If you’re considering buying a home with an Accessory Dwelling Unit (ADU) or a property with ADU potential, or even adding one to your existing property, this is the article for you. Many Gen Z and millennial homebuyers are loving the idea of an Accessory Dwelling Unit to offset their mortgage with rental income through house-hacking. Other people may be interested in ADUs to gain extra living space for family, or with so many American’s working from home, added office space! There are tons of benefits to an Accessory Dwelling Unit and we’ll consider those and how you might go about owning one in this article.

What is an ADU?

ADUs are smaller secondary residential units on a single-family property. They typically feature a separate kitchen, bathroom, and entrance from the main house.

Types of Accessory Dwelling Units:

  • Apartment over garage
  • Garage conversion
  • Mother-in-law quarters
  • Backyard cottage
  • Granny flat
  • Prefab detached unit (Tiny home)

Who’s Building and Buying ADUs?

In today’s low-inventory housing market, ADUs are a great option for many people. Here are some reasons people build or buy properties with ADUs:

    • Expand living space: Create more space for family or extended family. Maybe a parent can live nearby with some privacy, or a grown child can return home without feeling cramped.

    • Downsize living: Move to a smaller space while staying on your property.

    • Home office or studio: Have a dedicated workspace conveniently located at home.

    • Offset mortgage or generate rental income: Some homeowners live in the main house and rent out the ADU to help pay the mortgage. Others choose to live in the ADU and rent out the main house.

Why are ADUs so Popular?

Making the Most of an ADU

ADUs are versatile spaces that can serve various purposes depending on your goals. Consider if you want more internal space (like a basement conversion) or more yard space. Do you aim for rental income? Maybe you want to downsize and live in the ADU while renting the main house?

    • Multigenerational Living: Many homeowners build ADUs for aging parents or adult children who need a place to live. ADUs offer privacy and independence while keeping loved ones close.

    • Rental Opportunities: With high housing demand, building an ADU for real estate investment can provide a steady income stream. Whether you choose long-term tenants or short-term vacation rentals, an ADU can help offset your mortgage or provide extra cash flow.

    • Short-Term Rentals and Airbnb: Especially in tourist areas, short-term rentals are a popular option for ADU owners. Listing your ADU on platforms like Airbnb allows you to tap into a growing market for unique accommodations. Short-term rentals offer flexibility and potentially higher rental rates during peak seasons. However, be sure to check local regulations and HOA rules regarding short-term rentals before pursuing this option.

    • Home Office or Workspace: If you work from home or need a dedicated space for hobbies, an ADU can be the perfect solution. Design the space to meet your specific needs and enjoy a separate area to focus on work or passions.

    • Guest Accommodations: An ADU can also function as a comfortable and private space for guests. Whether you have out-of-town friends or family visiting or want to offer a unique Airbnb experience, an ADU provides a welcoming place for guests to stay.

Does an ADU Add Value to Your Home?

Home improvement projects like kitchen updates, bathroom additions, and energy-efficient windows can increase your home’s value. Building an ADU is another great way to add value.

ADUs can be profitable in smaller cities and towns as well as urban areas, but provide another great benefit of affordable housing in places where it is highly sought after. A study from Porch showed that in large cities, properties with ADUs typically sell for 35% more than similar homes without them.

Increased Property Value and Rental Income Potential

    • Property Value: Constructing an ADU on your property typically increases the resale value of the property. An appraiser will consider the value of other homes with ADUs when appraising yours. Properties with ADUs often sell for a premium because they offer an income-producing unit and more total living space.

    • Rental Income: In addition to the added value of increased property value, ADUs can provide a steady stream of rental income, helping offset mortgage payments or providing extra cash flow. They can also offer more privacy than simply renting out a room in your main house.

Are There Downsides to an ADU?

There can be a few drawbacks to consider depending on the type of ADU you have, how you use it, and your expectations going in:

    • Space Limitations: ADUs are inherently smaller spaces, which may not be ideal for everyone.

    • Construction Costs: Building an ADU can be expensive, especially if it includes a kitchen, bathroom, and separate entrance.

    • Building and Zoning Regulations: There are zoning regulations and permitting processes to navigate when building an ADU.

    • Privacy Concerns: Depending on the layout of your property and ADU, there may be some privacy considerations for both you and your tenants.

