ADU Building Guide: Costs, Process, and Financing in 2026

An ADU—Accessory Dwelling Unit—is a second living space on your property. Granny flat. In-law suite. Backyard cottage. Different names, same concept.

They're having a moment. Housing costs are insane, multigenerational living is back, and rental income sounds pretty good right now.

But building an ADU isn't simple. Here's everything you need to know before committing.

What Qualifies as an ADU?

An ADU is a self-contained living unit on a property with a main house. It must have:

• Kitchen or kitchenette
• Bathroom
• Sleeping area
• Separate entrance

Types of ADUs

Detached ADU (DADU) Standalone structure in backyard. Most expensive but most privacy.

• Size: 400-1,200 sq ft typically
• Cost: $150,000-400,000+

Attached ADU Addition built onto main house.

• Size: 400-1,000 sq ft
• Cost: $100,000-250,000+

Garage Conversion Transform existing garage into living space.

• Size: 400-600 sq ft typically
• Cost: $50,000-150,000

Basement Conversion Convert basement to separate unit (where allowed).

• Size: Varies
• Cost: $50,000-150,000

Junior ADU (JADU) Smaller unit carved from existing house (often bedroom + bathroom + kitchenette).

• Size: Under 500 sq ft
• Cost: $20,000-80,000

ADU Costs: Realistic Numbers

Let's be honest—ADUs are expensive. Here's what you're really looking at:

Detached ADU (New Construction)

Per square foot: $200-400+ depending on finishes and location.

Garage Conversion

Garage conversions are cheapest because the shell exists. You're not paying for foundation, framing, or roofing.

Why ADUs Cost So Much

1. Small doesn't mean cheap - A 500 sq ft ADU needs plumbing, electrical, HVAC, kitchen, and bathroom—same systems as a big house
2. Fixed costs - Permits, design, and utility connections don't scale down
3. Labor shortage - Contractors are in demand, especially for small projects
4. Code requirements - Modern building codes add cost (fire sprinklers, accessibility, energy efficiency)

The ADU Building Process

Phase 1: Feasibility (1-4 weeks)

• Check zoning laws for your property
• Confirm ADU is allowed
• Understand setback requirements
• Check parking requirements
• Verify utility capacity

Phase 2: Design (4-12 weeks)

• Hire architect or use pre-approved plans
• Site survey
• Design development
• Construction drawings
• Engineering (structural, MEP)

Phase 3: Permitting (4-16 weeks)

• Submit plans to city
• Plan review
• Corrections and resubmittal
• Permit issued

California note: State law mandates 60-day permit review for ADUs. Other states vary widely.

Phase 4: Construction (16-32 weeks)

For detached ADU:

• Site prep, excavation
• Foundation
• Framing
• Roofing
• Rough plumbing/electrical/HVAC
• Insulation, drywall
• Finishes (kitchen, bath, flooring)
• Final inspections

Phase 5: Occupancy (2-4 weeks)

• Final inspections
• Utility activation
• Certificate of occupancy

Total timeline: 9-18 months from start to move-in. Don't let anyone tell you otherwise.

Zoning and Legal Requirements

What Determines If You Can Build

Lot size minimum: Some areas require minimum lot size (e.g., 5,000 sq ft)

Setbacks: Distance from property lines

• Side: Often 4-5 feet minimum
• Rear: Often 4-5 feet minimum
• Front: Usually can't build ADU in front yard

Height limits: Typically 16-25 feet for detached ADU

Lot coverage: Maximum percentage of lot that can be structures

Parking: Some areas require adding parking (California recently eliminated this for most ADUs)

Where ADUs Are Easier

California: Most permissive state. Statewide laws override local restrictions.

• By-right approval in most cases
• No parking required near transit
• Streamlined permitting

Other ADU-friendly areas: Oregon, Washington, Minneapolis, Austin

Harder areas: Many suburban jurisdictions still restrict ADUs heavily

Check Your Specific Property

1. Search "[your city] ADU regulations"
2. Call planning department
3. Hire professional if unclear

ADU Financing Options

HELOC (Best for Most)

• Draw funds as needed during construction
• Interest-only during draw period
• Rates: Prime + 0-2%
• Learn more about HELOCs

Why it works: Construction is unpredictable. A HELOC lets you draw as costs arise rather than taking a lump sum upfront.

Construction Loan

• Specifically for building projects
• Converts to mortgage after completion
• More paperwork, more oversight
• Good for new construction

Cash-Out Refinance

• Access equity via new mortgage
• Works if rates are favorable
• Lump sum upfront
• HELOC vs cash-out comparison

Home Equity Loan

• Lump sum at fixed rate
• Good if you know exact costs
• Less flexible than HELOC

ADU-Specific Loan Programs

Some lenders offer ADU loans based on projected rental income:

• Factor future rent into qualification
• Higher rates than traditional
• Available in select markets

The Rental Income Math

Let's see if an ADU makes financial sense:

Example: California Detached ADU

Costs:

• Construction: $250,000
• HELOC at 8%: $1,667/month interest

Income:

• Rent: $2,200/month (1br in good area)
• Vacancy/maintenance: -15% = $1,870 net

Monthly cash flow: $1,870 - $1,667 = $203

That's barely positive, before taxes, insurance increase, and principal payoff.

When ADU Math Works

1. Lower construction costs - Garage conversion at $100K has better returns
2. Higher rents - Coastal California, Seattle, Denver
3. Lower financing costs - More equity = lower rate
4. Long-term appreciation - The ADU adds property value
5. Non-financial benefits - Housing family, aging in place

When It Doesn't Work

1. $400K+ construction costs - Math rarely works
2. Low rent markets - $1,000/month rent can't support $200K+ build
3. High interest rates - Debt service eats income
4. Short time horizon - Need 7-10+ years to recoup

Non-Rental Uses

Multigenerational Housing

• Parents age in place
• Adult children save for their own home
• Grandparent helps with childcare

Value: Priceless (and saves assisted living costs of $4,000-7,000/month)

Home Office / Studio

• Separate work from home life
• Artist studio
• Home business

Value: Tax deductions, productivity, work-life boundaries

Guest House

• Visitors without disrupting household
• Airbnb potential

Value: Hospitality + income flexibility

Should You Build an ADU?

Yes, if:

• You have equity and income to finance it
• Zoning allows it without variance
• Rent or family use justifies cost
• You're staying 7+ years
• You understand the true costs

No, if:

• Math only works with optimistic assumptions
• You need income immediately (construction takes 12+ months)
• Zoning requires variance (expensive, uncertain)
• You're planning to sell soon
• You're financing at high rates with no equity cushion

Alternatives to Consider

• Garage conversion (cheaper than new construction)
• Basement finishing (if allowed as ADU)
• House hacking (rent rooms in main house)
• Buying rental property (sometimes cheaper than ADU)

Bottom Line

ADUs are real estate investments. Treat the decision that way.

Build one if:

• The numbers work (or you're gaining value beyond rent)
• You have the equity to finance without strain
• You're committed to the process (12-18 months)

Don't build one because:

• Your neighbor did it
• You saw a HGTV episode
• You think it's "free money" (it's not)

The best ADU projects start with realistic expectations and end with either reliable rental income or family housing that money can't buy.

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Considering an ADU? Check your HELOC options to understand how much equity you can access for your project.