An ADU construction loan funds a second dwelling on a lot you already own or are buying as an investment: a backyard cottage, a garage conversion, a legal basement apartment, or a modular unit the city will CO. The primary might already rent. The ADU is the new door. Banks stall on zoning. Appraisers stall on unpermitted square footage. The construction stack has to match what planning will actually stamp.
Jaken Finance Group funds qualified investor ADU construction nationwide at 8.99%–13.5% interest-only. Vertical is sized to the lower of cost and 75% of as-completed value on the combined property when the ADU is real. Close targets 10–14 business days when zoning, plans, and the exit are already in the file. After CO and a lease, combined rent can exit to DSCR at 5.75%–10.5%.
This is not a tourist list of cities. Why ADUs are popular explains demand. Top cities to build ADUs is a listicle. This loan is the capital. It is not a spec house with a bonus room — if the city treats it as a second dwelling, say so. It is not an owner-occupied in-law suite. We do not finance houses you live in.
Apply for a permitted ADU: new construction · submit a scenario · (833) 264-7776
What counts as an ADU on this desk
Accessory dwelling unit here means a legal second dwelling on the same lot as an investment primary:
- Detached backyard cottage or coach house
- Garage or carriage-house conversion
- Basement or attic legalization with a proper egress and permit
- Attached addition that the city records as an ADU
- Prefab or modular unit set on a permitted foundation
It does not mean an unpermitted basement you already collect rent on. That income cannot support underwriting. It does not mean a second house on a lot you will split and sell as two specs — that is a lot split on infill plus spec construction. It does not mean a duplex from dirt. That is 2–4 construction.
ADU types and why the bid changes
| ADU type | Typical investor use | Cost band (illustrative) | Underwriting flag |
|---|---|---|---|
| Detached cottage | New door, clean lease | $150K–$350K+ vertical | Setbacks, utility tap, height |
| Garage conversion | Faster, existing shell | $80K–$180K | Foundation, insulation, parking lost |
| Basement legalization | Urban two-flats, English basements | $60K–$150K | Egress, ceiling height, damp |
| Attached addition | Lot too tight for detached | $120K–$280K | Fire separation, HOA |
| Modular / prefab | Speed, factory QA | $100K–$250K + set | Foundation, crane, inspections |
The American Planning Association ADU overview tracks the policy wave. California HCD’s ADU statutes are the loudest state preemption example. Your parcel still has a zoning letter. Bring it.
Zoning is the first draw, whether you like it or not
We do not size an ADU that planning will not allow.
By-right vs hearing. A cottage that is by-right in this district is a construction file. A cottage that needs a variance is a hearing first. We want the application and the date.
Size, height, setback. Many cities cap ADUs at 800–1,200 square feet and a story count. Plans that ignore the cap are not plans. They are a redesign.
Parking. Some cities dropped ADU parking minimums. Some did not. Some HOAs still require two spaces after the city dropped the rule. CC&Rs can ban what the city allows. Read both.
Owner-occupancy rules. A handful of ordinances still want an owner on site. If the rule applies to your lot, an investor LLC cannot use that ADU program. We will pass rather than pretend.
STR vs long-term. If your model is Airbnb in a city that banned STR ADUs, the exit is wrong. Long-term lease is the default we will underwrite unless you prove STR is legal on this parcel.
Local texture — not a substitute for this loan: Chicago ADU zoning · Chicago coach-house financing · Ohio ADU construction · DC English basement ADU · Los Angeles ADU zoning · Miami ADU zoning.
Two ways we actually fund ADUs
On a property you already own. Title is clean. Primary is a rental. You add the ADU. The loan can be construction-only on the vertical, or a recap that includes remaining basis if the numbers support as-completed combined value. We will not ignore an existing first lien. Say whether we are in first position or this is a different stack.
Acquisition plus ADU. You buy a tired rental with a garage that will convert, or a lot that already allows a cottage. Purchase and vertical can sequence in one relationship. Budgets still split. A house with no ADU path is a fix-and-flip or infill file, not an ADU slogan.
A conversion that is already framed with a frozen lender is mid-construction refinance.
Example: detached cottage behind a rental SFR
| Line | Amount |
|---|---|
| Existing rental (owned, as-is) | $310,000 remaining basis / as-is |
| Detached ADU hard cost | $195,000 |
| Soft cost (plans, permits, tap, insurance) | $28,000 |
| Contingency (12% of ADU hard) | $23,000 |
| Interest reserve (10 months @ ~10.5% on ADU draws) | ~$14,000 |
| ADU all-in (vertical + soft) | ~$260,000 |
| Combined as-completed (SFR + permitted ADU comps) | $620,000 |
| 75% of combined as-completed | $465,000 |
| First lien remaining (example) | $220,000 |
| Room for construction in first position (illustrative) | Subject to total cap and cost |
The sponsor used “ADU adds $200,000 of value” from a national blog. Neighborhood comps for permitted cottages supported a smaller premium. Unpermitted garage apartments nearby are not comps. Combined rent: $1,850 primary + $1,350 ADU. DSCR takeout at 70%–75% of $620,000 must clear at 5.75%–10.5% after taxes, insurance, vacancy, and maintenance on two dwellings.
Interest-only on construction draws at 8.99%–13.5%. Term 12–18 months. We do not treat the existing house as free collateral for a max ask if as-completed combined value does not support it.
