An ADU is one of the few ways to add a rentable unit to a San Diego lot without buying another lot. State law has made them easier to permit almost every year, the City of San Diego layers its own rules on top, and a coastal parcel adds a permit of its own. The financing follows the project: a new detached unit, a conversion or an addition.
Our general guide to ADU construction financing covers valuation, budgets and exits anywhere. This is the San Diego version, as of October 2026: the state and city rules that decide what you can build, the fees and taxes that land on the budget, and the loans that fund the build and pay it off.
First, whose property is it?
The construction, bridge and second mortgage loans below are business purpose loans for non-owner occupied investment property. If you live in the home and want to add an ADU, that is a consumer purpose loan with its own rules, and it goes through our owner occupied program. Everything below assumes an investment property.
What California law allows
State ADU law sits in the Government Code, sections 66310 through 66342, and the state housing department’s ADU handbook, updated in March 2026, explains it in plain English. The points that matter to an investor:
- What you can build. On a lot with a single-family home, a city must approve, without discretionary review, an ADU and a junior ADU within existing or proposed space, plus one detached new ADU, which the city may cap at 800 square feet (section 66323). A lot with an existing multifamily building can add ADUs in non-livable space, at least one and up to 25% of the units, and up to eight detached ADUs, never more than the existing units.
- The clock. The permitting agency has 15 business days to say whether an application is complete and 60 days to approve or deny a complete one, or it is deemed approved (section 66317).
- Owner occupancy. None for an ADU. A JADU, at most 500 square feet inside a single-family home, needs an owner on site only if it shares sanitation facilities with the house, a change in effect since January 1, 2026 (section 66333). An owner living on site makes the property a residence, which moves the loan to the owner occupied program.
- Rentals. ADUs approved under section 66323, and all JADUs, must be rented for terms longer than 30 days.
- Separate sale. An ADU cannot be sold apart from the main home unless the city has adopted the condominium option.
- Unpermitted units. A city generally cannot deny a permit to legalize an ADU built before January 1, 2020 over building code or ADU ordinance violations, unless a health and safety correction is needed (section 66311.7).
How the City of San Diego handles ADUs
Inside the city, every ADU and JADU needs a building permit from the Development Services Department, with no exemptions, per the city’s ADU page and Information Bulletin 400, revised in January 2026. Under the municipal code’s ADU regulations:
- A single dwelling unit lot can hold one attached or detached ADU, one ADU converted from existing space and one JADU.
- An attached or detached ADU runs from 150 to 1,200 square feet, a JADU from 150 to 500.
- No parking is required, except in the Beach Impact Area outside a transit priority area, and even there exceptions apply.
- The owner does not have to live on site, and an ADU cannot be leased for less than 31 consecutive days.
The city also runs an ADU Home Density Bonus program: bonus ADUs in exchange for ADUs deed-restricted as affordable, for at least 10 years at very low or low income rents or at least 15 years at moderate income rents. Inside a Sustainable Development Area each affordable ADU earns one bonus ADU; outside one, the limit is one of each. On single dwelling unit lots, ADUs and JADUs together are capped by lot size, from four on 8,000 square feet or less to six above 10,000, and several RS-1 zones are excluded unless the lot sits in a high-opportunity area. Bonus projects add fire sprinklers, a community enhancement fee and, outside transit priority areas, parking.
Outside the city limits, the county’s Planning and Development Services or the city the property sits in issues the permit.
Coastal lots and the coastal development permit
The municipal code requires a coastal development permit for coastal development in the Coastal Overlay Zone unless an exemption applies, and a parcel inside the Coastal Commission’s own permit jurisdiction gets its permit from the Commission. For ADUs, Information Bulletin 400 sets the trigger: a CDP is required for an ADU or JADU that is not completely contained in the existing home, adds habitable area or converts non-habitable space. A JADU inside the existing home can qualify for an exemption.
Three things make the process more predictable than it sounds. In the non-appealable area, the city can issue the CDP as a building permit when its findings are met. State law requires a decision within 60 days of a complete CDP application, with no public hearing required (section 66329). And the city’s decision on an ADU’s CDP cannot be appealed to the Coastal Commission.
Two things can slow it down. Coastal ADUs must meet the bluff, beach, wetland and sea level rise rules, and several of the city’s newer ADU amendments, including its 2025 changes to the bonus program, do not apply in the Coastal Overlay Zone until the Coastal Commission certifies them. Confirm which rules govern your parcel before you draw plans.
