Denver ADU Financing and Appraisals [4 of 9]

This episode #4 of our 9 part series on Denver ADUs with ADU4U. On this webinar we will be discussing how you finance an ADU, and how much value they add to your property.

Denver ADU Course
This post is part of the Denver ADU Course. The course explores the ADU building process in Denver.
Three Learning Options:
  1. Listen to episode “[ADU 4 of 9] Denver ADU Financing and Appraisals” on the Denver Real Estate Investing Podcast
  2. Watch the YouTube video at the bottom of the page.
  3. Read the blog post.


On this webinar we will be discussing how you finance an ADU, and how much value they can add to your property.

Finance Overview

As you continue your research into the possibility of construction of an ADU, remember to think long term! Properties with ADU’s built on them will be able to appraise for a higher value and have increased benefits of appreciation. Along with the flexibility that they can provide for family members both young and old their return on investment can be made back in a very reasonable amount of time.

Some ADU owners in the Denver area have been able to get 100% ROI in as little as 6-8 years. Short term rentals can provide the highest nightly rates and ones that are located in the popular parts of the city are able to command rates comparable to hotels. The need for affordable housing will continue to be in high demand in Denver and ADU owners should have an extremely low vacancy for the foreseeable future. ROI will vary based on the design type and finishes that are utilized during the construction process. Make sure to consider what your long term intentions are when deciding on how to finish the ADU.

Financing Options

Before digging too deep into financing options be sure to take a minute and make sure that your property is zoned for an ADU!

Keep in mind the financing side of ADUs is still relatively new. There are several options to get your ADU financed and owners with a lot of equity in their homes will have an easier time finding a financing solution. You may have to combine some of these ideas or work with your lender to see if you can come up with a unique solution for your property.

Cash is the easiest way to pay for an ADU and builders also like it because they don’t have to wait for disbursements from the bank. Not many people have enough cash to cover the costs for the construction or it perhaps it’s being used in a more efficient ROI situation. Like a conventional rental property paying for a percentage of the ADU with cash and financing the remainder will help boost cash on cash return and ROI.

HELOCs are an excellent option for homeowners who have a lot of equity built up in their homes. One of the great things about a HELOC is that you only have to pay interest on the amount that you borrowed from the maximum draw. The downside to them is that the interest rates are variable, in 2018 the rate changed 4 times.

Construction refinancing is a very unique solution that can be used to finance an ADU at an affordable rate. This loan product works by getting an appraisal that would consider the future value of the property with the ADU built on it, providing a 12 month interest only period, and then having the new loan converted to a 29-year mortgage. This is a refinancing product so your current loan would be paid off and you would have a new interest rate on your property, current rates for a construction refi are between 4.5-5.5%, and up to 1 million dollars is available for the refinancing. To utilize this type of loan the builder does need to be vetted and approved by the lender and they need to be able to find a good comp for an accurate appraisal. Contact Troy Williams at North Pointe Bank for more information on this type of product.

A stand-alone second mortgage can be a good option for owners who have at least a 90% loan to value on their current mortgage. There is a $250,000 limit for the second loan and you will have a higher interest rate than your primary mortgage. The closing costs for a second loan are lower and full appraisal is not required for this type of loan.

A refinance 203K or standard 203K, for a new purchase, could be utilized for ADU construction. A refi 203K works similarly to a construction refi, the loan is based on the future value and the builder is paid in draws as parts of the project are completed. One major difference is that there is not a 12-month interest only period on this product.

An unsecured loan could be considered for some property owners. Unlike a secured loan which has collateral and unsecured is based solely on credit score and income of the borrower, interest rates will be much higher than traditional financing options and finding lenders for the required amount could be difficult.

Credit cards are a way to avoid using a lender or for those who are doing their own construction. A property owner would need to expect to have high rental income upon completion to justify the high-interest rates that would be paid. It is likely that multiple high credit limit cards would need to be used in order to fully fund the construction of an ADU. Using this approach should be done with extreme caution.


At this early stage, it is still difficult for appraisers to give an accurate figure for properties who are considering adding an ADU or which already have an ADU built. Many times the comps are far outside the standard radius that is used to determine a similar value or not available at all. There are also multiple ways in which a property with an ADU can be appraised and each appraiser can utilize whichever method they think is more accurate. This can lead to results that are not in line with the expectation of the home-owners or that vary from method to method.

As time goes on and more ADUs are built the appraisal process will get easier and more accurate. We are currently seeing that ADUs are able to add about 50% of their cost to the overall value of the property. This can vary based on the size and quality of the finishes that are selected in the construction process. ADU4U is working with Blue Print Denver and local appraisers to help develop a more consistent and accurate method for determining the value added by ADUs so that the financing options will continue to improve for home-owners.

Special Guest: Troy Williams, a loan officer at Northpointe Bank. Contact Troy at [email protected] or 720-577-4103

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Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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