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The term “accessory dwelling unit” might sound foreign, but chances are you’ve encountered one. Sometimes called an in-law suite, granny flat, or, more romantically, carriage house, an ADU is a secondary dwelling unit on the same lot as a primary single-family home.

Although ADUs have risen in popularity in recent years, they’ve been around for decades, according to a study by the Federal Home Loan Mortgage Corp., known as Freddie Mac.

When the suburbs boomed in the 1950s, municipalities across the country created zoning laws prohibiting higher-density residential structures, the Freddie Mac report noted, but in cities like Los Angeles, San Francisco, and others that lacked affordable housing, the practice continued in secret.

As zoning laws across the country have changed to allow ADUs, the trend has boomed in tandem with population growth in the South and the West. “Half of our total 1.4 million ADUs are located in the Sun Belt states of California, Florida, Texas, and Georgia,” Freddie Mac reported.

What’s the attraction? Some property owners add an ADU to generate rental income; others want a place to accommodate guests, and still others need living space for aging parents.

Read on to learn why ADUs are all the rage in pricey cities and what it takes to build one.

ADU Meaning Explained

An ADU goes by many names, but its features make it unique among types of dwellings.

•   ADUs are smaller than the primary residence they accompany. In California, which passed statewide laws making many city restrictions on ADUs obsolete and streamlining the approval process, the size generally ranges from 500 to 1,000 square feet.

•   ADUs are self-contained. They usually include a bathroom, kitchenette, living area, and separate entrance.

•   ADUs require a special permit, which varies by location, according to the American Planning Association. Building codes may limit the size of the ADU and the number of occupants. Some cities, however, are offering an ADU amnesty program to help legalize under-the-radar units.

•   Unlike a duplex, ADUs usually share utility connections with the primary residence.

Recommended: A Guide to Buying a Duplex

What Are the Different Types of ADUs?

All ADUs have to follow ordinances and laws, but they don’t all look the same. Depending on homeowner preference, it might look like one of the following:

•   Detached This is likely new construction, formal or informal.

•   Converted garage This might mean retrofitting the garage or adding a second floor to create an ADU. Fans of Happy Days might recall Fonzie living in the Cunninghams’ converted garage, which was actually an ADU.

•   Attached Typically this is an addition to the existing residence.

•   Interior conversion An existing portion of the house, perhaps the basement, is transformed into an ADU. Fans of Full/Fuller House might recall the Tanners’ attic conversion and the basement/garage living space.

Benefits of an ADU

For the right homeowner, an ADU has upsides.

•   Rental income Choosing to rent out the space could bring in income, whether with a long-term rental or short-term Airbnb.

•   A true mother-in-law suite or adult-child dwelling For multi-generational families, adding an ADU could be a good way to create privacy and be close … but not too close. An ADU can also house an adult child who returns to the nest.

•   A space to age in place Conversely, aging homeowners or empty-nesters might choose to build an ADU for themselves. The homeowners could move into the smaller, more manageable space and rent out the larger property for passive income.

•   Flexibility An ADU could become a home office or art studio. For some homeowners, it might just be a good place to host guests.

•   Enhanced property value Compare the cost of buying a second small home or condo in your area with the cost of adding an ADU. How much value will a permitted habitable accessory dwelling add? A property appraisal will tell the tale.

Drawbacks of an ADU

ADUs may also come with their fair share of potential downsides.

•   Can be expensive A detached ADU may cost as much as a small house to build (though the homeowner already owns the land). An attached ADU or conversion of an existing structure will probably cost less, but still may cause sticker shock. Size, features, and the cost of professional services, permits, and any financing come into play.

•   Occupancy requirements Some local ordinances require that a home that has an ADU be owner-occupied in some capacity. That means a property with an ADU may not be the right fit for someone who wants to rent out the entire property.

•   Higher taxes On one hand, adding value to your property is a good thing. On the other, an ADU can make a property tax bill spike.

•   A smaller yard Unless a homeowner is retrofitting an ADU into their existing dwelling, building an ADU will cut down on outdoor space.

•   Financing Can be tricky. Read on.

Recommended: 8 Steps to Buying a Vacation Home

Ways to Pay for an ADU

While ADUs have different shapes and designs, they have a commonality: a price tag. If homeowners don’t have cash on hand to finance the build, they’ve got a few options to move forward.

A home improvement loan is a personal loan used to pay for a home renovation or update. When a homeowner takes out a home improvement loan, it’s not secured by the property — meaning the home isn’t collateral in the transaction.

