California ADU Construction Financing

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California ADU Construction Financing

Rich M.
Flipper · Gardena, CA · Member since 2017 · 13 posts · 3 votes

Project ADU Add

Currently I have a property in California I'm looking to build two ADU. Should I use HeLOC, Construction Loan or Hard Money to build? I'm on a 2% 30 year fixed loan I have good credit, I owe $240K current Value $900-1 Million. ARV for 4 units not rehabbed is 1.4 . I plan on keeping unit for appreciation & Cash flow but for the right price I'll sale after I add ADUs. This is an owner occupied property Rents total $3,500 currently, with 2 ADU Additions rents total $9,500

HeLOC
I found credit union that will do 80% LTV up to $500K on HeLOC. 10y interest / 25 year loan adjustable rate

Construction Loan

With a construction Loan I heard they wanted 20 % down that I don't have.. I heard I could use my property as the 20% down. I have a three unit now with adding two more ADUs rents (2) 2+1 (1) Studio (2) 3+2 ADU total rent = $9500. An Investor I know told me to get a construction loan, I need to find a bank who would let me use my property as the %20 down.

Hard Money

I have another friend who says he uses a hard money lender because he doesn't want to show his money for tax purposes and its easier. I know he pays a higher rate than equity line maybe 9-11% I guess it works for him. I'm just wondering is it good to take a hard money loan on a construction project adding sqft 350 to a garage and building 1000sqft 3+2 ADU? Is that a good model to use when building?

Hard Money

I was told to get the hard money so I can do two projects at once. Get a construction loan take half for building on one property and the rest buy another property and do the same thing use the other money for the down on the other project. Then get a loan on that property and do it all over again. The only catch to this strategy is you have to refi out of the 1.4 loan in a year or 18 months, I was told if I can't qualify for 1.4 refi then I need a partner to help me with it... that's the part that I don't like.

Can someone help me with some great advice I would like to do this multiple time, I just need to know which strategy to move forward with. If anyone knows how to do one of these strategy please share..

Thanks in advance

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  • Brian Larson
    Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes
    5y

    @Rich M. - I went with a HELCO for my project.  I liked the flexibility to pay for what I used as I used it.  It was a good idea too because it took well over a year to get an approved plan and start building.  Let me know what you choose.  I'm always curious to see.

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  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    5y

    @Rich M. Heloc over Hard Money any day! 
    My broker just used our specialized 1st position Heloc to add a 1 bedroom casita to his property. His interest-only cost was incredibly low, so the ROI was incredible. Along with that, you can continue to re-use the line of credit line for the 30-year term.
    Hard Money Lenders might even be using their own Helocs. If you have the ability, you should profit, not them. 

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  • Rich M.
    OP
    Flipper · Gardena, CA · Member since 2017 · 13 posts · 3 votes
    5y

    Thanks Justin..

    1st position HELOC? I never heard of that. Who has that product ? Can you send me information on it.

    Thanks

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  • Sam Crochet
    San Diego, CA · Member since 2018 · 29 posts · 8 votes
    4y

    I assume you've proceeded with this project, but I'm going through a similar process now. I'd say the HELOC is the best option for starters (especially with current rates). Given you live on site that's probably easiest (tougher to get HELOC with a rental property).

    Hard money does seem "easy" given the lack of red tape and the guaranteed financing (assuming you trust the hard money lender). I recently approached a good friend who I trust (they happen to be high net worth). They're happy to lend the money now and beat inflation. 

    Hope you did well on this one.

    Sam

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