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Building an Accessory Dwelling Unit

By Dr. Alan Sanderson, Guest Writer

At the beginning of 2023, I was ready to seize the day financially. That summer would be my 10th anniversary of graduating from training, and I felt like I was getting control of my finances for the first time in my life.

I did not learn much about personal finance in my youth. There were several times I can remember during my childhood when my family was financially supported by extended family or by our church for months or even years. Part of my motivation for going to medical school was so that I would have better job security than my dad did.

Sometime during medical school, I found time to read The Millionaire Next Door, which was probably the best way to start my financial education. The take-home message of the book for me was that I needed to keep my expenses moderate when my salary increased someday—or else I would never accumulate wealth.

I managed to pay off my student loans within six years of graduating fellowship, thanks to a frugal wife and a loan repayment benefit from my employer. But I was harpooned in my early career when I was sold a universal life insurance plan as an employment “benefit” (a limited-time offer!). With the help of The White Coat Investor and related resources, I started to get things on track in 2022. I cut my losses on the universal life insurance policy and replaced it with a term life policy. I wrote a financial plan and maxed out my 401(k) and 457(b) for the first time.

My mortgage principal balance was set to dip under $100,000 in 2023, and I was making more than double payments with the goal of being debt-free within 2-3 years. When we bought the house seven years earlier, the backyard was just a sloping weed land. Since then, we had installed a block wall at the property line, a nice curvy retaining wall to make upper and lower terraces, a shed and garden boxes, a large concrete patio and sidewalks, and a sprinkler system to support the grass and the trees and flowers we planted. All of these projects were funded by cash flow, and two of them had dipped our savings lower than with what I felt comfortable.

My net worth had gone from $0 to about $1.5 million in the previous seven years (much of it from my inflated home value), and my savings were sitting just under $800,000. I was feeling ready to take the reins on my own investments, and I wanted to get money into the stock market while it was still down from the 2022 bear market.

In short, things were looking up in January 2023. This may be too much background info, but that seems to be the style in personal finance blogs. Either way, most of these threads will tie into my story, so keep reading.


An Idea

Sometime in about February 2023, my wife and I had a conversation that went something like this:

Wife: Honey Bunny, I saw this paper from our realtor about ADUs.

Me: ADUs?

Wife: Accessory dwelling units.

Me: Oh. Yeah, I threw that in the trash.

Wife: I know. I pulled it out and read it, and I had this epiphany! We could build my mom an ADU in the corner of the yard.

Me: We weren’t going to do anything big this year, remember?

Wife: I know. But . . .

Me: An ADU would cost way more than the new patio. Like, four times more.

Wife: But this would be a really good thing to do.

Me: We don’t have the cash. We spent it all on the patio last year, and I’m just getting our savings back to a comfortable level. And the stock market is down. This is our chance to buy stocks on sale!

Wife: That’s play money. It’s not real.

Me: Yes it is! We are part-owners of real businesses.

Wife: But it can all disappear—poof!—and it’s just gone. [She gestures an explosion with her hands.] If we build a house, at least it’s real. And it might be the solution to get my mom out of her house.”

med school scholarship sponsor

My mother-in-law was in her late 70s and was getting tired of maintaining her five-bedroom house and garden. I had no experience with real estate investing, but I was getting curious about it from all of the finance books and blogs I was reading. Having a rental property in my own backyard sounded like a reasonable investment—a way to meet a family need while sticking our toe into a new asset class. I was willing at least to run the numbers and see if we could pull it off without shorting our retirement savings for the year.

My wife approached her mother about the idea of building a cottage on our property, and we were surprised by her enthusiasm. It was like a switch flipped after all these years of hesitating, and she was finally ready to make a move. We took this miracle as a sign to go ahead with the project.

More information here:

Giving Money to Family and Creating Boundaries


Planning and Preparation for Building a Mother-in-Law Suite

While my wife took on the job of drawing up architectural plans and getting quotes from contractors, I assigned myself the task of figuring out how to pay for this construction. The maximum allowable ADU in our city was 800 square feet. She started by studying blueprints available online and crafted an 810 square foot floor plan (the extra 10 square feet were an “unheated” utility closet, so they didn’t count in the eyes of the city). There was just enough undeveloped space left in our yard to fit this cottage. We also considered using a pre-built kit home, but the local kit home builders were 18 months out for new orders and didn’t return our phone calls anyway.

