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 [phone] for a free consultation.

Send us a text

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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...

Episode Transcript

Speaker 0 (00:00):
Hello and welcome to ADU Adventures, building in your
Backyard.
I'm James, your host, and todaywe're talking about one of the
biggest questions homeowners askwhen thinking about building an
ADU how do I actually pay forit?
Now, before we get into thefinancing options, I want to set
your expectations.
I'm no lender, I'm no financieror moneymaker.

(00:20):
I'm just your friendlyneighborhood ADU guy.
I'm not here to tell you whatan ADU costs, because the
reality is, costs vary widelybased on your property location
and the choices you make.
My role here isn't to tell youthe best financial decision for
your situation because, honestly, that depends a lot on your own
personal factors.
But what I can do is walk youthrough the most common ways

(00:43):
homeowners finance ADUs, explainthem in plain English and share
a real story of how homeownerslike yourself are successfully
financing their projects.
So today we're going to cover afew things the different
financing options available toADU projects, how to assess your
budget realistically beforegetting started, what homeowners
need to consider before takingout a loan or using home equity,

(01:05):
and I'll share a story aboutsuccessful ADU financing and
what that looks like.
So if you've ever wondered, howdo people actually afford to
build an ADU and how do they payfor it.
Stick around, because we'reabout to break it all down.
Before we start talking aboutfinance, though, let's talk
about the real cost of an ADU.
Now, I know I said I wasn'tgoing to say how much an ADU
costs, but I can provide alittle insight as to how you can

(01:28):
go about it Now.
One of the biggest mistakeshomeowners make is assuming they
can get a quick estimate andmove forward based on that, but
the reality is every property isdifferent, and the cost of an
ADU isn't just about thestructure itself.
It's about your property, thecity regulations and the
challenges unique to building onyour property.
Here are a few things thatdirectly impact the cost of an

(01:50):
ADU.
The type of ADU can impact yourcosts Detached, attached garage
, conversion, basement, adu orJADU.
Each has different structuraland permitting requirements that
can affect the cost.
You should also consider thatwhenever you're building a
structure and have to tap intoyour main home, just like with
an addition, you may discoverthings in your house that need

(02:12):
to be repaired.
So attaching an ADU orconverting a garage or a
basement or building a JADUinside your home can open up a
whole can of worms regardingwhat costs could creep up that
you didn't expect in thebeginning of your project.
There's also site conditions.
Things like soil quality,grading, access to utilities and

(02:34):
even tree removal cansignificantly impact your
construction budget.
And of course, there's localpermitting and impact fees.
Those vary depending on yourcity, jurisdiction, neighborhood
, and they can be a major factorin your project's overall cost
if you happen to be located in avery specific area or discover
something that you didn't knowyou'd have to pay for later on.

(02:56):
And then the simple things likethe size of your ADU or the
materials and the finishes, abasic ADU versus a high-end ADU
versus a custom ADU versus ahigh-end ADU versus a custom ADU
versus a build-ready orpre-approved ADU.
And there's something thatdoesn't get talked about enough
unexpected costs.
We talked a little bit aboutthat with JADUs and garage
conversions, but the reality isevery construction project,

(03:18):
whether it's an ADU or a remodel, comes with some surprises.
A good rule of thumb is to setaside a contingency budget,
usually around 10% of the totalproject cost, to cover anything
unexpected.
What's great is thatProfessional companies and ADU
specialists generally try tobake in this contingency so that
you don't have to over-budgetyour project.

(03:40):
The key takeaway here you needa clear budget before you start
looking at financing.
If you go into the process withonly a rough estimate, you
might find yourself scramblinglater when costs start to add up
or having difficulty actuallycreating a relationship with a
lender.
Alright, but let's say you'vedone your research.
You have a good sense of whatyour ADU will cost.

(04:01):
Now how do you actually pay forit?
There are a few ways homeownersfinance their ADUs, and each one
comes with pros and cons.
Let's go through them one byone so you can understand how
they work.
On a very basic level Homeequity line of credit or a HELOC
.
A HELOC is one of the mostcommon, if not the most common,
ways homeowners finance ADUs inCalifornia, because it lets you

(04:23):
borrow against the equity you'vealready built up in your own
home.
Think of it a little bit like acredit card that's tied to your
house.
You're approved for a setamount, but you only borrow what
you actually need for an ADU.
This is great becauseconstruction costs happen in
phases and you can pull money asyou go rather than taking out a
lump sum all at once.

(04:44):
Pros potentially lower interestrates than personal loan.
Only pay interest on what youuse, and the flexibility to
borrow is needed.
Cons your home is used ascollateral and there could be
variable interest rates.
Your payments can change overtime.
A home equity loan is similarto a HELOC, but instead of a
flexible credit line, you get alump sum all at once.

(05:05):
This is a better option if youalready know exactly how much
the ADU will cost, because youget a lump sum up front and can
make fixed monthly payments.
Pros fixed interest rates yourpayment won't change.
You also have predictablemonthly payments.
Cons it's less flexible.
You can't borrow more later ifthe costs increase and it can

(05:26):
require significant home equity.
There's also cash outrefinancing.
Cash out refinance you replaceyour current mortgage with a new
, larger mortgage and thedifference comes to you in cash
to fund your ADU.
This can be a good option ifinterest rates are low or if
you're planning to stay in yourhome for a long time.
Pros include it can provide alarge amount for the project,

(05:49):
may lower your mortgage rate ifrates have dropped.
And cons it does reset yourmortgage term.
You're starting over, in effect, and closing costs can be
significant.
There's a story about a familythat we worked with.
I'll say that they're the Lopezfamily and they'd been thinking
about an ADU for years.
They wanted a long-term rentalunit to create passive income,

(06:10):
but weren't sure how to pay forit.
At first they considered a cashout refinance, but after
speaking with a financialadvisor and an ADU specialist,
they realized a HELOC wasprobably the better option for
them.
Why their mortgage-inc why, youmay ask?
Well, their mortgage interestrate was already super low and
refinancing would have increasedtheir overall costs.
Instead, a HELOC allowed themto borrow only what they needed

(06:35):
as they needed it, which meantthey weren't paying interest on
unused funds.
Fast forward five years andhere's the kicker the rental
income from the ADU completelypaid off that loan.
Now they own a fully paid offADU that generates passive
income every month.
And there you have it.
If today's episode got youthinking about financing your
ADU, acton ADU is here to help.

(06:55):
We've been serving homeownersfor over 35 years and have
several financing partners.
We understand that clearfinancial plans are just as
important as a great design.
If you want to explore yourfinancing options, do visit
actonaducom slash podcast orgive us a call for a free
consultation.
Anyway, hope you enjoyedtoday's podcast.
Next time we'll be talkingabout how to pick the right

(07:17):
builder and what to look for ina partner.
Thanks for listening and goodluck on your radio journey.