Adding a backyard cottage, garage conversion or junior unit is one of the most popular ways to add value in Los Angeles. If you are researching ADU financing in Los Angeles, the main question is not just what it costs to build, but which loan fits your timeline, equity and income. Here is how the common options work.
What is an ADU?
An accessory dwelling unit (ADU) is a secondary living space on a residential lot, either detached (a backyard unit), attached to the main house, or converted from a garage or other space. A junior ADU (JADU) is a smaller unit within the existing home. California has passed laws to make ADUs easier to permit, but local zoning, setbacks, utility and permit requirements still apply, so confirm with the City of Los Angeles or your local jurisdiction.
How much does an ADU cost?
Costs vary widely by size, finish level, site conditions, utilities, design and permit fees. Garage conversions are generally less expensive than new detached units. Get at least two or three written bids and add a contingency for surprises, since site work and utility connections are common budget busters.
Common ways to finance an ADU
- Home equity loan or HELOC. If you have built up equity, borrowing against it can be a straightforward way to fund construction. Rates and terms depend on your credit, income and loan-to-value.
- Cash-out refinance. Replacing your mortgage with a larger one lets you take cash out. It can make sense if current rates are favorable, but a higher rate on your whole balance can cost more overall.
- Construction or construction-to-permanent loan. Funds are released in stages as work is completed. Some structures convert to a standard mortgage after the build. See our overview of construction financing.
- Renovation loans. Some programs (such as FHA 203(k) or Fannie Mae HomeStyle) wrap renovation costs into the purchase or refinance. Availability for ADU work depends on the program and lender.
- Personal savings or other financing. Some owners use cash, personal loans or contractor financing. Compare the total cost, not just the monthly payment.
What lenders look at
Expect lenders to review credit history, income and debt, the equity in your home, the plans, the contractor’s license and bid, and sometimes the projected rental income. The details depend on the loan type, so a conversation with a loan officer before you design the unit can save you from building something you cannot fund.
Will an ADU pay for itself?
Rental income can offset the cost, and an ADU can raise your property’s value, but results depend on build cost, local rents and vacancy. Run conservative numbers, and check rent rules and local regulations before you count on a specific income.
Steps to get started
- Confirm what is allowed on your lot with your city.
- Get a design and two or three contractor bids.
- Talk to a lender about your equity and the loan options that fit.
- Apply for permits and plan for the construction timeline.
Frequently asked questions
Can I get a loan to build an ADU in California?
Yes. Options include home equity loans, HELOCs, cash-out refinances, construction loans and some renovation loans. Which one fits depends on your equity, credit and income.
Do I need equity to finance an ADU?
Most options rely on equity in the existing home, though some construction and renovation loans look at the projected value after the work is complete.
Can I use rental income to qualify?
Some lenders count projected ADU rental income in certain programs. Ask a loan officer how it would be treated for your loan.
Planning an ADU? Our in-house lending team can walk you through construction and renovation loan options.
This article is general information, not a loan commitment, legal or tax advice. Programs, rates and rules change, so confirm current details with a licensed professional before you decide.
Written by the Terranova Real Estate Group team · DRE 01785581 · NMLS 1091484 · Meet Griselda Espinoza