We consulted three contractors who all had useful insights on the project. The gut punch came from the inflation of building materials; this project was going to cost about $200,000, which was actually 10 times more than the previous year’s patio construction. If we provided all of the appliances, the contractor we hired said he could build it for $170,000.

How would we come up with that kind of money while still maximizing my 401(k) and 457(b) contributions for the year? I had a few ideas.

First, we considered the option of having my mother-in-law sell her home. We rejected this idea because it would delay the project by the amount of time it would take to sell the house, and family dynamics were likely to complicate and delay the process. Also, I want to own every structure on my property without complicated financial entanglements (although, at her insistence, I allowed my mother-in-law to pay for the appliances).

I decided I could spare $20,000 from our savings account, leaving a rainy-day fund that was large enough to be useful but small enough to make me a little nervous. I calculated that if we stopped paying extra on our mortgage, I could cash flow another $22,000 in eight months. These amounts would cover 25% of the estimated building cost.

I could also liquidate my brokerage account, which was invested 100% in stock mutual funds. This gave me mixed feelings, because, at the time, it was underwater due to that 2022 bear market. But I could at least record the capital losses on my tax return and count it against income, so I guess that’s something. At the end of January 2023, this account was worth $72,000, which would cover another 42% of the project. If the market recovered quickly, then it would cover more.

That left us with about a $60,000 shortfall. Where would this come from? I considered a few ways to scrape the bottom of the barrel, and none were very appealing. All of them involved borrowing at 7%-8% interest against another asset like our home equity or a retirement account.

I started thinking outside the box—or the barrel, I guess—and decided to ask a sister-in-law for a private loan. She is skeptical of investing and keeps her money in a savings account, so I offered to pay her 5% interest. She was eager to help her mother and willing to earn a bit of interest while doing it, so we agreed to ink the deal later in the year when our other funding sources were running low.

Here is a summary of our projected funding sources for the project:


mother in law suite funding source


Construction of the Accessory Dwelling Unit

We broke ground in May 2023, and construction progressed quickly. There were minor delays and hiccups here and there, as with all big projects.


mother in law suite before

This is where the mother-in-law suite would be built.


Construction of the mother-in-law suite

Construction of the mother-in-law suite.


The cottage was framed and roofed in June; stuccoed, drywalled, and painted in July; and had flooring and cabinets installed and utilities connected in August. The plumber hit a gas line while digging a trench for the sewer pipe. Thankfully, the gash only went 75% of the way through the pipe, or we might have had a fireball in our side yard. The last appliances were installed, and the outside sidewalks were poured in September.

We paid the general contractor in five monthly drawdowns beginning with the first one in June for $34,000. That pretty much wiped out the contributions from our savings and cash flow to date, so it was time to act on some of our other funding plans in July.

More information here:

9 Tips for Hiring a Contractor to Build Your Dream House

How Expensive of a House Can I Afford?


Liquidating the Brokerage Account

For the previous seven years, I had been working with a financial advisor who was a good friend and my next-door neighbor. He helped explain the need for taking market risk in equities, and he helped me stay invested during the bear markets of 2018, 2020, and 2022. That alone was probably worth the AUM fees I paid. He helped me start the taxable brokerage account in early 2020.

mother in law suite

I kept a close watch on that account and sold off a few investments in March and early June that were close to break even. Checking my balances every day during 2023’s slow recovery really tested my patience. The amount of attention it would take to be an active investor is a lot more bandwidth than I want to devote to my finances. Finally, I emailed my financial advisor in early July and told him to just liquidate the account. By then, it had only recovered about $500 of its 2022 losses, so the total withdrawals for the year were $72,500. When I later calculated the internal rate of return for the life of the account, it was a nominally positive 1.65%, which obviously didn’t keep up with inflation.

While I was closing this account, I decided to take the plunge. I told my financial advisor that I was ready to manage my own investments and thanked him for his help over the past few years. Doing this was my eventual plan anyway, but the circumstances encouraged me to accelerate the timing. I rolled over my IRA to an account at Vanguard and invested it according to my financial plan. My neighbor and I are still friends.


Private Loan

Also in July, we signed the promissory note on the $60,000 private loan from my sister-in-law. I customized a legal document, triangulating between several examples I found online for our state. We have a good relationship with this sister-in-law, and one of my primary goals with our loan was to keep it that way. If I am to be in debt to a family member, then I want tight terms and no ambiguity. I want this loan to work out well for both of us.

