How to Get Funding for a Garage or Other Outbuilding

Detached structures can be a fantastic way to add both space and value to your home. Whether it’s a workshop, garage, or accessory dwelling unit (ADU), having an outbuilding on your property can significantly enhance its worth.

However, building detached structures can be costly. If you don’t have the funds to pay for the construction upfront, there are various financing options available. Let’s explore the details and benefits of these additions.

You can certainly pay for your detached structure in cash, but with costs potentially reaching five figures—up to $110,000 for more elaborate projects—this might not be the most practical option.

Here are some situations where financing might make sense:

  • You don’t have enough cash to cover the full cost of the project.
  • You have equity in your home that can be used to fund the construction.
  • You have a solid credit score that qualifies you for a competitive interest rate.
  • You have a repayment plan and are disciplined about following it.

Fortunately, there are several budget-friendly ways to finance your addition. Many personal loans offer repayment terms ranging from one to ten years, while home equity loans and home equity lines of credit (HELOCs) can have repayment periods of up to 30 years. With either option, you’ll need to make consistent monthly payments to maintain your credit health. Keep in mind, you’ll also be paying interest on top of the loan amount.

Home equity lines of credit (HELOCs) provide a line of credit based on the equity in your home, functioning similarly to a credit card. You typically have ten years to borrow from your line, followed by a repayment period of about 20 years, during which you’ll repay what you borrowed plus interest.

It’s important to note that HELOCs come with variable interest rates, which fluctuate with changes made by the Federal Reserve, potentially increasing the amount of interest you pay over time.

A HELOC might be a good option if:

  • You have excellent credit, qualifying you for the best interest rates.
  • You have substantial equity in your home.
  • You’re uncertain about the exact amount needed for your project or its timeline.

A HELOC might be a bad option if:

  • Your income is not stable, making it difficult to manage monthly payments.
  • You plan to sell your home soon, requiring immediate repayment of your credit line.
  • You don’t have strong credit.

Similar to a HELOC, a home equity loan leverages the equity you’ve built in your home. However, unlike a HELOC, a home equity loan is an installment loan, providing you with a lump sum upfront, which you repay in fixed monthly installments.

Typically, you can borrow up to 80-85 percent of your home equity. Payments begin immediately, but the interest rate and monthly payment remain constant.

A home equity loan might be a good option if:

  • You need all of your funds upfront and know the exact amount required.
  • You have substantial equity in your home.
  • You prefer fixed interest rates and monthly payments.

A home equity loan might be a bad option if:

  • You don’t have at least 80-85 percent equity in your home.
  • Your financing needs may change throughout the construction project.
  • You don’t have strong credit.

A cash-out mortgage refinance involves replacing your existing home mortgage with a new, larger mortgage and taking the difference in cash. This cash can be used for any purpose.

Keep in mind, a cash-out refinance completely replaces your existing mortgage, which may alter your repayment timeline and monthly payments. It’s generally advisable to pursue this option only if you can secure a lower interest rate or improve your mortgage terms in some other way.

Like your original mortgage, your monthly payments will be fixed if you choose a fixed-rate loan. “In this way, the cash-out refi provides protection from rising rates in the future, which is an advantage over a HELOC,” says Glenn Brunker, president of Ally Home. Additionally, the interest rates for a cash-out refi may be lower than those of home equity loans.

A cash-out mortgage refinance could be a good option if:

  • You can obtain a better interest rate than your current mortgage.
  • You want to revise or change your current mortgage terms.

A cash-out mortgage refinance could be a bad option if:

  • You don’t qualify for a lower rate than your existing mortgage.
  • You prefer your current mortgage terms.

A personal loan can be a solid option for financing a detached structure on your property. Unlike home equity loans, personal loans don’t require collateral, and the funds can be made available quickly, sometimes within a few days.

The downside is that personal loans typically have higher interest rates than home equity products and shorter repayment terms, meaning you’ll need to pay back the money faster.

The amount you can borrow and the interest rate you receive will depend on factors such as your credit score, income, and other debts. If your credit isn’t strong, you might want to consider other financing options.

