DSCR Loans for Garage Conversions: Finance Your ADU Investment

Garage conversions are one of the most cost-effective ways to add rental income to a property. Converting an attached or detached garage into a livable rental unit—an accessory dwelling unit (ADU)—can add $1,000-$2,500/month in rental income at a fraction of the cost of new construction. And in many states, recent legislation has made garage conversions easier than ever.

For investors using DSCR (Debt Service Coverage Ratio) loans, garage conversions create a compelling value proposition: the added rental income boosts the property's DSCR, potentially turning a marginal deal into a strong one, or an existing property into a cash-out refinance opportunity.

Why Garage Conversions Make Financial Sense

The Math

Before conversion:

3-bedroom house rents for $2,200/month
PITIA: $1,800/month
DSCR: 1.22 (modest)

After garage conversion (add 1-bedroom ADU):

Main house: $2,200/month
Garage ADU: $1,400/month
Total rent: $3,600/month
New PITIA (after refinance with conversion costs): $2,100/month
New DSCR: 1.71 (excellent)

Cost Comparison

Adding a rental unit through garage conversion vs. other methods:

Garage conversion: $30,000-$80,000 (depending on size and location)
Detached new-build ADU: $100,000-$250,000+
Home addition: $80,000-$200,000+
Buying a second property: Full property price + closing costs

Garage conversions offer the lowest cost per additional rental unit, especially when the structure already exists.

What's Involved in a Garage Conversion

Typical Scope of Work

Converting a standard 2-car garage (approximately 400-500 sq ft) into a studio or 1-bedroom unit typically includes:

Structural:

Remove garage door and frame in a new wall with window
Add or upgrade insulation (walls, ceiling, floor)
Pour or upgrade flooring (many garages have sloped concrete)
Possible foundation modifications for habitation standards

Systems:

Electrical panel upgrade or sub-panel installation
Plumbing rough-in for bathroom and kitchen
HVAC installation (mini-split is most common)
Hot water heater (tankless is space-efficient)

Finishing:

Bathroom installation (toilet, sink, shower/tub)
Kitchenette or full kitchen
Interior walls, paint, and trim
Flooring (vinyl plank or tile over concrete)
Lighting and electrical fixtures
Separate entrance and exterior finishing

Compliance:

Fire separation between units (if attached garage)
Separate utility metering (recommended)
Egress windows per code
Smoke and CO detectors
Address/unit numbering

Timeline

A typical garage conversion takes 3-6 months from permit application to occupancy:

Permit approval: 2-8 weeks (varies greatly by jurisdiction)
Construction: 6-12 weeks
Final inspection: 1-2 weeks

DSCR Loan Strategies for Garage Conversions

Strategy 1: Purchase + Convert, Then DSCR Finance

Buy a property with a convertible garage (use any financing method)
Complete the garage conversion
Rent both the main house and the ADU
Refinance with a DSCR loan based on total rental income

This works well because the DSCR loan will be based on the property's enhanced income after conversion.

Strategy 2: DSCR Purchase Loan Based on Post-Conversion Income

Some DSCR lenders will underwrite based on projected income if:

You have permits in hand for the conversion
An appraiser can assign value to the planned ADU
You can demonstrate market rent for similar ADUs

This approach lets you use DSCR financing for the initial purchase, with conversion costs funded separately.

Strategy 3: DSCR Cash-Out Refinance After Conversion

If you already own a property with a garage:

Complete the garage conversion (fund with savings, HELOC, or personal loan)
Rent the new ADU
Do a DSCR cash-out refinance based on the property's increased value and income
Recover your conversion costs through the refinance proceeds

Strategy 4: DSCR Renovation

Some DSCR lenders offer products that include renovation costs:

Purchase price + renovation budget in a single loan
Renovation funds released in draws as work completes
Final DSCR evaluation based on completed property
Avoids needing separate financing for conversion costs

ADU Regulations: What You Need to Know

State-Level ADU Laws

Several states have passed legislation making ADU creation easier:

California: AB 68, SB 13, and subsequent laws have dramatically streamlined ADU permitting. Most single-family lots can now add ADUs with ministerial approval (no discretionary review). Garage conversions are explicitly permitted.

Oregon: Statewide legislation requires cities to allow ADUs in residential zones.

Washington: Recent legislation requires most cities to allow at least two ADUs per lot.

Other states: Many states are following the trend with ADU-friendly legislation.

