Why an ADU Could Be Your Next Best Investment
Accessory Dwelling Units (ADUs) are becoming a powerful way to monetize your property whether you own a home or an investment property already. An ADU provides additional living space that can be rented out or used for family members, increasing your cash flow and property value.
But before you dive in, you need to know:
- What kind of ADU you’re actually buying
- Local zoning and building rules
- Cost of utilities, site work, and structural design
- How to finance the build without losing your favorable primary mortgage
Let’s break it down in a way that makes sense (and keeps you from surprises).
Understand What You Are Buying
It’s tempting to see a prefab ADU or tiny home listed online for $10,000 and think you got a steal. But that’s often misleading.
Is the unit fully finished and shipped? Or is it just a kit you must assemble? In many cases, you’ll need a licensed contractor to handle the build, permits, and inspections. If you must assemble it yourself, talk to a local contractor first to estimate the labor cost.
Look for people who specialize in ADU builds and check reviews or websites like Angi, HOMESTARS, or local contractor boards.
As for cost, it’s wide-ranging. A built-on-site ADU might cost $80,000 to $400,000 or more, depending on size, materials, region, and complexity.
Check with Your City or County Zoning & Building Department
Before you commit, make sure your local rules allow ADUs where you live. Look up your city or county’s planning or building department, check their website, or talk to them in person. Ask:
- Do they allow ADUs on your lot type?
- What permits or occupancy rules apply?
- Are there size, height, setback, or unit type restrictions?
If you’re serious, hiring an architect or plan-engineer familiar with ADU rules will save you headaches.
Plan Utilities & Site Work
Utilities are essential: water, sewer, electricity. Many people underestimate how much it costs to trench, connect lines, or upgrade panels. It might run $10,000 to $20,000 or more.
You’ll need to dig trenches, run pipes and electrical conduit, and ensure proper drainage this is not a DIY project. Work with a contractor experienced in these tasks.
Make Sure the Unit Is Weather-Resistant & Code-Compliant
Because ADUs are treated like full homes under building codes, you must ensure fire, wind, seismic, and structural ratings meet local standards. Check materials for Class A or 1 fire ratings, wind resistance, and adherence to structural codes.
Prefab or modular units should come with certifications or test reports you can provide your building official.
Look Into Insurance Options for Your ADU
Getting insurance for an ADU or tiny home can be tricky. If it’s on wheels, it might require RV or mobile home insurance. If built on your property, it might be covered under “other structures” of your homeowners’ policy—but check with your broker.
Insurance cost and availability will depend on materials, occupancy, and how the unit is classified by your insurer.
Don’t Underestimate All the Costs
Beyond materials and labor, you’ll encounter:
- Foundation or site prep (concrete slab, footings) — maybe $5,000 to $15,000
- Permit fees, plan check, legal and architectural costs
- Transportation, crane work, site access logistics
- Utility upgrades like electrical panel, meter or sewer capacity
- Contingency buffer for unexpected issues
Often, the total cost ends up close to—or even above—twice what the prefab listing promised.
But if done right, an ADU can provide years of stable rental income or increase your home’s value.
How to Finance Your ADU Build: Creative Options That Protect Your Low-Rate Mortgage
Financing an ADU doesn’t mean giving up your great first mortgage rate. Here are strategies that let you tap equity without high cost or risk:
- Home Equity Line of Credit (HELOC) or Home Equity Loan on Your Primary Residence
If your ADU is built on your own home, a HELOC or home equity loan lets you borrow against your existing equity. You maintain your first mortgage, and you can use the borrowed funds for construction.
Pros: lower interest than construction loans, flexible draw ability (HELOC)
Cons: variable rate, closing and origination fees
- Use a DSCR Loan in Second Lien Position
If your ADU is built on a rental or investment property, you can use a DSCR (Debt Service Coverage Ratio) loan as a second lien. Because the DSCR loan is based on cash flow from the property (including the ADU), you don’t have to refinance your first mortgage or lose your low rate.
This method allows you to retain your existing mortgage and layer additional financing.
- Private Money Construction Financing
If you need speed or don’t qualify for traditional options, private money lenders can fund ADU construction. These will come with higher rates and stricter terms, but they bridge the gap until you complete the project.
Once your ADU is built and reappraised—including the added value—you can refinance into a 30-year fixed or other longer-term financing to reduce payments and aim for positive cash flow.
Tools & Resources to Help You Estimate & Plan
We offer several tools to support your project decision-making:
- An ADU Scope of Work Estimator to help you break down tasks, cost components, and contingency
- DSCR Calculator to estimate how well your property’s cash flow supports new debt
- Property Cash Flow Analysis Tool to model your potential rental income minus expenses
These tools help you visualize feasibility, returns, and financing impacts before locking in any commitments.
Why SEI Mortgage Makes This Work For You
At SEI Mortgage, we understand that not all projects fit neatly into conventional rules. Our team specializes in non-traditional solutions that let you unlock your home equity or carry second-lien construction debt without jeopardizing your primary mortgage.
We can help you structure:
- A HELOC or equity loan on your first home
- A DSCR 2nd lien for rental properties
- Private money bridge or construction financing
- Refinancing solutions once your ADU is built and appraised
We’ll walk you through which path fits your situation best and help manage terms that aim for positive cash flow.
Final Takeaway
Building an ADU is more than adding square footage—it’s a real investment strategy. When executed well, it can produce rental income, increase property value, and improve cash flow. The key is planning every detail, including how you finance it.
Use our calculators and analysis tools to vet your budget, structure financing with care, and if you decide to move forward, SEI Mortgage can help with creative solutions that work with your existing mortgage structure.