A personal loan could be a good option if:

  • You don’t want to use your home as collateral.
  • You need the money quickly.
  • You have a solid credit score or a creditworthy co-signer.

A personal loan could be a bad option if:

  • You need a longer repayment period.
  • You don’t have strong credit, and thus won’t get the most competitive rate.

Renovation loans can be excellent choices for improving your home, especially when they combine financing for both purchasing a property and renovating it, including building new detached structures or upgrading existing ones.

FHA 203(k) Loan One popular option is the Federal Housing Administration (FHA)’s 203(k) loan. Backed by the FHA, these loans offer low interest rates and are relatively easy to qualify for.

The FHA also offers 203(k) refinancing, allowing you to refinance your existing mortgage into a 203(k) loan. This provides the funds needed for improvements while consolidating your payments into a single monthly installment.

However, to be eligible for a 203(k) refinancing loan, your property must meet certain requirements. For example, the detached structure must be on the program’s list of eligible activities, and your home’s value must fall within FHA’s mortgage limits.

Freddie Mac CHOICERenovation Loan/Fannie Mae HomeStyle Renovation Loan Private sector renovation loans, like the Freddie Mac CHOICERenovation loan and the Fannie Mae HomeStyle Renovation loan, are also available. These loans allow you to both purchase and renovate a property.

These loans are designed for any home renovation or repair that is affixed to the property and adds value, including detached structures if they are permanent fixtures.

Fannie Mae and Freddie Mac loans may have stricter qualifications than government-backed loans, such as higher credit scores and larger down payments. For instance, Fannie Mae conducts thorough credit checks, evaluating not only your credit score but also your credit utilization habits. Both Fannie and Freddie loans require that renovations be completed within 450 days of the note date (approximately 15 months).

A home renovation loan could be a good option if:

  • You’re buying a property that needs substantial rehabbing.
  • You want to refinance your existing mortgage.
  • You have your renovation plans ready and are prepared to start quickly.

A home renovation loan could be a bad option if:

  • Your property or project doesn’t meet FHA requirements, or you don’t meet the lender’s credit requirements.
  • You’re not ready to begin work within 30 days of closing.
  • The project is likely to exceed the designated completion time.

When considering a loan to build a garage or other outbuilding, it’s important to weigh the pros and cons. While loans provide the immediate funds needed to start your project, it may sometimes be more prudent to use savings or other forms of financing.

Pros:

  • Better Borrowing Options: Loans often offer more favorable terms compared to credit cards, including lower interest rates.
  • Cash Preservation: By using a loan, you can keep your savings intact and maintain cash reserves for other expenses.
  • Tax Benefits: The interest paid on certain loans may be tax-deductible if you itemize deductions on your tax return.

Cons:

  • Qualification Requirements: You must meet the lender’s approval criteria and qualifications to secure a loan.
  • Time-Consuming Application: Applying for a loan can take time and might delay the start of your project.
  • Increased Costs: Interest payments can significantly raise the overall cost of your project.
  • Additional Debt: Taking out a loan adds to your debt burden, which could negatively impact your financial profile.

The expenses associated with constructing a detached structure vary based on its specific design. Costs can range from a few thousand dollars to as high as $100,000 for more elaborate constructions. Various factors influence the overall cost, including:

  • Engagement of professional contractors.
  • Necessary site preparations such as tree removal or land leveling.
  • Inclusion of windows and doors.
  • Requirements for electrical and plumbing systems.
  • Choice of roofing, framing, and siding materials (metal being more costly than wood).
  • Potential permit expenses.
  • Type of foundation required (e.g., concrete).
  • Additional costs for paint, stain, or decorative features.

Let’s delve deeper into the anticipated costs for each type of home addition.

If you don’t have a garage or need additional space for vehicle storage, a carport can be an easy and affordable option. According to HomeAdvisor, carports typically cost between $3,143 and $9,537, with an average price of about $6,324. Factors influencing the cost include site preparation, unit size, permit fees, and whether a concrete slab is needed. However, a potential drawback is that carports might require permits from your city, which can be tedious and sometimes costly to obtain.

