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Isaiah Jernigan
  • Rental Property Investor
  • Durham, NC
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Looking for Financing for an ADU

Isaiah Jernigan
  • Rental Property Investor
  • Durham, NC
Posted Jan 13 2023, 08:27

Okay so here's my situation:

I bought my primary house in October of 2021. I'm eager to get into my next unit and I thought a great way to get into another one is using Rob Abasolo’s (Robuilt) strategy and build a tiny house in my backyard. It mitigates the risk by building on land I already own, and the low overhead of building a tiny house is great, low startup cost. The utilities hook up to the primary house so no paying for street lines. My brother lives with me and is going to help me build the house, we are going to outsource the plumbing and electrical. I owe 176k on the house, bought it for 200k and it's worth about 220k right now.

This is the loan I need:

This loan is for a modern tiny house, which will be built on my primary residence. The financial aid will go directly towards the construction (e.g. site work, foundation, rough-in framing, finishing), the furnishing (e.g. appliances, furniture, basic fixtures/installments) and management of this project. The project will take approximately four months to complete, beginning in January of 2023 and ending in April of 2023. Upon completion of the construction and inspection, we expect a cash flow of $1448.00 per month after expenses. This estimate is based on earnings from similar rental properties marketed on Airbnb and VRBO reported on [Airdna, Airbnb Comps.], calculating 75% occupancy per month and a daily rate of $100.

My Problem:

1.I don't have quite enough equity to do a HELOC, 80% LTV would break even on what I owe.

      2.I don't have enough credit history to apply for such a large personal loan

  1. 3.Small business lenders won't lend on it because even though it is a business, it is not established and it's more of a project than a traditional business
  2. 4.Hard Money Lenders won't lend on it because its a primary residence, also the loan is to small for them

Looking into:

Im looking into using personal 0% credit cards to build it, it cash flows so well I can pay it back before interest kicks in at 18 months. Also looking into private investors, I don't have anyone with that kind of capital but if anyone knows someone who would be interested in private lending I would love to meet them.

Also once construction is complete I could get a HELOC or refinance and pay back the cost of the tiny house

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John Underwood
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  • Investor
  • Greer, SC
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John Underwood
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  • Greer, SC
Replied Jan 13 2023, 09:02

It also ads risk in that if someone who stays in your ADU sues you they are Sueing against your primary residence since the tiny house is on your property. Make sure you have the correct insurance for this and make sure it is 100% allowed.

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Michael Baum
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  • Olympia, WA
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Michael Baum
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  • Olympia, WA
Replied Jan 13 2023, 10:58

Hey @Isaiah Jernigan, you have made some statements that need some clarification.

You say "that is cashflows so well I can pay it back..." How do you know it will cash flow that well?

How much are you expecting it to cost? Are we talking about a foundation with a small stick built house? Are we talking about a tiny house on a trailer?

The former is considered a real asset, but you have to be zoned R2 (usually) in order to build it or have some kind of city program that allows ADU's. Seattle has something like that if it meets size requirements etc, but it needs to be rented long term.

If it is the second, then you are talking about a RV essentially. It is not considered real property so getting financing on it is more difficult.

Have you checked with some of the tiny home people (trailer type) to see if they offer in house financing on their products or have a lender ready to go?

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Bruce Woodruff
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Bruce Woodruff
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Replied Jan 13 2023, 15:53
Quote from @Michael Baum:

You say "that is cashflows so well I can pay it back..." How do you know it will cash flow that well?

Yep, that was what stood out to me as well. Always remember that the ultimate worst case scenario is 'zero'.

Maybe it will cash flow well, maybe it won't. You cannot use this as anything but a projection (or a wish:-)

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Lawrence Potts
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Lawrence Potts
  • Real Estate Agent
Replied Jan 27 2023, 11:19

I think you also need to consider if your local market is supporting ADU builds….not in a literal sense (but some counties are allowing SFR's in my area to convert garages and attics into ADU's), but if your ROI and refinance will support it.

You should consider your exit strategy. Let's say it's going to cost you $45,000 to do it since you mentioned your overhead will be less by doing some of the work yourself. If you cashflow $1,450/month, it'll take you 31-32 months to get your capital back. That's almost twice as long as the 0% APR credit cards have (18 months). I'm pretty sure all the interest will add up from the 18 months and be added afterwards so it'll hit pretty hard.

And if you go to refinance, will your property appraise $45,000 more with the new adu? My guess is no. You have some equity, but not enough for refinancing successfully. You should research your neighborhood and find homes that have converted/added ADU's and see what they've sold for. Appraisers are going to use comps within 1-2 mile radius at most of similar homes (with ADU's). And most owners that build permitted ADU’s don’t sell after building. So the comps may not support the build and you may be stuck unable to refinance.

I think in theory it's a great idea but your missing a few key parts to make this successful. Unless you can float that costs and/or have the construction liquid (no leverage), I think you should look at other options. Hope that helps! Didn't mean to s*** on your plans, I honestly think that is the future of real estate in higher markets in about 10 years but we haven't seen enough ADU builds that have sold to create the valuation to justify the builds doing the BRRRR method. Most people doing these builds either have LOTS of equity or LOTS of cash.

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Henry T.
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Henry T.
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Replied Jan 28 2023, 13:53

I don't know about NC but a sewage hook up in Seattle is 30k. No, you can't just connect into your backyard sewer line for free. Did you get your plans approved yet? Even though Seattle claims to be ADU friendly, the process is anything but, with the different utilities contradicting the building dept. I wish you luck and I hope it goes smoothly. You can do it, but if you're hiring it all out, it will more likely cost more than the house that you just bought. Let us know how it's going.

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Michael Haas
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Michael Haas
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Replied Jan 28 2023, 16:13

Does Raleigh allow Detached ADUs?

Assuming they do, make sure the ROI pans out- usually in markets where you can buy a house for $200k it's cheaper and more profitable to buy another $200k house than it is to build a DADU.

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Bryce Platt
  • Rental Property Investor
  • Raleigh, NC
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Bryce Platt
  • Rental Property Investor
  • Raleigh, NC
Replied Jan 28 2023, 17:11

I'm doing this right now in Raleigh. However, I bought the house hack because it already had a detached garage to convert to an ADU. That makes it cheaper overall, but I'm not doing any of the work myself.

Also, your timeline will need shifting. I’ve been working on getting permits approved for this conversion for 9 months 😀

I’m financing with a loan from the solo 401k that I just set up for my sole proprietor consulting business.

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Adam Schneider
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Adam Schneider
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  • Raleigh, NC
Replied Jan 29 2023, 03:59

@Isaiah Jernigan--Is your land large enough to cut into two parcels, and have the ADU on the second parcel?

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Ryan Thomson#1 House Hacking Contributor
  • Real Estate Agent
  • Colorado Springs, CO
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Ryan Thomson#1 House Hacking Contributor
  • Real Estate Agent
  • Colorado Springs, CO
Replied Jan 30 2023, 13:11

@Isaiah Jernigan might be a good time for a personal loan. Hit up people you know and ask if they would invest in your project. Negotiate rates with them. If they really like you or they can get a couple of points above a "risk-free" treasury bond, I think a lot more people than you think would lend to you right now. And you never know who will say yes and who has money to loan. 

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Dave Skow
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Dave Skow
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  • Seattle, WA
Replied Jan 30 2023, 16:14

@Isaiah Jernigan- thanks ...consider asking family for short term loans ...consider leveraging your retirement account ( if you have one ) .....regaring getting a HELOC after the ADU is completed - dont count on this being automatically possible as most heloc lenders will want to have 15-20% equity in the property before providing a HELOC