    • Maintenance and Upkeep: Like any additional structure, an ADU requires maintenance and upkeep.

Does Adding an Accessory Dwelling Unit Increase Property Taxes?

Adding an ADU may increase your property taxes because it increases the value of your property. It’s recommended to reach out to your county assessor’s office beforehand to determine the potential tax impact. Consulting with an accountant or tax advisor can also be beneficial to discuss your specific situation.

Can an ADU Have a Separate Address?

Whether or not an ADU can have a separate address depends on your location. Here are some possibilities:

    • Half address or unit designation: Some homeowners use a ½ address or add “Unit B” or “Unit 2” to the existing main address.

    • Assigned address during permitting: In some states, an ADU is assigned an address during the building permitting process.

    • No separate address: In other states, the ADU may not be assigned a separate address.

ADU Zoning, Rules, and Regulations

Importance of Early Planning

Thinking about building an ADU requires early preparation for a smooth process. Zoning regulations and legal requirements are in place to ensure these projects align with the community’s planning goals. Cities and counties have varying approaches to ADUs;  Some actively encourage them for more housing options, while others have restrictions to protect existing neighborhoods. Understanding the specific rules in your desired location is crucial. Don’t assume what’s allowed elsewhere applies to your area!

    • Contact your local planning department. They are the ultimate authority on what you can and cannot build. Proactive research pays off. Before investing in design plans, consult the planning department to understand restrictions like minimum lot size, height limitations, allowable square footage, and any parking requirements. Some cities even have pre-approved ADU designs to streamline the process!

    • Partner with experienced professionals. Architects and builders well-versed in ADU construction are invaluable. They understand the nuances of the permitting process and can translate zoning code legalese into practical advice for your project. Their knowledge of local regulations can even help you explore creative design solutions that maximize your project’s potential while remaining fully compliant.

Working with Professionals: Contractors and Designers

To ensure your ADU meets all requirements and integrates seamlessly with your property, working with experienced contractors and designers specializing in ADU construction is essential. Here are some qualities to look for in professionals:

  • Licensed and insured
  • Experience building ADUs
  • Provide references and examples of their work
  • Understand local zoning laws and permitting requirements

Which Loan Types Allow for ADUs?

Financing an Accessory Dwelling Unit can vary depending on how you plan to use it. If you intend to use rental income from the ADU to offset your mortgage or qualify for a larger loan, many loan types will allow for current or projected rental income to be taken into consideration, while others don’t.

Loans That Allow Rental Income from ADUs

    • Conventional Loans: A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or US Department of Agriculture (USDA) loan programs). 

    • FHA Loans: The Federal Housing Administration (FHA) now allows homebuyers to use projected rental income from ADUs to qualify for mortgages on new construction, homes with existing ADUs, or renovations that include ADUs. Learn more about the new FHA financing policies as of 2023.

    • VA Loans: VA loans are offered by the Department of Veterans Affairs to help servicemembers, veterans, and their families buy homes.

    • Construction Loans: build a brand new home and include an ADU in the plans

    • Renovation Loans: From Fannie Mae HomeStyle, Freddie Mac Choice Renovation and FHA 203(k) a renovation loan can act as a bridge between what a property is now, and what it could be with a bit of extra work.

Loans You Can’t Use Rental Income from ADUs to Qualify

USDA Loans: If you’re looking to buy a home outside of a big city, with no down payment, a USDA home loan is a great option. However, you cannot use rental income from an Accessory Dwelling Unit on the property to qualify for the mortgage. With a USDA loan, you would be better off using the ADU for single-family living, multigenerational living situations, or an office/additional space for those residing in the main unit.

Considering the Next Steps with an ADU

If you’re interested in exploring the possibility of adding an Accessory Dwelling Unit to a property you’d like to buy, or purchasing a property with an Accessory Dwelling Unit already onsite, here are some next steps:

    • Get Preapproved! As a home mortgage lender near you, I’m excited to explore if buying a property with an ADU, or building onto an existing property is right for your goals. Together we can determine the budget for your plan and we can guide you through your next steps. We’ll also discuss which loan options are available to you based on your financial situation and how you plan to use the ADU.