A home equity loan or home equity line of credit (HELOC) leverages homeowners’ equity in a property and allows them to borrow money against the value of the home. Unlike a home improvement loan, a home equity loan or credit line is tied to the house, meaning the property is used as collateral. A home equity loan provides you with a lump sum of funds at one time and typically has a fixed interest rate. With a HELOC, homeowners can draw different amounts at different times, typically with a variable interest rate.

With sufficient equity in your home, homeowners could also consider a cash-out refinance.

The Takeaway

Determining if an accessory dwelling unit is the right move for a homeowner comes down to needs, preferences, and finances. ADUs have pros and cons, but many areas have eased the way for this cottage industry.

Homeowners who don’t have much equity in their property or don’t want to use their home as collateral may want to consider a SoFi unsecured personal loan to cover the cost of an ADU. SoFi’s home improvement loans range from $5K to $100K, and offer competitive, fixed rates, as well as a variety of terms. Plus, there are no fees required.

Imagine the possibilities. Then check your rate. It’s easy.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

This article is not intended to be legal advice. Please consult an attorney for advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Dealing with debt can be overwhelming and stressful. If you find yourself struggling to pay off multiple debts, the snowball method can provide a practical and effective strategy to regain control of your financial situation. This method, popularized by personal finance expert Dave Ramsey, focuses on paying off debts in a specific order to build momentum and motivation.

Read on to learn how the snowball debt payoff method works, including its benefits, plus alternative payoff strategies you may want to consider.

Building the Snowball

With the snowball method you list your debts from smallest to largest based on balance and regardless of interest rates. The goal is to pay off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, you roll the amount you were paying towards it into the next smallest debt, creating a “snowball effect” as you tackle larger debts.

Getting rid of the smallest debt first can give you a psychological boost. If, by contrast, you were to try to pay down the largest debt first, it might feel like throwing a pebble into an ocean, and you might simply give up before you got very far.

A Word about Paying off High-interest Debt First

From a purely financial perspective, it might make more sense to first tackle the debt that comes with the highest interest rate first, since it means paying less interest over the life of the loans (more on this approach below).

However, the snowball method focuses on the psychological aspect of debt repayment. By starting with the smallest debt, you experience quick wins and a sense of accomplishment right away. This early success can then motivate you to continue the debt repayment journey. In addition, paying off smaller debts frees up cash flow, allowing you to put more money towards larger debts later.

Recommended: How to Get Out of $10,000 in Credit Card Debt

Making Minimum Payments Doesn’t Equal Minimum Payoff Time

While you may feel like you’re making progress by paying the minimum balance on your debts, this approach can lead to a prolonged payoff timeline. The snowball method encourages you to pay more than the minimum on your smallest debt, accelerating the repayment process. Over time, as you pay off each debt, the amount you can allocate towards the next debt grows, increasing your progress.

The Snowball Plan, Step By Step

Here’s a step-by-step guide to implementing the snowball method.

1. List all debts from smallest to largest. You want to list them by the total amount owed, not the interest rates. If two debts have similar totals, place the debt with the higher interest rate first.

2. Make minimum payments. Continue making minimum payments on all debts except the smallest one.

3. Attack the smallest debt. Put any extra money you can towards paying off the smallest debt while making minimum payments on others.

4. Roll the snowball. Once the smallest debt is paid off, take the amount you were paying towards it and add it to the minimum payment of the next smallest debt.

5. Repeat and accelerate. Repeat this process, attacking one debt at a time, until all debts are paid off.

A Word About Principal Reduction

It’s a good idea to reach out to your creditors and lenders and find out how they apply extra payments to a debt (they don’t all do it the same way). You’ll want to make sure that any additional payments you make beyond the minimum are applied to the principal balance of the debt. This will help reduce the overall interest you pay and expedite the debt payoff process.

Perks of the Snowball Method

The snowball method offers several advantages:

•   Motivation and momentum The quick wins and sense of progress provide motivation to continue the debt repayment journey.

•   Simplification Focusing on one debt at a time simplifies the process, making it easier to track and manage.

•   Increased cash flow As each debt is paid off, the money previously allocated to it becomes available to put towards the next debt, accelerating the payoff timeline.

Alternatives to the Snowball Method

While the snowball method has proven effective for many, it’s not the only debt repayment strategy available. Here are three alternative methods you may want to consider.