I still needed my cash flow to fund the ongoing construction, so we delayed the first payment for six months and added the first six months of interest ($1,515.71) to the principal amount. I then used the amortization calculator at to make a two-year amortization schedule based on a starting balance of $61,515.71. The monthly payment turned out to be about what we were previously overpaying on our mortgage, so we won’t have to tighten the belt to do this. But it will delay our debt-free celebration by a couple of years.

More information here:

The Right Way to Borrow Money from Family


The Project Completed

Move-in day was in late September, about four months after the groundbreaking. My mother-in-law arrived with a big trailer full of stuff from the house she had been living in for the previous 25 years, and we obviously couldn’t fit all of that in 800 square feet. Most of it ended up in our garage, and I remain hopeful that I can park there again someday. But the most important thing of all—the woman herself—ended up in the little house to stay.

Here is an itemized list of expenses for the project (excluding appliances paid for by my mother-in-law):


mother in law suite payee


This came out to $15,000 more than we had planned, mostly because of extra concrete sidewalks to finish our landscaping. Only 9% above budget is not too bad. We managed to squeeze the difference out of our cash flow and savings. On our final payment to the general contractor, we gave him a $1,000 bonus for doing such a good job and getting it done so quickly. He was astonished and said that he had only been given a bonus one time in all his years of building. By the end of December, I had my savings back up to a more comfortable level. Late that month, I made the first payment to my sister-in-law on the private loan.


mother in law suite done

The finished product.


Lessons Learned Building a Mother-in-Law Suite

Investment money can buy tangible things. Somehow you forget that when all you do is automated index investing in your retirement account.

A high income allows you to do a lot with cash flow, but a project like this requires more than just that. Having something stashed away but not locked up until age 59 1/2 is really helpful when you want to do something with real estate or another investment. When I started contributing to the brokerage account in 2020, I didn’t have a specific use for it in mind except for retirement, which is still a decade or two away for me. It would have been smart to consider possible uses for that money before retirement, which would have affected its asset allocation. Knowing what I know now, I will always keep some part of my brokerage account in cash so that I don’t have to worry about the market being down when I need my money. Now that the interest rate in money market accounts is reasonable, this should hopefully be less painful to do.

Not having a robust plan for what to do if our project went over budget was a rookie mistake that could have turned out badly. The majority of building projects go over budget, and it would have been smarter to build a 10%-20% buffer into my plans. I am a lucky guy, but probably I shouldn’t bank so hard on that luck next time.

What about the financial impacts of this project? How did it affect my net worth?

I think it was mostly a wash. My property is worth more now with a rental in the backyard. The value of the brokerage account and the amount I pulled from savings were transferred into our property value. The cash flow I diverted from my mortgage payment would have had a similar numerical effect on my net worth if I had paid down the mortgage. I have a new $60,000 debt that is offset by an equal increase in property value. And, of course, I passed up the opportunity to put about $53,000 into a stock market that was on sale, but I didn’t totally miss out on that party because I still got $44,100 into the market by maxing out my 401(k) and 457(b) contributions for the year. The financial risk of this project was acceptable because I could continue my saving and investing plan while doing it.


mother in law suite final


I suppose you could say that this project cost me time because I will be in debt for a couple of years longer than I otherwise would have been.

The new cottage is an income-producing asset, because my mother-in-law wanted to pay us rent. Of course, whatever stock I might have bought with that $53,000 would also have been an income-producing asset.


Making Grandma Cry

A day or so before my mother-in-law moved into the house, my wife sent her a bunch of pictures of the finished construction. One of them showed our two youngest kids standing in the kitchen, waving at the camera. She looked at that picture of her smiling grandchildren eagerly waiting for her, and she started crying with happiness. This kind of reaction happened over and over again at every stage of the project.

“I just can’t believe that you’re doing such a nice thing for me,” she would say.

Having resources available and knowledge of how to use them gave us the power to make a huge difference in the life of someone we love. Money is the tool, not the job.

Perhaps the most important lesson here is that this personal finance story is not really about personal finance. Technically, this was a real estate investment, but really it was an act of charity. My mother-in-law has sacrificed and served her family for decades, and she has lived a hard life. I was willing to take a financial risk to build this house for her so she can live the rest of her life in peace, surrounded by family members who love her. How much is that worth?

Have you ever gone through a similar ADU construction? What did you learn from it? What did you do well? What mistakes did you make? Comment below!

[Editor’s Note: Dr. Alan Sanderson is a general neurologist who enjoys music, trail running, and writing. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]


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