We refinanced essentially our whole portfolio between 2020 and 2022 into roughly 4% loans, and those notes are family heirlooms now: we don't touch them. Which raises the obvious question on every build project: if you won't cash-out refinance the low-rate loans, where does construction money come from?
Here's the full stack, ranked the way we actually use it, plus the math rule that decides how every project ends.
The Ranking: Cash or HELOC, Then Private, Then DSCR
First choice: your own cash or a HELOC. HELOCs are back, and for construction they have a superpower beyond rate: no draw process. Construction loans reimburse you after appraisals, inspections, and paperwork; a HELOC just lets you pay the subs and keep building. The investment-property realities: most banks cap second-position HELOCs at around 60% combined LTV, they're almost exclusively local banks, and every one we've used wanted a deposit relationship first: I've never found a bank that does this without one. Every commercial banker wants all your accounts; I'll give them two, and it's all a negotiation (a $100K deposit relationship has been worth a quarter point off a rate). We cross-collateralize across properties to get lines sized for real projects.
Second choice: private lenders. Flexible on collateral (the build property, other properties, whatever you agree on) and reliably cheaper than DSCR construction money. Don't discount them; build the relationships before the project (how that debt compares to equity).
Third choice: DSCR construction loans. Asset-based, underwritten on the finished unit's rent and value. Typical structure: about 100% of purchase price plus 80 to 85% of build cost, capped near 75% of after-repair value, with pricing that lives in hard-money territory: 8.5% on a good day, more like 10 to 12%, plus a point or more. Experience-based: your terms improve with completed projects. It works, and it's the most expensive tool in the drawer, so it's last.
For owner-occupants there's a cheat code the pros barely mention: Fannie Mae HomeStyle and FHA 203(k) renovation loans wrap build costs into your mortgage based on future value. If you'll live in the front house while building the back unit, start there.
The Rule That Decides the Exit: 70% of ARV
Think of the whole play as a BRRRR, but new construction. The target that makes it self-funding: all-in build cost under about 70% of the finished value. Under that line, you can do a full cash-out refinance, recover your invested cash, and most likely still cash flow.
Our own version is more conservative: I keep the portfolio around 50% LTV, pay ourselves back the invested cash, and prioritize cash flow over maximum extraction. The payoff shows up at the bank: when lenders see our schedule of real estate, approvals are nearly automatic, while friends who maxed every property fight for every new loan. Leverage spends the same either way; borrowing capacity is the asset nobody prices.
Three Structural Details That Save Real Money
You don't need your lender's permission to build on your own lot. Adding units to their collateral benefits them. The exception is a partial reconveyance (carving off and selling part of the collateral): a local portfolio bank might work with you, but good luck with a conventionally serviced mortgage.
Time the condo, don't default to it. You can hold both units on one loan without ever condoing, or complete the condominium and finance the front and back separately. It's not always advantageous to complete the condo on a long-term hold (the tax and insurance consequences are real); we prepare the condo paperwork and pull the trigger right before an exit, when the separate values get captured.
Watch HELOC seconds on anything you might sell. The bank wants its payoff at closing, and layered liens make sales messier. Think a move ahead before securing a line against a property with a shorter hold horizon.
Every dollar of this is in service of one philosophy: I want every single dollar to go to work for me every single day. Idle cash loses to inflation, untapped equity earns nothing, and the spread between what your assets could produce and what they're producing is the quietest cost in your portfolio.
FAQ
Q: What's the best way to finance an ADU build? A: In order: your own cash or a HELOC (no draw process, lowest cost), private money (flexible and cheaper than institutional construction debt), then DSCR construction loans (100% of purchase plus 80-85% of build, ~75% of ARV, at 8.5-12%). Owner-occupants should look at HomeStyle/203(k) renovation loans first.
Q: What is the 70% rule for build-to-rent? A: Keep all-in build cost under roughly 70% of the finished appraised value. At that ratio a cash-out refinance returns your invested capital and the property still cash flows: a BRRRR, but new construction.
Q: Do I need my mortgage lender's permission to build an ADU? A: Generally no; you're improving their collateral. Permission problems only arise when you want to carve off and sell part of the secured property (partial reconveyance) or demolish a structure securing the loan. Read your deed of trust before either.
Q: Should I condo my new unit right away? A: Usually not if you're holding. One loan can cover both units, while condoing triggers reassessment and per-unit insurance. Prepare the condo map, then record it just before selling to capture the separate retail values.
I'm not a financial advisor, and this isn't lending advice. Loan structures, LTVs, and terms vary by lender and state; verify everything with your own lenders and professionals.