Detached Garages

Detached garages offer versatility, serving as workshops, studios, or simply as storage for cars and other items. HomeAdvisor estimates that a two-car detached garage costs between $19,200 and $45,000, with the average cost per square foot ranging from $40 to $70. A one-car detached garage might cost as little as $11,500, while a three-car garage typically starts at around $31,000.

Accessory Dwelling Units (ADUs)

An ADU is a secondary housing unit built within or adjacent to your single-family home on the same lot. It can be either attached or detached and functions as an independent living space with its own entrance, bathroom, and kitchen facilities. According to Angi, the average cost to construct an ADU is $182,000, with prices ranging from $60,000 to $225,000.

Storage Sheds and Barns

Sheds and barns are popular for both storage and personal use. HomeAdvisor reports that most sheds cost between $1,500 and $10,000, although small prefabricated sheds can be as inexpensive as $300, while custom upscale sheds may cost at least $33,000. Barns generally range from $20 to $150 per square foot, including labor and materials, which translates to roughly $1,597 to $4,967.

The cost of constructing a detached structure hinges on various factors, including its size, chosen materials, and desired finishes. Numerous home improvement resources can assist in outlining the materials required for your project and estimating their costs. These platforms typically provide insights into project expenses per square foot, permit fees, roofing materials, drywall, framing, foundation types, siding materials, and other pertinent expenses.

Equally significant is the decision between using a prefab kit, which simplifies the process for DIY enthusiasts, or opting for a custom construction from scratch.

Should you opt against the DIY route and enlist the services of a contractor for your home addition project, it’s crucial to have a clear vision of your objectives, advises David Steckel, a former home expert at Thumbtack, a platform for home renovations and contractor services.

“Are you aiming for a modest office space, or do you envision creating a rentable living area?” he prompts. “This objective is translated by the general contractor into a scope of work budget, providing a detailed breakdown of the intended work, expected level of finish, and associated costs.”

When evaluating potential contractors, conduct background checks through the Better Business Bureau and ensure the company holds a valid contractor’s license. Additionally, seek references from past clients or review feedback on platforms like Yelp and Google.

80 percent of the cost of the garage’s construction.”ChatGPT

It’s challenging to precisely predict the return on investment from adding a detached structure to your home. However, it’s generally understood that a well-constructed garage, carport, shed/barn, or ADU can enhance your property’s value to some degree. Any addition that improves the living space or functionality of the property typically contributes positively to its overall value.

The extent to which different types of outbuildings can increase your home’s worth varies based on factors such as size, quality, and condition.

Jasen Edwards, a real estate agent and chair of the AgentAdvice.com Agent Editorial Board in Austin, Texas, suggests that a new detached garage might boost a home’s value by 5 percent to 20 percent, while a significant shed could contribute between 2 percent and 10 percent. He estimates that a new barn might add 5 percent to 15 percent in value, compared to 2 percent to 8 percent for a new carport.

According to Cam Dowski, a Realtor and founder of WeBuyHousesChicago, adding a two-car garage to a house lacking one could increase the home’s value by around $20,000.

While return on investment considers project costs, the project’s nature is paramount. Austin Beachy, responsible for marketing at Sheds Unlimited in Morgantown, Penn., notes that while a new shed can provide decent value, it typically doesn’t match the value added by a garage. He explains, “For instance, if the cost of building a new shed is $10,000, it could increase your home’s value by between $5,000 and $7,000, or 50 to 70 percent of the total building cost. Conversely, a new garage can yield a higher return on investment, ranging from 60 percent to 80 percent of the garage’s construction cost.”

Taking out a loan to fund an outbuilding can be a sound decision provided you have a clear repayment strategy in place.

Fortunately, there are numerous financing options available for building a garage, ADU, barn, or shed. However, it’s crucial to conduct a thorough assessment of your labor and material expenses to determine the amount you need to borrow. Take the time to research and select the right contractors and materials, and carefully compare bids.

Similarly, when it comes to financing, it’s prudent to explore multiple home equity lenders. By doing so, you can compare interest rates and identify the most cost-effective financing solution for your detached structure. With proper planning and preparation, you can enhance the chances of a successful project outcome while simultaneously increasing the versatility and value of your property.