How to Hack Your Mortgage with an ADU (or two)

Don’t want to pay your mortgage? Okay, let’s figure that out. It’s actually not impossible.

In this article we’ll break down how folks are actually making money each month on their house (on top of their equity of course) and show you a super smart design (that we happen to be selling) to get you inspired.

That’s right folks – 4 rental incomes.

There are many ways to walk down this road to financial independence, and while they all take work and patience, this one has our imaginations running wild. 

Our listing on SE Knapp St. has us dreaming of living mortgage free, so we thought we’d look at one way to use a home as an income generator: owning an ADU. 

Or in this case, two ADUs and then some.

What’s an ADU & What’s the Return?

An accessory dwelling unit is a “smaller, auxiliary dwelling unit on the same lot with a house, attached home or manufactured home.” It must include “independent living facilities,” including “provisions for sleeping, cooking and sanitation.” 

Canning the technical jargon, that means it’s a separate unit that has a stove, a sink and a full bathroom. An ADU can be new construction or created through the conversion of an existing space, such as a garage or basement.

The City of Portland has been pro ADU for a number of years. There is a big push here to address a housing shortage through an increase in urban density. There are a number of incentives offered to homeowners if they are willing to create an ADU. Most notably, an SDC fees waiver (pg .4) which can save you considerable cash. To qualify, your ADU can only be used for long-term rental housing for the first ten years. In other words, no AIRBNB or other short-term rentals lasting 30 days or less. 

This all sounds well and good, but the proof is in the pudding, as they say. 

Enter the SE Knapp St. duplex. This Woodstock, Portland home was designed with multiple rental income streams in mind. It’s actually three homes in one, and could easily be four.

As it exists now, there are two adjacent full size homes and one ADU, and the unit on the right is designed for an easy split – the bottom level is ripe for a second ADU. Take a look at the image below. 

The house on the left currently has two units. A two bedroom, one bathroom ADU on the bottom floor, and a two bedroom 1.1 bathroom home spread across the second and third stories. 

The home on the right is a separate four bedroom, 2.1 bathroom home. If split, it would mirror the other breakdown. 

For our exercise in ADU mortgage hacking, we’ll take a look at the left wing that has already been made into a two unit dwelling.

This home presents a concrete example of how an ADU or two can offset your mortgage, and even generate income. Note the breakdown I’ve created below comparing what the ADU currently rents for against a mortgage payment for the whole property. For simplicity, the below mortgage assumes a standard 30 year fixed rate loan. 

Owning an $855,000 home with a net mortgage of $495 isn’t too shabby, especially considering the fact that having a well designed and architecturally integrated ADU (such as this one, built by an architect and designer husband and wife super duo) can increase your property value. Combine that with Portland’s annual rent increase of 3% and you have a nice investment. 

If you’re wondering what it would look like to max out the rental income of a unique property like this one, check out the video up top.

Use your ADU to pay off your mortgage.

Kami Gray, the seller/designer of the property.

You’ve secured a pad with an ADU. Now it’s time to work towards being mortgage free. Here are two tried and true mortgage hacks that you can take advantage of with your newly increased income.

• Make biweekly mortgage payments. 

Because there are 52 weeks in a year, making a payment every two weeks increases your annual full payment amount to 13. One full extra payment goes a long way toward boosting your equity. This will likely be much easier to manage with rent income increasing your liquidity.

• Make extra payments on your principal. 

In our above Knapp St. example, the net mortgage payment was $495. If this allows you to set aside extra cash, some of it can go towards an additional payment directly to your mortgage principal.

This is handy because of how a fully amortized mortgage payment is structured. Initially, a larger portion of your payment goes toward interest than principal. This adjusts over the life of the loan. However, this doesn’t happen until around the loan’s midway point. 

• For example: we used this simple amortization calculator to see where we break even if we buy one of the Knapp St. homes for $855k (20% down) at a 3.875% interest rate. Payment 153 (in year 12) reflected more of the payment going to principal. That is nearly $300k in interest paid over those 12 years. 

However, if you set up an extra payment toward your principal, you can save a considerable amount of that interest. Just be sure to confirm with your lender that this extra payment is set up to go to principal only. 

The goal with any investment property is always to find a way to gain 100% control of an income generating asset. Owning a home with an ADU to offset your mortgage is one way to make that goal a reality. 

Want to build your own ADU?

Maybe you already have the perfect backyard for an ADU, or are looking for a home with space to build one. There are ways to start subsidizing your mortgage with less upfront time and cost. 

One such option is a company called Dweller. This startup provides a prefabricated ADU and includes the costs of permitting, design and construction into one upfront cost. Their ethos is to provide a turn key ADU solution. To that end, they partner with lenders who specialize in ADU financing, and even offer access to property management services if you don’t want to take on the landlord role. 

There’s plenty to learn about building an ADU. A good place to start is Portland’s official ADU guide. The FAQ page on the Dweller site also offers some good insight into the world of ADUs. 

Looking for a home with an ADU or a perfect space to build one? Give us a call, we’re happy to advise.