage conversions are not much cheaper than new construction if at all. Conversions of interior space (basement or otherwise) are often the cheapest.
Other factors:
- Quality of interior finish work and amenities
- Architectural form and details
- Extent of utility, structural, mechanical, electrical, and plumbing upgrades required
- Required site upgrades (sidewalks, sewer and water)
- Whether sprinklers are required
- Whether doors and windows meet emergency exit standards
- Lot complexity (slope, trees, fault lines, etc.)
