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Does an Alley Flat make good economic sense for you?

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Building an Alley Flat requires much of the same thought as any big investment.

Take a look at your needs, your finances, and determine if an Alley Flat makes good financial sense at this time. Alley Flats meet the requirements for conventional home financing and home insurance. Although the Alley Flat Initiative suggests financing options, it is the responsibility of the property owner to secure financing.

Expected Expenses:

Alley Flat Initiative clients receive permit fee waivers and expedited permitting in exchange for complying with affordability and sustainability requirements.

Professional Fees:

Architectural and Structural Engineering will likely range between $8,000 – $14,000.

Construction Cost:

We do not provide construction services. The contractor is hired directly by the homeowner. We encourage people to contact contractors early on to make sure the construction fee is feasible.


Additional construction cost of $10,000 – $20,000 may be required if the existing water service needs upgrading.

Expected Income:

Your expected rental income will depend on the annual income limits set by the US Department of Housing and Urban Development for the first 5 years. During this period the rent for an Alley Flat is limited to 28% of 80% Median Family Income (MFI).

For 2020, this breaks down as follows:

0 & 1-bed 2-bed3-bed


The Alley Flat tenant’s income must be at or below 80% MFI. If your tenant’s household income increases above the 80% limit after the first year of renting the Alley Flat, then their rent may increase up to 28% of their increased income. If their income increase above %140 MFI then they are no longer eligible to rent the Alley Flat if it is still within the 5 year SMART Housing compliance period.

Updated income limits are published annually by the City of Austin and can be found here.

Financing Options:

Traditional Mortgage

Financing an Alley Flat with a traditional mortgage is usually straight forward and can work regardless of whether or not the home is currently mortgaged. The process typically starts with the homeowner qualifying for a new, larger mortgage (one that includes the construction cost of the new unit), continues with construction funds being released as progress is made, and after construction is complete, the homeowner begins making payments on the new mortgage. The typical terms are 15 to 30 years and rates remain near historic lows.

Home Equity Loan

Unlike a traditional mortgage, a home equity loan is a second loan that typically has a shorter term than a mortgage, usually between 15 and 25 years. The homeowner must have enough equity to borrow against and must qualify for the additional debt service. Because a home equity loan is a second lien, rates are generally higher than with a traditional mortgage.