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Once you have decided you want an ADU as an investment or for family one of the most questions is how to pay for it. While some homeowners may have the cash on hand to pay for their ADU, the main focus of this piece is on how to finance an ADU. HELOC/HELOAN HELOCs or HELOANs are second mortgages. They are secured against the primary residence. These typically have slightly higher rates than primary mortgages. At the time of writing (June 2023) the prime rate for this type of loan is 8.5% compared to under 7% for a primary mortgage. This rate will vary on a series of factors including your credit score, equity in the home etc. To get a quote on a HELOC/HELOAN from a Buildoly partnered provider you can fill out this 1 minute form: https://lnkd.in/dAp8QYxb The amount you can borrow depends on the amount of equity you have in your home as most lenders enforce a loan to value ratio. Refinancing Refinancing refers to getting a new primary mortgage on the primary residence. This will mean the interest rate of your current primary mortgage changes to the new rate. The benefit of this is that the interest rate will be lower than a HELOC/HELOAN. The potential drawback is that at the time of writing we are in a fairly high interest rate environment so if you locked in a low interest rate years ago and still have a fairly substantial mortgage this could increase your overall interest rate To learn more about refinancing your home you can fill out this 1 minute form: https://lnkd.in/dAp8QYxb Home Equity Investment This is a newer alternative to finance your ADU. Instead of borrowing money the other party is actually buying a portion of your home with the goal of selling it at a profit in the future. This is probably best illustrated with an example: If I had a 2 million dollar home and got a $200,000 home equity investment for 10% of my home. I then could build an ADU with that $200,000. Then in 10 years (each investment has a set duration at the beginning) my home is now worth 3 million. At this time I owe the home equity investment company 10% of 3 million or $300,000. To come up with this money I can pay cash or could finance it (potentially with another home equity investment). The main benefits of this type of financing is that there are no interest payments whatsoever reducing financial strain. Also if the value of your home depreciates the value you owe back also goes down. The downside is that you are losing out on appreciation of your home. It should also be noted that companies take a premium to minimize their chances of losing money. In the example above the company would take more than 10% equity for 200k. Buildoly partners with Hometap to provide home equity investment. If you are interested in that option just shoot us an email at hello@buildoly.com or visit Hometap directly.

Why Should You Build an ADU? The two main reasons our customers look to build ADUs are as an investment and to keep their family (think older parents or recently graduated children) close. Let’s dive into each use case and why ADUs are a good fit. Investment Use Case ADUs provide several benefits as a real estate investment. Firstly, there is no need to purchase land because you are leveraging underutilized land on your own property. Less cost building the ADU means higher returns. Secondly it is typically cheaper to build an ADU than a new home as it may be able to leverage existing infrastructure. (We will cover how to determine which existing infrastructure can be leveraged in an upcoming post). In the investment use case homeowners make money in two ways, rental income and appreciation of the overall property. To get a sense of the going rate for ADUs in your area we advise going to Zillow and searching for the ADU keyword. I did this at the time of writing and the first ADUS that popped up in LA were: 2 bed, 1 bath: $2,190/month Studio: $2,444/month Studio: $1,850/month On a yearly basis this likely already comes out to ~10% return on the ADU but this does not take into account the appreciation of the unit. According to https://lnkd.in/gC66D3T8 you can typically count on getting about 100x the price of monthly rent. In the cases above that basically pays for the entire ADU. Family Use Case Many of our customers have older parents who are starting to require a bit more assistance, but do not need professional help. An ADU allows the parents to maintain independence and their own space while making it easy to both get quality time as a family and any assistance that is needed. It’s really the best of both worlds. Another common pattern we have seen is people leveraging ADUs for their adult children. The parents increase their property value while providing affordable housing for their children that provides them independence. To learn more about building an ADU with Buildoly checkout https://www.buildoly.com/ or book a consultation with us at https://lnkd.in/gmdHqHuS .