A garage conversion on the same lot would show a lower hard cost and a parking problem. A basement legalization in DC would show egress and ceiling-height cost that this cottage example never sees.
What dies in underwriting
- No zoning letter. “ADUs are legal in this city” is not a parcel confirmation.
- HOA ban. CC&Rs beat the city’s brochure.
- Owner-occupancy ordinance on an investor file.
- Unpermitted existing unit used as rent comps or as “already done.”
- Owner-occupy the primary. Wrong lender.
- Utility tap treated as $0. Sewer and electric for a second dwelling are real invoices.
- Spec SFR package with an ADU hiding in a footnote.
Utilities, access, and the cottage you cannot reach
A backyard unit needs a path the fire department accepts, a water line, and a sewer that the city will let you tap. Shared laterals fail inspection. Overhead electric across a neighbor’s yard is not a plan.
Modular units need a crane window and a foundation inspection that factory photos do not replace. Budget set days, not a weekend.
If the primary is occupied during construction, tenant notices and access are a calendar. We still need inspections. A lease that forbids construction is a file problem.
Takeout — combined DSCR, not two fantasies
The ADU is rarely a standalone refinance. Takeout is usually the combined property: primary plus legal ADU.
Model two rents, two vacancy factors if the ADU is shorter-stay legally, and maintenance on a new small building plus an older primary. Construction interest-only is not the permanent payment.
If you intend to sell the primary with a permitted ADU, as-completed comps must be other ADU properties, not larger houses without a second door. Buyers who cannot finance an unpermitted unit will not pay your premium.
For first-time builders pairing a strong GC with a cottage, ground-up construction with limited experience is the cousin. Still label the product ADU.
What “qualified” means on ADU construction
A GC or conversion contractor who has pulled ADU permits in this city helps more than a kitchen-flip resume. Liquidity for tap fees and a failed setback inspection is not optional.
First-time sponsors with a zoning confirmation, sealed plans, and combined comps can clear. First-time sponsors with a Pinterest cottage and no site plan do not.
Credit is reviewed. Approval rides on zoning, cost, combined as-completed value, and exit — not on a W-2 story.
Insurance on two dwellings, one lot
Course-of-construction on the cottage is not the primary’s landlord policy. At CO you need a policy that knows there are two dwellings. Some carriers price ADUs poorly. Get the quote. A lapse between binders is a gap we cannot fund around.
Taxes may reassess when the ADU COs. Ask the assessor. A new door that adds $4,000 of tax will show up in DSCR.
Garage conversions — parking you just deleted
A garage conversion is often the cheapest ADU. It is also the one that deletes parking the primary still needs.
If the city or the HOA required two spaces and the garage was both of them, the conversion is not by-right until you replace parking or get a waiver. A slab that becomes a living room still has a garage-door header and a floor that was never insulated for habitation. Budget moisture, vapor, and a new envelope. A “$80,000 conversion” that skips those lines becomes a $140,000 conversion after the first inspection.
Do not use the garage as storage for the primary’s junk during construction and then claim it is a dwelling in month two. Inspectors will see it.
Modular ADUs — factory photos are not a foundation inspection
Modular can be faster. It is not a skip-the-city product. The set still needs a foundation inspection, a crane window, utility stub-ups that match the factory drawings, and a local inspector who has seen this product.
Lead times slip. A unit that ships four weeks late still accrues interest on land and on any site work already drawn. Put a real ship date in the file, not a brochure.
If the modular company wants payment before the box leaves the factory, that is a materials advance we have to underwrite. It is not automatically a construction draw.
Tenant in the primary while you build
Investment primaries are often occupied. Construction on a cottage or a garage still needs access, dumpsters, and noisy days. A lease that promises quiet enjoyment without a construction clause is a conflict.
We want a plan: notice, rent concession, or a vacant primary. A file that assumes the tenant will “be cool with it” is not a plan. If you must keep the tenant, budget the concession. DSCR takeout later will also want a lease that reflects reality.
Combined appraisal logic
As-completed value is the house plus the legal ADU, not the house plus a national “ADU premium” percentage. Appraisers look for paired sales — similar houses with and without permitted ADUs. If those sales do not exist in the grid, the premium shrinks. Your construction budget does not shrink with it. That is how ADU files hit the 75% cap.
Do not send comps of unpermitted basement apartments. Those are not legal second dwellings. They are a different, weaker story.
Package to submit
- Deed, existing liens, entity docs
- Zoning confirmation or a dated planning email for this parcel
- HOA CC&Rs if any — rental and ADU clauses highlighted
- Plans, budget, GC or conversion bid, tap estimate
- Combined as-completed comps (permitted ADUs, not unpermitted)
- Exit: hold rent roll for both units, or sale of the combined asset
- Photos of access, setbacks, and the existing primary
Starting point across construction: new construction loans for investors. If you are scraping the primary and building two new dwellings, that may be infill plus 2–4, not an ADU.
Bring zoning for this parcel, not a city brochure. Apply: ADU construction via newbuild. Between cottage, garage conversion, and a full scrape? Submit a scenario. Get approved · (833) 264-7776
ADU construction examples are nationwide lending illustrations on investor real estate. Rates, terms, and conditions apply only to qualified borrowers and may change without notice. Jaken Finance Group does not finance owner-occupied housing.