    • Talk to an Agent. If you haven’t yet talked to a real estate agent, we are happy to provide a recommendation. Someone who is experienced in buying or selling income producing properties including ADUs will have a ton of knowledge and info to give you. They can guide you around potential pitfalls before you even start searching for the right property.

    • Research local zoning regulations and permitting processes. Contact your local planning department to learn about the specific requirements in your area.

    • Consult with a qualified architect or builder experienced in ADU construction. They can help you assess the feasibility of your project and navigate the design and permitting process.

By carefully considering these factors and taking the necessary steps, you can determine if an Accessory Dwelling Unit is the right fit for you and unlock the potential value and functionality it can add to your current or future property.


If you’re in the market for a new home, you’re probably keeping an eye on the current interest rates. When rates are low, it can be easier to jump into the homebuying process, but not so much when rates are high. Fortunately, if you’re ready to buy a home now, there’s something you may be able to do to pave the way for more manageable mortgage payments, regardless of what the market is up to. One of these handy strategies is called a Temporary Buydown.

Explaining Temporary Buydown Mortgages

A Temporary Buydown is an option where a buyer is able to temporarily reduce the interest rate on their new loan, in exchange for a one-time fee at closing. This tactic can give a homebuyer some breathing room and help ease into the full mortgage payment through the first few years of the loan, especially in a high interest rate environment.

How does a Temporary Buydown Work?

There are different buydown options, each offering a specific reduction in interest rate for a set period.


At NFM, we offer three different types of temporary buydowns:

  • 1 Year Buydown (1-0 ): This option allows for the effective rate of interest paid by the buyer to decrease by 1% for the first year of the mortgage loan.
  • 2 Year Buydown (2-1): The option allows for the effective rate of interest paid by the buyer to decrease by 2% for the first year of the mortgage loan and 1% for the second year.
  • 3 Year Buydown (3-2-1): This option allows for the effective rate of interest paid by the buyer to decrease by 3% for the first year of the mortgage loan, 2% for the second year and 1% for the third year.
Table chart showing a yearly comparison between a 3 year temporary buydown, 2 year temporary buydown, and 1 year temporary buydown. For each type of buydown, the chart shows the reduced interest rate payment a borrower would make for each year of the buydown period.

Temporary Buydown Example

Let’s say you secure an 8% interest rate on a 30-year fixed-rate mortgage with a 3 year buydown (3-2-1 buydown).

  • Year 1: Your payment will be based on a 5% interest rate (8% – 3% = 5%).
  • Year 2: You’ll make payments calculated at a 6% interest rate (8% – 2% = 6%).
  • Year 3: Your payments reflect a 7% interest rate (8% – 1% = 7%).
  • Year 4 onwards: Your monthly payments transition to the original 8% interest rate for the remaining loan term. 
A bar graph showing an example of a 3 year temporary buydown where the note rate begins at 8%. At year 1, the payment is based on a 5% interest rate. At year 2, the payment is based on a 6% interest rate. At year 3, the payment is based on a 7% interest rate. Then on year 4 and beyond, the payment is based on the original 8% interest rate.

So, for as long as you own the home, or until you refinance to a new loan with a potentially lower interest rate, you will continue to make the principal and interest payment based on this 8% rate.

Temporary Buydown Calculator

Use our temporary buydown calculator to estimate the cost and potential savings associated with different buydown scenarios. We can also discuss if this makes financial sense for you any time!

Who Pays for a Temporary Buydown?

There are several ways to fund a temporary buydown:

  • Seller/Builder Concession: Traditionally, sellers or builders will offer a temporary buydown as a seller concession to attract buyers, especially in a slow market.
  • Buyer Funded Buydown: You can choose to pay for the buydown yourself at closing. This might be a good option if you have the savings and want to lock in lower monthly payments in the early years of your loan.
  • Lender or Realtor Incentive: In some cases, lenders or real estate agents may offer a temporary buydown as part of a promotional package.



Funding and Cost Considerations

The party responsible for paying for the buydown pays the amount as a closing cost when the loan is funded. The amount is equal to the buyers interest savings. Meaning the difference between the final note rate and the agreed lower interest rate during the first years of the loan. 

An overlapping bar chart where the

These funds are deposited into a custodial escrow account at closing. The loan servicer then draws from the account every month to make up the difference between the full loan payment and the discounted bill the homeowner is paying.


