Accessory dwelling units (ADUs) are additional, stand alone units built on a property with an existing unit. ADUs are typically small units, ranging from around 400 to 1,000 square feet. They must include a separate entrance from the main home, a bathroom, shower, kitchen, and a living/sleeping area. All requirements must be met for the unit to be considered an ADU.

ADUs are gaining a lot of popularity for their flexibility and affordability. In a 2020 report by Freddie Mac, properties with ADUs increased almost 7%, which is a significant climb from 1.6% reported 20 years prior. With a high demand for housing and a shortage in supply, ADUs are proving to be a great solution. Not only are they advantageous for the renter, but also for the investor.

Advantages of ADUs

Many investors are taking advantage of the housing shortage and increasing popularity of ADUs and are building accessory units on single family properties as well as smaller multifamily properties, such as quadplexes. Doing this allows them to create multiple streams of income on a single property. For example, if the investor is doing a fix and flip for a quick resale, they can now sell the property originally bought as a single family home as a dual unit property. If the investor is using a fix and hold strategy, they will earn passive profit from two renters on a single property. Either way, ADUs are providing more income to the investor while also supplying more people with a place to live. A win-win situation for all.

Another benefit of ADUs is that they are easy to finance. Investors have a few different loan products to choose from, but it is important to work with a lender that has experience in funding ADUs who can help find the right option for you.

Finding the Right Financing For An ADU

Bridge loans are a good option for investors who have multiple properties for sale and are in need of quick funding. These types of loans have short terms and often have high interest rates, but with the additional profit from the ADU, a high interest rate isn’t something to deter you from this type of loan.

Construction loans are another product to consider for an ADU. These loans are based on the future value of the property once the project is completed. Similarly to bridge loans, construction loans are short term, fast and flexible, making them a great option for investors working on multiple projects at once.

When deciding between these two types of loans you need to consider your project and investment goals. The loan product, cost, and terms will depend on whether you are purchasing a new property or building an ADU onto an existing property that you own.

In the case that neither a bridge loan or construction loan make sense for your specific project and you own an investment property with ample equity, you can explore cash out options and use those proceeds to fund your ADU project.

Time to Level Up

Accessory dwelling units offer many compelling advantages for investors. If you’re interested in ADUs, now is the time to get in on the action as they are quickly gaining popularity. Talk with a lender who knows the ADU landscape so you can find the right loan product for you and start building your portfolio right away!