Financing for San Jose ADUs

Financing for San Jose ADUs

Once you know what ADUs (Accessory
Dwelling Units) are and are convinced that building one is a good idea
for a rental property it’s a good time to think about its financing.
First is construction cost, and it is by far the largest part of an
ADU’s development cost. Design fees, permits and inspections take a
significant share as well. To check San Jose’s permit fees go to the
Permit Fee and Construction Tax
Calculator
. Please note that
economies of scale don’t really apply to ADU’s as these are small
structures ( from 600 to 900 sq ft maximum in San Jose). Combining your
ADU construction with your remodelling can help to reduce design costs
and the cost of contractors. For more details, check out
Maxable, an excellent source of information
on ADU’s projects.

Financing ADUs can be difficult. Many of the ADUs built today are
financed with the homeowner’s own cash. There is lack of specialized
financial products for ADUs at the present time. While there are quite a
few options including cash refinancing, second mortgage, rehab loans,
hard money loans and others, lenders are never comfortable in situations
where there is no clear understanding of the financial impact on the
overall house value of adding an ADU. Also, all loan options require
down payments and they add to an owner’s monthly payment obligations.
You can find a good overview of all conventional sources of financing at
the ADU Financing Guide by Santa Cruz
County

(p 27). Please remember that other information in the Guide does not
apply to San Jose and Santa Clara County due to differences in
regulations adopted by counties. Home equity loans work well during the
“draw period” (usually 10 years) as the banks charge interest only
during that time, but during the subsequent 15 years repayment period
the monthly payments add significant burden to borrowers, especially
because most of HELOCs have adjusted rates during the repayment period.

Is it possible to avoid monthly payments? Yes, it is. There are a slew
of so called “no debt” approaches of obtaining investment funds, but
they limit the investment amount that can be obtain to $200 K or max to
$250 K. The cost of building an ADU in San Jose can be anywhere from
$100 K to $450 K, and possibly more. Also, while there are no monthly
payments, this approach carries a very high price tag. Property owners
have to pay anywhere from 20% to 70% of their home value increase during
the period of investment. Good overview of different ADU financing
methods, both conventional and alternative can be found in How to
Finance an
ADU
.

HomeBrik matches property owners with investors. Both parties sign
HomeBrik’s Profit Participation Agreement
(PPA)
. The agreement entitles investor to
profits from the percentage of the property he/she invested in at the
time agreed by both parties. Profits are from both, property
appreciation and rents. Lets say an investor invests $100k in a
property worth $1 M (10% of the value). At the time of repayment or
property sale the property is worth $2.5 M. The investor will be repaid
$250 K, $100 K investment amount plus $150 k profit on 10% of the
property. Together with the profits and repayment, the investor will
obtain the amount that accrues during the investment period at 2% per
year. For example, for the $100 K investment the investor will also
receive a payment of $10,408 if investments ends in 5 years. The
investor will receive $21,899 or $48,595 if the investment period ends
respectively in 10 or 20 years. 10% rental income can be paid monthly or
annually. The HomeBrik’s PPA is de facto a home loan at 2% a year, but
payments accrue and are paid at the end of the investment term. The
amount covers investor’s cost of the money, independent of the profits.

Financial picture of ADU investment will be incomplete without
consideration of the impact of adding ADU on homeowner taxes. Adding
ADU, will not trigger the property reassessment. However, the tax will
increase, as the market value of the ADU will be added to the existing
assessment home value. Let say that ADU value at $100 K was added to
the $1 M house in the example above. That house was worth $305 K in
1998 and it has a base $376 K. To calculate the new base value
California uses a blended
assessment

approach as it blends the base value of the existing house with the ADU
value at the current market rate. The new base value for the above house
will be equal $376 K + $100 K = $476 K.

Contact us if you are interested in
HomeBrik to find you an investor for your ADU or you have question you
would like us to answer. In our next post we will show why the HomeBrik
arranged financing is much cheaper than those of competitors.

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