I'd like to build a guest house on the back of our personal property and rent it out either as a long-term rental unit or vacation rental. It will be under 1000 s.f. not counting the garage.

The goal is to rent it out now, and eventually move into that unit and rent out the main house when the kids are out of the house.

My question is, what's the best way to finance this? I already have a small HELOC on the property that we've used for main house improvements, and getting a larger one wouldn't cover all of the construction costs for this project. Doing a cash-out refinance of our primary would force us to give up our 3.5% fixed rate. Not completely out of the question, but the numbers would have to work.

The other idea I had was to purchase a chunk of adjacent land (we've already done this once on another side of our property from the same owner) and then subdivide our property so we can develop it as two separate parcels with a shared well. I've done prelim research with planning on this, but don't want to go every which way on this project and spend a lot of time researching every single option under the sun. In other words, I want to be efficient with the time spent on this endeavor from start to finish.

Without running formal numbers, I'm going to say it looks like this:

Land purchase: $40k

Permits, plans, etc: $8k

Construction costs: $190k

Potential rental income: $900-1000/month or average $675/month vacation rental (est)

Are there any ways to finance this that I'm not aware of? Would be interested in any ideas, experience or feedback from the forum community.