ADU financing stacked on a HELOC costs less at closing and more over the life of the build than most projections account for.

The six-to-ten week vacancy window is the part people always wave off, and it is actually the cruelest stretch because your HELOC is maxed and you are still writing checks. Last punch list items, landscaping, appliance delivery, whatever the inspector flagged.

On my last small reno the permit alone added five weeks I had not modeled, and that was a straightforward interior job, not a garage conversion with setback questions. What is the permitting jurisdiction, because that eight-month window could easily be twelve in a slow county?

The draw-timing carry is the right thing to flag, and the vacancy lag compounds it in a way that most spreadsheets hide. You have the mechanics correct. I want to name the assumption doing the most work in your framing, though, which is that the HELOC rate stays static across that eight-month window. Variable-rate exposure on a growing balance during construction is a second carry risk layered on top of the timing one. If the rate moves 50 basis points between draw one and draw six, your $6,000 to $11,000 range shifts, and the pro forma has no mechanism to catch it.

The risk you did not mention is what happens if permitting extends. You described eight months as the construction window, but permit timelines on ADU conversions in jurisdictions with active review queues can slip two to four months without any change to the scope of work. The HELOC sits open, the balance grows at a slower pace because draws are tied to progress, but the interest meter is still running. A construction loan with an interest reserve handles this somewhat, because the reserve was sized at origination and you can see when it is burning down. The HELOC gives you no such signal; it just costs more.

On the construction loan rate premium, confirm with your lender what the all-in cost looks like when you include origination, the reserve requirement, and the conversion or refi into permanent financing at the back end. That is sometimes where the apparent rate advantage disappears when you run it against HELOC total cost.

One thing worth checking in writing with your lender: how Fannie Mae's ADU income-qualification policy interacts with the existing HELOC lien position when you eventually want to refi into a conventional product. Lien position and seasoning requirements can constrain that exit.

What does your current permitting jurisdiction look like, and did you build a timeline buffer into the carry estimate or use the contractor's stated completion date?

The draw-timing point is exactly right, and it is one of the most consistently undercooked numbers in ADU pro formas.

For anyone reading this who is newer to the vocabulary: a HELOC (home equity line of credit) works like a credit card secured against your home's equity. You draw money as you need it and pay interest only on what you have drawn. An interest reserve is money set aside at the start of a loan specifically to pay interest during construction, so you are not scrambling for cash while the unit is not yet earning rent.

The carry cost math in the original post is sound. On a $180,000 draw spread over eight months, you might draw $20,000 to $30,000 per month as work hits milestones. Interest accumulates on each draw from the day it lands, so your effective interest-bearing balance grows every month. At a 9 percent HELOC rate, eight months of staged draws can cost $7,000 to $9,000 in interest alone before you collect dollar one in rent. Add six to eight weeks of vacancy while the unit turns and gets leased, and you can add another $2,000 to $3,000 on top of that. Those are real numbers, and a pro forma that calls them zero is already wrong on day one.

The construction loan trades lower flexibility and higher upfront closing costs for a structure that forces you to account for that carry. Whether that trade is worth it depends on how tight the rest of the budget is.

I am not in a position to tell you which financing fits your deal. A lender who works specifically with ADU construction and a CPA who knows your full picture are the right people to run both scenarios with real numbers.

What does your current contingency line look like as a percentage of total build cost?

Eight months is already optimistic in a lot of jurisdictions and that gap between permit submission and first draw is dead money that nobody models.

My version of this mistake was smaller scale, not an ADU, but I had a HELOC sitting open for a bathroom gut job that dragged four months past schedule and I was paying interest on the full drawn balance through a winter where nothing happened on site. Cost me about $2,200 I had not budgeted, which on a project that size actually mattered to the numbers I had shown my wife to get sign-off.

What I have never seen anyone account for in these pro formas is the rate environment when the HELOC finally matures or when you go to refinance the primary to absorb the balance, because that is a second timing bet stacked on top of the construction timing bet.

The assumption doing the most work is that the draw schedule is predictable enough to model at all.

The part that got me was "a number someone wrote to make the deal work." I have watched that happen with the duplex I inherited, the previous owner's paperwork had a contingency line that was clearly reverse-engineered from the target return, not built from actual costs. Nobody audits that number until something goes wrong.

What I have not seen mentioned is what happens to your HELOC availability if the project runs long and you need more draws than the original schedule assumed. A lot of HELOCs are structured with a draw period and then a repayment period, and if your eight-month build becomes fourteen months because the city sat on your permit for three of them, you can find yourself in repayment phase on a unit that is still under construction. That is not a soft cost problem, that is a liquidity problem. My question for you is whether your lender gave you a draw period that actually has a buffer for permit delays in your specific municipality, because some cities right now are running four to six months on ADU permits alone before a shovel touches dirt.