Temporary VS Permanent Buydown

While both options involve lowering your interest rate, temporary and permanent buydowns have key differences:

  • Reduction Amount: Temporary buydowns offer a more significant initial reduction (up to 3%) compared to permanent buydowns (typically 0.125% – 0.5%).
  • Loan Structure: Temporary buydown funds are held in an escrow account and used to supplement your monthly payments. In a permanent buydown, the lender reduces the loan amount itself.
  • Buyer Qualification: For a temporary buydown, you need to qualify for the full loan amount and original interest rate even though you’ll pay lower rates initially. Conversely, you only need to qualify for the reduced interest rate with a permanent buydown.

When is the best time to use a Temporary Buydown?

Temporary buydowns can be a good idea for first-time home buyers who are shocked by the speed at which mortgage rates have risen, and who will deplete their savings on the down payment and closing costs. The temporary payment reduction allows borrowers to replenish savings or spend the money on home upgrades.

The most favorable time to take advantage of a buydown is when the seller or builder is offering to contribute cash towards closing. Sometimes this can happen as an incentive to get a buyer to purchase their home or to encourage the purchase of a home in a newly built community. If this isn’t an option, a buyer can often still pay down the rate themselves. 



Final Thoughts

Now that you understand temporary buydowns, it’s crucial to weigh the pros and cons against your individual financial situation and homebuying goals. Consulting with a mortgage professional is the best way to determine if a temporary buydown aligns with your needs. They can assess your eligibility, calculate potential costs and savings, and guide you through the entire mortgage process.

Beyond temporary buydowns, there are other strategies to navigate the homebuying journey in today’s market. Our team of home loan experts is dedicated to helping you explore all your options. Additionally, check out our blog for informative articles on various mortgage programs, down payment assistance, and tips for first-time homebuyers.


Let us empower you to make informed decisions and turn your dream of homeownership into reality. Contact us today to schedule a free consultation!

*Reduction in payment is the result of builder or seller concessions used to buy down the rate and are not guaranteed by NFM Lending. 5% down payment is the responsibility of the borrower. Available for fixed-rate conventional, VA, USDA, and FHA loans. For new or existing home purchases only. 

We love helping Gen Z and millennials navigate the exciting world of homeownership. Let’s face it, between inflation, student loans, monthly bills and trying to go on vacation someday, saving for a down payment can feel like climbing Mount Everest in flip-flops. But what if there was a way to hack the system, own a piece of real estate and potentially live for free (or close to it)? Buckle up, because we’re diving into the world of house hacking strategies.

What is House Hacking?

Imagine this: you buy a nice duplex in a good area with two separate units. You live on one side, rent out the other, and – plot twist – that rent covers most, if not all, of your mortgage payment. That’s the magic of house hacking! It’s all about buying a multi-unit property (think duplexes, triplexes, or fourplexes) or a single-family home with a rentable space (like a finished basement or in-law suite). You live in one unit and rent out the others, turning your home into an income stream.

Benefits of House Hacking:

With so many young adults hoping to buy homes, and rent prices are brutal these days and house hacking offers a way to save money on your living expenses. Ideally, your rental income covers most of your mortgage payment, property taxes, and insurance (PITI). That translates to living for free (or very cheap) while building equity in your property – a major win-win! 

But house hacking goes beyond just saving money. It’s a springboard for ambitious young adults or anyone interested in financial independence. Here’s how:

    • Jumpstart Your Investment Journey: House hacking gives you valuable real estate experience. You learn the ropes of being a landlord, from screening tenants to managing minor repairs. This knowledge becomes a steppingstone for future real estate investments, allowing you to build wealth and diversify your income streams. It’s often said that the average millionaire has around 7 income streams. So, add rental income to your other income stream(s) and you’re one step closer to retirement!

    • Build Equity While You Live: Remember that house you’re living in? As you make mortgage payments and property values hopefully increase, you’re building equity – essentially ownership – in your property. This equity can be tapped into down the line for various purposes, like a bigger investment property, upgrading with renovations to your current property/properties, or even paying down consumer or student debts.

    • Become a Mini-Landlord Boss: House hacking equips you with valuable life skills. You’ll learn business budgeting basics to manage your property’s finances, hone your people skills when screening tenants, and even develop some DIY prowess for minor maintenance tasks.