Fees and the San Diego budget lines
Under section 66311.5, renumbered from section 66324 on January 1, 2026, no impact fee may be charged on an ADU with 750 square feet of interior livable space or less, or on a JADU of 500 square feet or less. Above 750 square feet, impact fees must be proportionate to the square footage of the main home. The city goes further: under section 142.0640 of its municipal code, the first two ADUs on a premises are exempt from its development impact fees, whatever their size.
Exempt from impact fees is not the same as free. Information Bulletin 400 lists what still applies: plan check and permit fees, school fees depending on size, the General Plan Maintenance Fee, regional transportation fees when you build more than one ADU, and inclusionary housing rules once a project reaches 10 total units, or five in the Coastal Overlay Zone. Then the construction lines:
- Utilities. A conversion approved under section 66323 cannot be required to take a new utility connection, but a detached ADU can, with a connection fee proportionate to its size or plumbing load.
- Sprinklers. Required in the ADU when the main home has them.
- Solar. Required for a newly built detached ADU under the California Energy Code, on the ADU or the main home.
- Fire zones. In a Very High Fire Hazard Severity Zone, the ADU keeps a four-foot side and rear setback.
Add a contingency on top. Our post on construction budgets and contingency shows how to build one a lender will fund.
Property tax after the build
An ADU is new construction. Under the Board of Equalization’s Rule 463, the assessor sets a new base year value for only the newly built portion and adds it to the taxable value of what was already there, so the existing home and land keep their base year value. A 2024 bill to exclude new ADUs from reassessment died in the Assembly, so as of October 2026 the new unit’s value goes on the roll. Put that added tax into the payment you test the refinance against.
Financing the build
Which loan fits depends on what you are building and what the property already carries.
A detached ADU built new is closer to ground-up construction and can go on our ground-up construction loan: up to 80% LTC of the lot, the build and the interest reserve, on a 12 to 18 month term, with a 600 minimum FICO and two completed ground-up projects. It covers single family homes, condos and townhomes, and 2 to 4 unit buildings, and it is priced per project. Draws are released through the build, interest is charged only on what has been drawn and there is no prepayment penalty. Our San Diego construction loans page covers how the city’s permit clock shapes that term.
A conversion or an attached addition on a property you already own is usually financed against the equity you hold. Our bridge loan publishes rates from 9.00% to 13.00%, up to 75% LTV including cash-out and 1 or 2 year terms, with a 650 minimum credit score and no prepayment penalty. It needs no prior experience, so it also suits an investor who has not yet completed two ground-up projects. If the property carries a first mortgage you want to keep, a second mortgage sits behind it: business purpose, 12 to 36 months, with rates and leverage quoted per property.
Buying a property and adding the unit in one step is covered in the general guide linked above.
Budget, draws and timing
On the construction loan, the build money is held back and released as each stage is completed and verified, so the early months cost less. A cash-out bridge or a second usually funds at closing, so interest runs on the full amount from the start: borrow what the plan needs, not the maximum. Either way, agree a schedule with your contractor that matches how the job is really sequenced. Our post on rehab draws and holdbacks walks through the mechanics.
Then time the loan to the permit. A 12 to 18 month term spent waiting on plan check or a coastal permit is a shorter loan in practice, so start the conversation when the plans are close to approval.
The exit: refinance on the rent
Most investment ADU projects end in a refinance. ADU income is permitted on our rental DSCR loan, which publishes rates from 6.50% to 9.99% on the Non-QM tier, up to 80% LTV and 5, 7, 30 and 40 year fixed terms, with a 620 minimum credit score, on single family homes, condos and townhomes, and 2 to 4 unit buildings. Rates are subject to change and every loan is subject to underwriting.
Size it before you break ground. Apply 80% to the finished value, then test the long-term rent of the house and the ADU against the full payment, including the added tax on the new unit. In the City of San Diego that rent is long-term by law, and an affordable unit in the bonus program can only earn its restricted rent. Our San Diego DSCR loans page covers the local payment lines. If the loan that results does not repay the construction balance with room to spare, change the scope or the leverage now.
Selling instead? The city allows ADUs to be converted to condominiums and sold separately, though ADUs built through the bonus program are not eligible, nor are rent-restricted ADUs while the restriction runs, and the condominium plan cannot record without each lienholder’s written consent. Tell your lender at the start.
Where to start
Send us the address, what is owed on the property, the plans or the scope, the budget and the expected permit date, and we will tell you which loan fits and how the exit sizes. Start a loan request or call (619) 617-2797.