Local Regulations

Even in ADU-friendly states, local requirements vary. Check:

Setback requirements for the converted structure
Parking replacement rules (some cities require replacing lost garage parking)
Size limits for ADUs (typically 800-1,200 sq ft maximum)
Owner-occupancy requirements (some jurisdictions require the owner to live in one unit—this can conflict with DSCR investor use)
Separate utility metering requirements
Design standards (exterior appearance, materials, etc.)
Impact fees and permit costs

Owner-Occupancy Issue

Some jurisdictions require the property owner to live in either the main house or the ADU. This creates a conflict for DSCR loan investors since DSCR loans are specifically for investment properties (non-owner-occupied).

Research this carefully. If owner-occupancy is required, the property may not qualify for investor use of the ADU, or you may need to wait for the requirement to expire (some are time-limited).

Costs and Budgeting

Detailed Cost Breakdown

Permits and fees: $1,000-$10,000

Building permits
Plan check fees
Impact fees (varies widely)
Utility connection fees

Demolition and prep: $2,000-$5,000

Garage door removal
Concrete work (leveling sloped floor)
Debris removal

Structural work: $5,000-$15,000

New wall framing (where garage door was)
Insulation
Roof modifications (if needed)
Fire separation (attached garages)

Plumbing: $5,000-$15,000

Bathroom rough-in and finish
Kitchen plumbing
Water heater
Sewer connection

Electrical: $3,000-$8,000

Sub-panel installation
Wiring and outlets
Lighting fixtures
Separate meter (if required)

HVAC: $3,000-$8,000

Mini-split heat pump (most common for ADUs)
Ductwork (if connecting to existing system)

Finishing: $10,000-$25,000

Kitchen cabinets and countertops
Bathroom fixtures and tile
Flooring
Paint and trim
Doors and windows

Total range: $30,000-$80,000

Factors That Affect Cost

Geographic location (labor and material costs vary significantly)
Existing infrastructure (easier if plumbing/sewer is already nearby)
Garage condition (newer garages need less structural work)
Finish level (basic vs. premium finishes)
Kitchen scope (kitchenette vs. full kitchen)
Permits and fees (some jurisdictions charge significant impact fees)

Pros and Cons

Advantages

Lower cost than new construction ADUs
Existing structure reduces construction time and cost
Significant income addition ($1,000-$2,500/month)
Property value increase often exceeds conversion cost
Improved DSCR for loan qualification or refinancing
Growing regulatory support makes permitting easier
Strong tenant demand for small, affordable units
Flexible use (long-term rental, medium-term, or personal use)

Disadvantages

Loss of garage/storage space
Parking concerns if garage parking is lost
Permit complexity varies by jurisdiction
Owner-occupancy requirements in some areas conflict with investor use
Utility costs for separate metering and connections
Noise and privacy concerns with attached conversions
HOA restrictions may prohibit conversions in some communities
Construction disruption if the main house is tenanted

Maximizing Your Garage Conversion Investment

Design for Rentability

Include a full bathroom (not just a half bath)
Install a proper kitchen (not just a hot plate)
Maximize storage in a small space
Ensure good natural light (enlarge or add windows)
Create a private entrance separate from the main house
Include in-unit washer/dryer hookups if possible
Install sound insulation between units

Target the Right Tenants

Garage ADUs (typically 400-600 sq ft) attract:

Single professionals
Students
Retirees downsizing
Remote workers seeking affordable housing near urban centers
Couples without children

Price Appropriately

Research comparable ADU and studio/1-bedroom rentals in your area. Garage ADUs typically rent for:

60-75% of a comparable full apartment (due to smaller size)
But at a premium per square foot due to private unit with own entrance
All-inclusive pricing (utilities included) commands higher rents

Getting Started

Evaluate your property (or target property): Is the garage suitable for conversion?
Research local regulations: Confirm ADUs are permitted and understand requirements
Get contractor bids: Obtain 3+ quotes for the conversion scope
Run the numbers: Calculate post-conversion rental income and DSCR
Choose your financing strategy: DSCR purchase, renovation loan, or cash-out refinance
Learn DSCR basics: Review our complete DSCR loan guide
Execute: Pull permits, complete construction, and start earning rental income

Garage conversions represent one of the highest-ROI improvements you can make to an investment property. When combined with DSCR financing that rewards rental income, converting that underused garage into a rental unit can transform your property's financial performance.

Dscr Loan For Garage Conversion

Key Takeaways