On September 21st, 2021, California adopted Senate Bill 9 (SB9). It eliminated much of the red tape for homeowners looking to build additional living units on their property- or even to split their property.
Many of your neighbors have been taking advantage of this new law to create extra monthly income for themselves or in order to have their loved ones closer. It can be difficult with the cost of living for adult children starting out… they can save money and live close (but not too close!) to home. Many people
aren’t comfortable putting their parents into nursing homes. Homeowners with a granny flat can help them age in place.
Below is a graphic on different configurations for people who are interested in adding to their properties.
If one digs a little deeper into the bill.. and look at Section 65852.22. (a) they can see it’s possible for a homeowner to have 3 units on their property- without splitting. This would be possible by adding a Junior ADU (500 Sq Ft max) to the property. There is a caveat that says that the JADU needs to be in owner occupied portion of the property. However, there is an option to live in the JADU and rent the main house if someone was really looking to maximize their return.
Many people dream of having a guest home on the property or creating multiple income streams for themselves. However, the process… can seem a little daunting. In Los Angeles it’s currently taking around 9 months AFTER submitting plans to get an approval. In the surrounding county and certain other areas that process takes 14 months.. or longer. Therefore, for most homeowners it’s appropriate to work with a licensed general contractor who is experienced in building ADU’s and can help them navigate the process.
While it’s true it may be possible to get a cheaper price per sq feet by working with multiple subcontractors or by doing the work themselves, the average homeowner isn’t qualified to do this, nor do they have the time. There can be all kinds of unknown hazards that could be run into!
Working with a general contractor you may expect costs to be somewhere around the following:
$245/Sq ft for a Garage Conversion
$295/Sq ft for a New Build
$345/Sq ft for a 2 Story New Build
That brings the question… how to pay for all this?
There are really 4 options:
Pay Cash – Of course!
Get a mortgage – This could be a cash out refinance or a renovation loan. A renovation loan will allow the lender to take advantage of the “After Repair Value” (ARP) of the house. This could be useful if the home was recently purchased.
Get a Home Equity Loan – This could be in the form of a Home Equity Line of Credit or a Home Equity Loan (sometimes called a HELOAN or “2 nd mortgage”). There ARE now some home equity options that take ARP into account. One drawback of home equity loans or HELOCs are that they are often variable interest rates.
Get a Personal Loan – This can be a good option especially if homeowners don’t plan on keeping the loan for a very long time. These are often faster as they don’t have a lot of the regulation that home loans have. Check with your general contractor to see if they offer any financing. Some builders have relationships with lenders. Be cautious, some of these loans can have very high fees involved! One perk of these loans is that they sometimes offer 12-24 months with NO payments. One drawback is that many of them are capped somewhere around 150,000. This may not be enough for some homeowners depending on their project.
Every homeowner’s situation is unique so there is not a one size fits all solution to financing. A combination of options is often appropriate. In General, the dilemma for many homeowners is that they have a low interest rate on their current mortgage that they do not want to forfeit in order to complete a project like building an ADU. For that reason, the HELOC option makes sense for many people. A renovation HELOC or Renovation loan is a good option for people that don’t have enough equity to get a traditional loan. For homeowners who are free and clear or have a very low balance on their first mortgage the cash out refinance may make more sense. Please feel free to reach out if you would like to brainstorm any ideas around this topic.
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