The Avalanche Method

The avalanche method involves making a list of all your debts in order of interest rate. The first debt on your list should be the one with the highest interest rate. You then pay extra on that first debt, while continuing to pay the minimum on all the others. When you fully pay off that first debt, you apply your extra payment to the debt with the next highest interest rate, and so on.

This method can potentially save more on interest payments in the long run. However, it requires discipline and may take longer to see significant progress compared to the snowball method.

The Debt Snowflake Method

The debt snowflake method is a debt repayment method you can use on its own or in conjunction with other approaches (like the snowball or avalanche method). The snowflake approach involves finding extra income through a part-time job or side gig, selling items, and/or cutting expenses and then putting that extra money directly toward debt repayment. While each “snowflake” may not have a significant impact on your debt, they can accumulate over time and help you become free of high-interest debt.

Debt Consolidation

If the snowball, avalanche, or snowflake methods seem overwhelming, you might want to consider combining your debts into one simple monthly payment that doesn’t require any strategizing. Known as debt consolidation, you may be able to do this by taking out a personal loan and using it to pay off your debts. You then only have one balance and one payment and, ideally, a lower interest rate, which can help you save money.

Recommended: How Refinancing Credit Card Debt Works

The Takeaway

The snowball method offers a practical and motivational approach to paying down debt. By starting with small debts and building momentum, you can gain control of your finances and work towards becoming debt-free.

However, it’s important to choose a method that aligns with your financial goals and personal preferences. Whichever method you choose, the key is to take action and commit to a debt repayment strategy that works for you.

If you’re interested in exploring your debt consolidation options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a debt consolidation loan from SoFi is right for you.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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In a traditional merger, a company may acquire another that is in a similar or complementary business in order to expand its footprint or reduce competition. A “reverse merger” works quite differently, and investors are eyeing the assets of a private company.

The acquiring company in a reverse merger is called a public “shell company,” and it may have few to no assets. The shell company acquires a private operating company. This can allow the private company to bypass an initial public offering, a potentially lengthy, expensive process. In essence, the reverse merger is seen as a faster and cheaper method of “going public” than an IPO.

Reverse Merger Meaning

As mentioned, the meaning of the term “reverse merger” is when a group of investors takes over a company, rather than a competing or complementary business acquiring or absorbing a competitor. It’s a “reverse” of a traditional merger, in many ways, and appearances.

A reverse merger can also act as a sort of back door in. It can also be a way for companies to eschew the IPO process, or for foreign-based companies to access U.S. capital markets quickly.

What Is Investors’ Motivation?

Investors may purchase units or shares in a shell company, hoping their investment will increase once a target company is chosen and acquired. This can be good for values of stocks when companies merge, netting those investors a profit.

In other cases, investors may own stock in a publicly traded company that is not doing well and is using a reverse merger to boost share values for shareholders through the acquisition of a new company.

In either case, shareholders can vote on the acquisition before a deal is done. Once the deal is complete, the name and stock symbol of the company may change to represent that of the formerly private company.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Do Reverse Mergers Work?

A shell company may have a primary purpose of acquiring private companies and making them public, bypassing the traditional IPO process. These types of companies can also be called special purpose acquisition companies (SPACs) or “blank check companies,” because they usually don’t have a target when they’re formed.

They may set a funding goal, but the managers of the SPAC will have control over how much money they will use during an acquisition.

A SPAC can be considered a sort of cousin of private equity in that it raises capital to invest in privately traded companies. But unlike private equity firms, which can keep a private company private for however long they wish, the SPAC aims to find a private company to turn public.

During its inception, a SPAC will seek sponsors, who will be allowed to retain equity in the SPAC after its IPO. There’s a lot to consider here, such as the differences and potential advantages for investors when comparing an IPO vs. acquisition via SPAC.

The SPAC may have a time limit to find a company appropriate to acquire. At a certain point during the process, the SPAC may be publicly tradable. It also may be available for investors to buy units of the company at a set price.

Once the SPAC chooses a company, shareholders can vote on the deal. Once the deal is complete, managers get a percentage of the profits from the deal, and shareholders own shares of the newly acquired company.

If the SPAC does not find a company within the specified time period — or if a deal is not voted through — investors will get back their money, minus any fees or expenses incurred during the life of the SPAC. The SPAC is not supposed to last forever. It is a temporary shell created exclusively to find companies to take public through acquisition.

Are Reverse Mergers Risky?

Investing in a SPAC can be risky because investors don’t have the same information they have from a publicly traded company. The lack of transparency and standard analytical tools for considering investments could heighten risk.

