Retiree (Not Me Yet) with Paid Off House Wants to Finance an ADU

[Nicholas LaGatta]

Hi BP,

I have a retired neighbor in an in-town historic Atlanta neighborhood that's paid off his house and now he's looking to finance building an Accessory Dwelling Unit (ADU) that he can rent out for supplemental income. He's got modest but steady retirement income, 750s credit score, and minimal debt. The house recently appraised for around $350k in current condition and the ADU would cost around $125k.

He's done some preliminary research and has found a 2nd mortgage will be easier to get than a construction loan or HELOC. I'm going to talk with him tomorrow morning about some considerations for finance and construction and I'd like to crowd source some ideas.

What do you think is the best way for this guy to finance the project?  What kind of interest rate could he expect?  What are some other finance considerations we should talk through?

Thanks in advance!

[Rick Baggenstoss]

@Nicholas LaGatta I'd ask him what his expected rents are from the ADU and help him run the numbers. Also, when the ADU is completed and rented out, what's the strategy? Refi the ADU loan and primary dwelling so it's one big, low interest loan? He's got to be really clear on that step as it's even harder than the ADU loan if he's retired.

I'll tell you most banks don't appraise the ADU as adding much additional value to the primary. He's got to really coach the appraiser to consider it as a rental in addition to the primary, not just finished space.

Now to your question, a HELOC would be the easiest.