San Francisco ADU Rental Income and Financing Strategies

What if one smart project could help cover your San Francisco mortgage and add long-term value to your property? If you have space for an accessory dwelling unit, you may be closer than you think. Building or legally renting an ADU can create steady income, and some lenders may count part of that rent when you qualify for a loan. In this guide, you’ll learn the local rules, financing paths, costs, and a simple plan to get started. Let’s dive in.

What an ADU can do financially

An ADU can generate monthly rent you can use for cash flow, and in some cases, for loan qualifying. Federal updates have made this easier to access if you meet program rules.

How lenders count ADU rent

• FHA allows lenders to use up to 75% of estimated ADU rent from an existing ADU for qualifying. If you are adding an ADU with an FHA 203(k) rehab loan, lenders may use up to 50% of projected rent, with specific appraisal and documentation requirements. See the FHA update in HUD’s announcement for details. (HUD ADU policy)
• Freddie Mac and Fannie Mae permit ADU rental income on owner-occupied 1-unit homes under guide rules. Freddie caps counted ADU income so it does not exceed 30% of your total stable monthly income when used to qualify, and requires appraisals when ADU income is considered. Lender overlays may apply. (Freddie Mac ADU FAQ, Fannie Mae ADU guidance)

Qualifying vs cash flow

• For qualifying, lenders usually count a conservative share of gross rent, often 75%, to allow for vacancy and expenses. Always confirm the exact percentage and rules with your lender. (HUD update)
• For cash flow, focus on net income: gross rent minus operating costs and a vacancy allowance. That net can help you cover a portion of your mortgage payment each month.

San Francisco rules you must know

Before you count on income, make sure your unit is legal, permitted, and aligned with local protections.

• ADU types recognized: San Francisco allows attached, detached, converted, and junior ADUs. The Planning Department and the Department of Building Inspection (DBI) publish program details and steps. (SF Planning ADUs, DBI ADU program)
• No short-term rentals: ADUs are not eligible for the city’s Short-Term Rental program, so you cannot legally use an ADU for short stays. (Short-term rental restriction)
• Tenant notice: If you add an ADU in a tenant-occupied building under the Local Program, you must send a Notice of Addition of ADU(s) and file a Declaration with the Rent Board. Tenants can object, and services cannot be removed without cause. (SF Rent Board guidance)
• Possible rent control: In some cases, ADUs added to rent-controlled buildings and granted certain Planning waivers may become subject to the Rent Ordinance. Verify status before you set expectations. (DBI ADU page)
• Separate sale is limited: State law now allows cities to adopt rules permitting separate sale of ADUs, but local adoption varies. As of 2024–2025, most ADUs in San Francisco still cannot be sold separately. Check current local rules. (Overview of 2024 housing laws)
• Fees and timing: ADUs under 750 square feet may receive impact fee breaks under the Planning Code. Many projects take 12 to 18 months or longer due to plan review, interdepartmental coordination, and utility scheduling. (Ordinance 31-21 context, City ADU timeline overview)

Build costs, rents, and a simple pro forma

• Build costs: Recent Bay Area data shows many ADUs range from about $150,000 to $475,000 or more, with San Francisco often at the high end. Smaller units can cost more per square foot due to fixed kitchens, baths, and utility tie-ins. Get local bids for accuracy. (Bay Area ADU cost guide)
• Market rents: Citywide indicators show studios around roughly $2,000 to $3,000 and one-bedrooms around $2,800 to $3,600 or higher, depending on location and quality. Pull comps for your specific neighborhood. (San Francisco rent trends)

Simple example for context: if your ADU can rent for $3,000 per month and you budget 25% to 40% for expenses and vacancy, you might net about $1,800 to $2,250 per month toward housing costs. For loan qualifying, an FHA lender might count up to 75% of market rent, or $2,250, subject to program rules and documentation. (HUD ADU policy)

How to finance an ADU in SF

Several loan paths can incorporate ADU plans or income. The right choice depends on your situation and whether the ADU already exists.