House Hacking Strategies:

House hacking isn’t a one-size-fits-all strategy. The beauty lies in its flexibility. Here are some popular house hacking approaches to consider:

House Hacking with Roommates

Maybe you’re not quite ready to jump into managing a separate unit. House hacking with roommates is a fantastic way to test the waters. Here’s the idea: you find a single-family home with extra bedrooms and share it with responsible roommates. Their rent contribution significantly reduces your monthly housing costs, freeing up cash for other goals.

Pro Tip: When screening roommates, prioritize responsible individuals who align with your lifestyle. Open communication and clear house rules are key to a harmonious co-living experience.

Hacking a Multi-Unit Property

Ready to dive deeper? Look into multi-unit properties like duplexes, triplexes, or even fourplexes. These properties offer dedicated rental units that provide a more consistent and potentially higher rental income compared to roommates.  Live in one unit, rent out the others, and watch your rental income potentially cover a significant chunk of your mortgage payment.

Things to Consider: Multi-unit properties come with additional responsibilities like managing separate entrances and potentially maintaining shared yards. Make sure you’re comfortable with the extra workload before taking the plunge.

House Hacking with an ADU

Does your dream home have a finished basement or a separate in-law suite? An Accessory Dwelling Unit (ADU) could be your perfect house hacking setup. You could rent out the additional space for a steady income stream while still enjoying the privacy of your main living area.

Keep in Mind:  Pay attention to local zoning and permit regulations for specific requirements for renting out any type of ADU. Do your research and ensure your property complies with all the rules before advertising the space. Your friendly real estate agent should be able to help you understand your local limitations (let us know if you’d like us to connect you with someone we trust!)

Getting Started with House Hacking:

House hacking might sound complex, but with the right guidance, it can be a smooth and rewarding experience. Here’s how we can help you navigate the house hacking journey:

The Financials:

    • Loan Options: The absolute best part (in our opinion) of house hacking is that these homes can be purchased with a traditional mortgage (think FHA, VA, USDA and Conventional loans) with more competitive interest rates, depending on your credit score and financial situation than if you were to purchase an investment property separate from your primary residence.

    • Down Payment Assistance: There are fantastic programs available to help first-time homebuyers with their down payment. We’ll explore these options and see if you qualify for any additional down payment assistance programs.

    • Affordability Calculations: House hacking isn’t just about finding a cool property. We’ll do a deep dive into your finances to ensure you’re comfortable with the ongoing costs of ownership, including property taxes, insurance, and potential maintenance needs. We’ll also factor in projected rental income to create a realistic picture of your monthly expenses.

Building Your Dream Team:

House hacking doesn’t have to be a solo act. Here’s how I can help you assemble your dream team:

    • Realtor: A good realtor is your partner in crime when it comes to finding the perfect house hack property. If you aren’t already working with someone, we have trusted, experienced partners we can connect you with who understand the house hacking market and can guide you through the buying process.

    • Property Management (Optional): If managing tenants seems daunting, consider partnering with a reputable property management company. They can handle everything from tenant screening and rent collection to maintenance requests and repairs, freeing up your time and minimizing stress.

    • Lawyer: When contracts are involved, it’s always a wise decision to lawyer up and make sure your lease or rental agreement is rock solid. You don’t want to take on the financial burden of someone else’s mistakes if it can be helped.

Finding the Right Property:

    • Location, Location, Location: Just like any real estate investment, location is key. Discuss with your real estate agent neighborhoods that have a high rental demand and good potential for stable tenant occupancy.

    • Rental Potential: Not all properties are created equal for house hacking; analyze factors like the number of bedrooms and bathrooms in the rentable units, overall square footage, and amenities that might attract tenants and command higher rent.

    • Property Types: It’s obvious to say that different house hacking strategies require different property types. Whether it’s a multi-unit property with separate entrances or a single-family home with a rentable basement, all of that will be covered while you work with your homebuying team.


House hacking isn’t for everyone. It requires some upfront effort, financial responsibility, and a willingness to learn. But for ambitious go-getters, who are ready to take control of their financial future, house hacking can be a game-changer. It allows you to live for free (or close to it), build equity, gain valuable real estate experience, and potentially set yourself on a path to financial freedom.

Ready to chat? Let’s schedule a consultation to discuss your financial goals and see if house hacking aligns with your vision.