Photo by John Yu

Helpful Tips for ADU Budgeting and Financing

Homeowners across California are building Accessory Dwelling Units (ADUs) to increase their properties’ functionality and value. While adding an ADU is always a good investment, you’ll need to establish a realistic budget and secure financing before you’re ready to break ground.

In the following blog post, we'll share our essential tips and best practices for ADU budgeting and financing, ensuring that your project stays on track and meets your goals.

1. Check with the jurisdiction

Before you dive into budgeting and financing, it's crucial to confirm that your property is eligible for an ADU. Different municipalities have varying regulations and zoning laws, so consult with your local city planning department to understand the requirements.

Additionally, be aware of utility easements that might hinder or halt the ADU permitting process. The last thing you’d want is to invest significant time and money into planning your ADU only to discover an easement prevents building on your property.

2. Consult an ADU expert

Connecting with an ADU company, designer, or architect early on in the planning phase can be invaluable. Their expertise will help you create a realistic budget and project scope that aligns with your goals. Additionally, some financing methods may require a detailed budget and project plans before they’ll approve the funds.

Read our blog post on the benefits of working with an ADU company, or contact Otto for a free ADU consultation.

3. Compare loan offers

When it comes to financing your in-law unit, don't settle for the first loan offer you receive. It’s worth the extra time and effort to compare different lenders to find the one that offers the best terms.

If you’re unsure which lending option is right for you, read our article on the best ADU financing options.

4. Consider more than just the interest rate

While the interest rate is an important component, it's not the only factor to consider when comparing loan offers. Take into account closing costs, private mortgage insurance, and any other expenses associated with the loan. A comprehensive assessment of multiple factors will provide a clearer understanding of the financial commitment you're making.

5. Allow wiggle room in your budget

Nearly every construction process is accompanied by unexpected costs that can throw your budget off balance—if you’re unprepared. To counter unwelcome surprises, build some flexibility into your budget. This buffer will help you navigate surprise expenses without jeopardizing the project's completion.

6. Anticipate a property tax increase

A granny flat adds value to your property, which can result in an increase in property taxes. While this might seem like a drawback, most homeowners find the benefits of having an ADU far outweigh the modest tax increase. Regardless, it’s important to be prepared for a slight tax increase and incorporate it into your overall budget.

For more information about ADUs and property taxes, read this blog post.

7. See if you qualify for a grant

Grants provide financial assistance that can help offset the costs associated with building an ADU. This can include construction costs, permit fees, and other related expenses. Grants and special loan programs can reduce the financial burden on qualifying homeowners, making ADU construction more affordable.

Read our article on the CalHFA ADU grant to see if you qualify for up to $40k off your ADU.

Conclusion

As you start planning your ADU, remember that careful budgeting and financing are the cornerstones of a successful project. By checking city regulations, seeking expert advice, comparing loan options, and accounting for unexpected expenses, you'll be well-prepared to turn your ADU dreams into a reality. The result? A practical, valuable addition to your property that offers countless benefits for years to come.

When you’re ready to start planning your ADU, contact Otto. Our ADU experts will design the perfect unit for your needs and budget.

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