• Purchase with an existing ADU: Conventional or FHA purchase loans can consider ADU income if guide rules are met. (Fannie Mae ADU guidance)
• Build or convert: Construction or construction-to-perm loans are common. FHA 203(k) can fund additions and may allow a portion of projected ADU rent for qualifying under defined terms. (FHA 203(k) update)
• Refinance and home equity: Conventional cash-out, FHA options, HELOCs, and home equity loans may fund construction. Some lenders place limits on counting ADU income for cash-out refinances. Confirm early. (Program implementation example)
• Alternatives: When conventional underwriting will not count your rent, certain non-QM or DSCR products underwrite to property cash flow. These can be more costly but flexible.

What lenders will ask for

• If rented now: signed lease, proof of deposit and rent receipts, Schedule E if available, and an appraisal with a rent schedule. (Freddie Mac overview)
• If not yet rented: an appraiser’s market rent opinion and sometimes a preapproved lease. Some programs require rent to begin by your first payment due date. Reserve requirements may apply. (Freddie Mac ADU insights)
• Seasoning: some lenders want rental history, while others permit projected rent for subject-property ADUs under defined rules. Confirm early. (Selling guide updates context)

Your step-by-step plan

• Confirm eligibility: Review SF Planning and DBI ADU criteria. If your building has tenants, review Rent Board notice rules. (DBI ADU program, SF Rent Board guidance)
• Pull rent comps: Use recent local comps to set expectations and support appraisals. (San Francisco rent trends)
• Talk to a lender: Ask which loan programs will count ADU income, how much, and what documentation is needed. Provide concept plans if possible. (HUD ADU policy)
• Budget with contingency: Get multiple bids and include 15% to 25% contingency, soft costs, permit fees, and utility tie-in allowances. Plan for 12 to 18 months. (City ADU timeline overview)
• Coordinate taxes: Discuss Schedule E reporting, depreciation, and the property tax impact with your CPA. (Assessor guidance on new construction, Rental tax basics)

Taxes and reporting basics

• Property taxes: The county will add the ADU’s value as new construction to your existing assessment. Your original Prop 13 base stays intact, and you pay an incremental tax on the ADU’s assessed value. (Assessor guidance)
• Income taxes: Report ADU rent on Schedule E. You can typically deduct related expenses and depreciate the unit over 27.5 years under residential rental rules, subject to IRS limits and allocations. Consult a tax professional. (Rental income and depreciation basics)

Common pitfalls and tips

• Respect local limits: ADUs cannot be used for short-term rentals in San Francisco. (Short-term rental restriction)
• Document early: Lenders require appraisals, rent schedules, and leases. Clarify seasoning and reserve requirements before you design.
• Plan for delays: Multi-agency reviews and utility coordination can extend timelines. Build schedule risk into your plan. (City ADU timeline overview)
• Check rent control exposure: If your building is rent-controlled and you rely on waivers, your ADU may be covered by the Rent Ordinance. (DBI ADU page)

Ready to map your numbers and options? If you want a design-informed plan, local lender introductions, and a clear path from permit to lease-up, connect with Kia Amini for tailored guidance.

FAQs

Can ADU rent reduce my mortgage payment in San Francisco?

• You can use ADU rent as cash flow to pay your mortgage, and some lenders may count a portion of that rent for qualifying under FHA or GSE rules, subject to documentation. (HUD ADU policy)

Are ADUs in San Francisco allowed as short-term rentals?

• No. San Francisco does not allow ADUs to participate in the Short-Term Rental program, so nightly rentals are not permitted. (Short-term rental restriction)

Will an ADU trigger full property tax reassessment in San Francisco?

• No. The county typically adds the new ADU’s value to your existing assessed value, creating a blended assessment; expect incremental tax on the ADU’s assessed value. (Assessor guidance)

Are new ADUs subject to rent control in San Francisco?

• They can be, especially when added to rent-controlled buildings that receive certain Planning waivers; confirm your building’s status and any waiver effects. (DBI ADU page)

How long does it take to build and start renting an ADU in San Francisco?

• Many projects take 12 to 18 months or more due to plan review, interagency coordination, and utility work; build this into your budget and timeline. (City ADU timeline overview)

Can I sell an ADU separately from my home in San Francisco?

• In most cases today, no; while state law allows cities to adopt separate sale options, San Francisco’s rules remain limited, so confirm current local policy before planning a sale. (2024 housing laws overview)