The SPAC itself has little to no cash flow or business blueprint, and the compressed time frame can make it tough for investors to make sure due diligence has been done on the private company or companies it plans to acquire.

Once a deal has gone through, the SPAC stock converts to the stock of the formerly private company. That’s why many investors rely on the reputation of the founding sponsors of the SPAC, many of whom may be industry executives with extensive merger and acquisition experience.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

What Are the Pros and Cons of Reverse Mergers for Investors?

For investors, reverse mergers can have advantages and disadvantages. Here’s a rundown.

Pros of Reverse Mergers

One advantage of a reverse merger — being via SPAC or some other method — is that the process is relatively simple. The IPO process is long and complicated, which is one of the chief reasons companies may opt for a reverse merger when going public.

As such, they may also be less risky than an IPO, which can get derailed during the elongated process, and the whole thing may be less susceptible to the overall conditions in the market.

Cons of Reverse Mergers

Conversely, a reverse merger requires that a significant amount of due diligence is done by investors and those leading the merger. There’s always risk involved, and it can be a chore to suss it all out. Further, there’s a chance that a company’s stock won’t see a surge in demand, and that share values could fall.

Finally, there are regulatory issues to be aware of that can be a big hurdle for some companies that are making the transition from private to public. There are different rules, in other words, and it can take some time for staff to get up to speed.

Pros and Cons of Reverse Mergers for Investors
Pros	Cons
Simple	Homework to be done
Lower risks than IPO	Risk of share values falling
Less susceptibility to market forces	Regulation and compliance

An Example of a Reverse Merger

SPACs have become more common in the financial industry over the past five years or so, and were particularly popular in 2020 and 2021. Here are some examples.

Snack company UTZ went public in August 2020 through Collier Creek Holdings. When the deal was announced, investors could buy shares of Collier Creek Holdings, but the shares would be converted to UTZ upon completion of the deal. If the merger was successful, shareholders had the option to hold the stock or sell.

But sometimes, SPAC deals do not reach completion. For example, casual restaurant chain TGI Fridays was poised to enter a $380 million merger in 2020 through acquisition by shell company Allegro Merger — a deal that was called off in April 2020 partially due to the “extraordinary market conditions” at the time.

Allegro Merger’s stock was liquidated, while the owners of TGI Fridays — two investment firms — kept the company.

Investor Considerations About Reverse Mergers

Some SPACs may trade in exchange markets, but others may trade over the counter.

Over-the-counter, or off-exchange, trading is done without exchange supervision, directly between two parties. This can give the two parties more flexibility in deal terms but does not have the transparency of deals done on an exchange.

This can make it challenging for investors to understand the specifics of how a SPAC is operating, including the financials, operations, and management.

Another challenge may be that a shell company is planning a reverse merger with a company in another country. This can make auditing difficult, even when good-faith efforts are put forth.

That said, it’s a good idea for investors to perform due diligence and evaluate the shell company or SPAC as they would analyze a stock. This includes researching the company and reviewing its SEC filings.

Not all companies are required to file reports with the SEC. For these non-reporting companies, investors may need to do more due diligence on their own to determine how sound the company is. Of course, non-reporting companies can be financially sound, but an investor may have to do the legwork and ask for paperwork to help answer questions that would otherwise be answered in SEC filings.

Investing With SoFi

Understanding reverse mergers can be helpful as SPACs become an increasingly important component of the IPO investing landscape. It can also be good to know how investments in reverse merger companies can fit financial goals.

Many investors get a thrill from the “big risk, big reward” potential of SPACs, as well as the relatively affordable per-unit price or stock share that may be available to them.

Due diligence, consideration of the downsides, and a well-balanced portfolio may lessen risk in the uncertain world of reverse mergers. If you’re interested in learning how they could affect your portfolio or investing decisions, it may be a good idea to speak with a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is an example of a reverse merger?

A SPAC transaction is an example of a reverse merger, which would be when a SPAC is founded and taken public. Shares of the SPAC are sold to investors, and then the SPAC targets and acquires a private company, taking it public.

Why would a company do a reverse merger?

A reverse merger can be a relatively simple way for a company to go public. The traditional path to going public, through the IPO process, is often long, expensive, and risky, and a reverse merger can offer a simpler alternative.

How are reverse mergers and SPACs different?

The term “reverse merger” refers to the action being taken, or a company being taken public through a transaction or acquisition. A SPAC, on the other hand, is a vehicle or business entity used to facilitate that acquisition.

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