People building an Accessory Dwelling Unit
Refinancing, Home Equity, Mortgage & Home Buying

What to Know About Accessory Dwelling Units

Accessory Dwelling Units, or ADUs, have become a popular option for California homeowners who seek to increase income or home equity, or create a space for mom and dad. Home shortages have plagued the state for years and driven up pricing to unaffordable levels in many large communities, including Orange County. Recent California legislation has made it less restrictive for owners of a single family residence to add an ADU. As a result, permits and construction for ADUs have increased substantially since laws changed in early 2020. Here are things to know about adding an Accessory Dwelling Unit to your property.

What is an ADU?

An Accessory Dwelling Units is a secondary living unit on a single family property. ADUs come in one of three general forms:

Attached ADU: The homeowner adds on to the existing home with modifications to create a completely separate living unit, including kitchen, bathroom, and separate entry.

Detached ADU: A separate building on the property that includes a kitchen and bathroom.

Conversion of existing space: ADUs can be created from an existing space in the home, such as a large bonus room or garage. The same rules regarding the creation of a separate dwelling apply.

Why Build an ADU?

There are two main reasons to build an ADU in addition to the state’s goal of creating more housing availability. The most popular reason homeowners build ADUs is to create a new source of income. This is achieved either by renting out the ADU, or downsizing to the ADU and renting out the main home on the property.

The second most-likely reason to build an ADU is to house relatives, friends, or a caretaker while allowing each family privacy in their own dwellings. For example, caring for an elderly relative while still allowing them their independence can be a great solution to the higher costs of assisted living facilities. Additionally, with ADUs reaching up to 1,200 square feet, they can be a much more affordable and expansive option for young couples or families who can’t afford to buy or even rent near you. It’s an excellent way to help out your young adult children while they save for their own home.

Whatever the reason for building an ADU, you should expect a decent return on the investment. Even if you never rent out or share the space, homes with ADUs are increasingly desirable on the real estate market and will fetch a higher price in an eventual sale.

How to Finance an ADU

According to a 2021 survey by the UC Berkeley Center for Community Innovation, the median construction cost of an ADU is $130,000 ($200 per square foot) in Orange and San Diego Counties, and $100,000 ($197 per square foot) in Los Angeles County. That doesn’t include permitting and other administrative costs to complete the job. More financial institutions - including Orange County’s Credit Union - are stepping up to help people access the funding they need to finance an ADU.

  • Savings/Cash on Hand – Those who have been diligent with their savings as well as high-net-worth homeowners are likely people to build ADUs because they have the funds to cover all related costs without borrowing money.
  • Cash Out Refinance – Homeowners who can refinance to a lower-rate mortgage can pull equity out at the same time to cover the costs of construction.
  • Home Equity Loan or HELOC – If you have equity in your home, a low-rate home equity loan or line of credit can be an option to finance the ADU.

If you’re thinking about building an ADU and you need financing, your Credit Union is here to help. We can explore your options and determine the best way to meet your objectives. Contact one of our knowledgeable Loan Consultants today to get started.

 

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