Columbia Missouri New construction financing for ADU's
Milton ChamberlainPro Member
Real Estate Agent · Kansas City, MO · Member since 2019 · 236 posts · 107 votesHi all, I own a deep 0.75-acre inner-city lot in Columbia next to a similar lot owned by my father-in-law. THey share an easement driveway. ADUs are very popular there, and we’re looking at building 4 ~400 sq ft units that rent for about $800–$850/month. We’d also add a shared concrete driveway, parking pads, and small patios. Estimated cost is around $90k per unit, potentially ~25% less if we manage it ourselves, plus ~$40k to remodel the front house and increase its rent by ~$500/month.
My wife and I have an S-corp and a dental business, but on paper our DTI isn't great due to multiple properties, loans, and other debt. My father-in-law is mostly debt-free and could partner with us. He has a high income. We also have significant equity across properties we could tap into, but rates are sub 4% so prefer not to.
Are there financing options for something like this without a large out-of-pocket investment? Open to creative structures like partnering with my father-in-law in a new LLC, seller financing, leveraging equity, or using our entities.
This is a fantastic 'highest and best use' play for that lot. Since you're dealing with a DTI hurdle but have a high-income partner and existing equity, you have a very clear path to the finish line.
As an investor and lender, here is how I would structured this to avoid the DTI trap:
1. The 'Bridge' Phase: Ground-Up Construction Loan Standard DSCR loans won't work for the actual build because there's no 'Debt Service' to cover yet. You'll want a Short-Term Construction/Bridge Loan.
2. The 'Exit' Phase: The DSCR Portfolio Loan Once the 4 ADUs are built and the front house is remodeled, you 'take out' the construction loan with a 30-Year Fixed DSCR Loan.
3. Creative Equity Strategy Since you have equity in other properties but don't want to touch those sub-4% rates, look into a HELOC on a rental property or a second-position 'Investor Line of Credit.' You can use this specifically for the 'soft costs' (permits, architectural plans, and the $40k front house remodel) without refinancing your low-rate primary debt.
One Columbia-Specific Tip: Check if your lot is zoned for 'Missing Middle' housing. If you can legally classify this as a single 5-unit 'multifamily' project rather than 1 house + 4 ADUs, you might open up even better commercial lending terms.
Happy to run the math on what the 'Exit' DSCR looks like based on your $850/unit rent projections so you can work backward to see your maximum construction budget!
@Milton Chamberlain - MIZ! I lived in CoMO for 16 years before moving down to Springfield with the family.
Sounds like a good situation. The properties I've refinanced in Columbia recently for clients all had good cash-flow, and depending on where your lot is located, I assume you might be targeting the college market there. I think that a residential ground-up construction loan might be a good fit here. For your awareness, a private lender's financing will not be contingent on your personal income, taxes, DTI, etc. It will be underwritten to the value-add that you are performing, along with your credit-worthiness as a guarantor.
Here are some things that a lending partner will need to know:
• Lot value
• Current debt (if any) on lot
• Estimated budget (~$400k from the sound of it)
• Projected After Repair Value (ARV)
• Your experience level with ground-up construction
One thing you may run into though is the fact that this lot will have 5 units on it after all is said and done. That is actually going to take a commercial ground-up construction loan (harder to come by), and the lot will need to be re-zoned from residential to commercial. Once you cross that 4-unit threshold into the 5+ unit territory, you're looking at commercial multifamily. Your exit options on the DSCR lending side are also going to be more limited when it comes to commercial vs. residential.
You referenced that you may be looking to avoid significant out-of-pocket expenses. That may be possible if your lot is owned outright and makes up 15% or more of your total project cost. However, the construction loan will not be advancing funds for construction. Instead, it will need to be through reimbursements, in which case you would pay for a certain amount of work to be completed and then be reimbursed for that completed work out of escrow.
Feel free to reach out and we can discuss further.