ADU for Old Littleton (Advice)

[Tyler Hardy]

Hello Everyone!

I had posted many months ago about ADU plans I had for my house. At the time everything was hypothetical. Fast forward today, I have the zoning required and the necessary variances to build a full new build garage with ADU above. Green light from the city as the 1st legal ADU, in fact. While this was certainly all a large hurdle, what's becoming more cumbersome is the financial justification of the project as a whole. Construction costs are far more insane than I had thought. I'd like to disclose the financial picture I am looking at and invite any financial and real estate advice / experience anyone can bring to the table. I'd like to hear from others on whether or not this makes financial sense.

Current Property

Current Mortgage Balance: $334,000
Home Value: $500,000
Equity: $166,000

ADU + Project Overview

Total Estimated Cost: $200,000

• Two car garage with work shop (property does not have garage today)
• 576 sqft of livable space in ADU above
• 1 bedroom, 1 bathroom, kitchen, living room, & laundry
• ADU has private entrance outside of garage
• ADU has 140 sqft patio with mountain views

    Additional Projects to be Included for Main Property 

• Landscaping my current yard (no improvements to date)
• Adding oversized deck/patio that extends living room outside
• Includes all infrastructure, sewer taps, designs, permitting, etc.
  
  

Financing & Home Value

As a Veteran I have access to the VA Home Loan which I used to purchase the property back in 2016. I would be leveraging a VA Cash Out Refinance because it permits 100% LTV at 3.5% rate with continued absence of PMI. The cash out refinance would be on the total $500,000 value of the home, those new numbers are reflected below.

1st Mortgage: $1,950/mo (escrow + taxes)

2nd Mortgage: $2,602/mo (escrow + taxes)

Mortgage Increase: $652

Cash Out: $140,000 (after closing costs, taxes, VA funding fee, etc.)

Additional Personal Cash Needed: $60,000

Est. Home Value Increase: $200,000

Operating Expenses & Income

Est. Monthly Rental Income:$1,200

Est. Annual Operating Expenses: 1,200

Monthly Cash Flow: $448 (before taxes)

At times I look at the above numbers and they make sense. Other times, I struggle. I’m fronting $60,000 of cash which is far more than I was hoping to. I’m also onboarding $600+ more in my mortgage which is always a risk. The cash flow on the backend is tighter than I was hoping as well — easily could be whipped out should any major issues arise. I’m not well versed in how taxes will come into play, and for the most part, have not factored them into my calculations.

The garage, large patio, and landscaping are projects that will add great joy and utility to the home. I see these projects as being funded by the renter, which is huge a benefit. All said, I need to sh*t or get off the pot. With a pending economic downturn, I’m nervous about spending such a high premium on labor/construction when I know in the next 12-18months it could be 30-40% cheaper. I’m not sold that this is the best use of my money either.

Anyways, any thoughts?