How To Build Wealth With ADUs Featuring Rafael Pozas

What's up everybody? Welcome back to the New and Experienced Investor Podcast. Today we're talking about building wealth and cash flow through ground-up ADU development. It's definitely a show you don't want to miss. I'm one of your hosts. I'm Alex Barnett. I'm the new guy.

And I'm Joe Homs, and that makes me the experienced guy and excited Excited today.

Yep.

Our producer's back. Oh my gosh.

I'm back.

She's back.

That's right.

Thank God.

We're gonna have a sweet show.

Welcome back.

Yep. Yep. It, it's perfect cuz we have an amazing guest here today. Uh, he helps investors and homeowners locate the best properties and help build ADUs. So, uh, it's gonna be really awesome. Make sure to share this far and wide. Before we bring him on, let's talk about our meetup that we have coming up.

October 27th, Hangar 24. Yep, 6 o'clock. Oh yeah, Adam Nishikawa. Yes, he's going to talk about 1031 exchanges. Good way to build, build wealth.

Yeah, yeah, that's what we're all about.

So yes, so make sure that you're there, please, uh, like every month. And is it gonna rain?

No. No, it's gonna be about 80 degrees.

Okay, you're my weatherman.

Calling it right now.

We're, uh, we're gonna be there this month and next month, but we are moving indoors in December, just like in case. Yeah, a new location, and it's already posted. We're going to Knollwoods in Irvine, right off of Sand Canyon. If you've never been there, it's a different place. Let's just call it that, a different place. So we're gonna, we're gonna try it out. They have plenty of room for us. We've already been there. We've actually eaten the food as well. Yeah, wasn't bad.

Wasn't bad.

It was pretty good.

Yep.

So yeah, so December, then that's my Prediction month, and we're actually going to go over what I predicted last year as well to see if any of it came true. Yeah, I'm kind of worried because I said the interest rates would be down to 5, and like I heard today, somebody getting a loan at 5.8. 5.8.

Yeah, 5.8.

Yeah, that may— Should I call it a win?

I guess.

I mean, it's in the 5s, right?

It's in the 5s. Yeah, somebody's getting it.

It's in the 5s.

I mean, if you buy down your rate, you can get, you You know, into the fives. But yeah, okay, we'll see what happens.

We'll see.

We'll see.

I've got two months.

It's always a fun one.

I'm I'm pulling for the fives.

Pulling for the fives.

Yeah.

I always like to remind you guys this is live, so please jump in the chat and make sure to share this with any new or experienced investor in your life. Okay, we're not messing around anymore. Let's go ahead and bring our amazing guest in. We have the Brazilian builder. Rafael Puzzles, how you doing?

Good. How are you?

Good, brother. Right on. Yeah, I'm stoked. Stoked to have you.

Yeah. Thank you so much for the invitation.

Absolutely. Let's jump right into it. For those of the audience that don't know you, give a quick bio. What got you into real estate?

Family. My father started a development business in south of Brazil. I'm a second generation builder, start visiting job sites with 10-year-old and continue the family business. Did a couple of years and then that's how I end up getting involved and, and doing the real estate development.

That's amazing. And so you come here and do you just go right into development or how does that process work?

Yeah, I, I learned a sentence in English that old dogs never learn new tricks. So when we got here with my, my wife and my, my kids, I only know how to do real estate and the real estate development. So I have to start with that. I really researched the, the market. I need to, you know, check what was going wrong around here.

Mm-hmm.

And then for the first time, I saw this shortage of housing, prices super high for— wow, what is this? And I started getting to know the reasons for that. And that I got the first contact with the ADUs.

Yeah.

Because in real estate, the most important resource is the land, right? And the long story short, California was as a rich state and with a lot of wealthy cycles, gold rush, war, all the military equipment, aerial industry, movies, tech, all these cycles, you know, there's a rich state. And as a rich state, it was developed with a lot of single-family zones and not so many multifamily zones, big ranches. And a lot of people start coming to the state to have a better, more opportunities, better life. So there's still more people coming to California than leaving the state. And over the years, because there was too many land in the hands of one single homeowner, was enough land to do the big developments. So, and then the prices start to get more expensive and the homeowners start to build illegal casitas by themselves, without permitting.

Mm-hmm.

Just to give you an idea, when I first started to research the ADUs, there was 350,000 illegal ADUs in Los Angeles in 2018. So it's important to understand this to project what's coming next because this is not a legislation that the guys just created. To get more money. It was something organically that the homeowners started doing. And then the legislators saw that and create laws to facilitate the process. So, and that's the whole thing started. I think the law started in the end of 2017 and I got here in 2017. So when we're a few months later than we first met, Joe. When I first met Joe—

Yeah, I was gonna ask for the audience when we first met. And you came here on a special visa, correct? You and your family?

Yes, yes, yes.

Okay, maybe just a little bit of an explanation what that visa was.

Yeah, my visa is called O-1 visa. It's called Extraordinary Ability in Business. It's for people that achieve special achievements in the field. And also I'm MBA professor. I teach real estate in Brazil for a university. And I also was an advisor for many dissertations for students. And also I was— I judged some real estate contests in Brazil because of the relationship with the university. So that, uh, I wrote some books, uh, not books, chapters for books and magazines. So that gave me a special, uh, uh, you know, like, uh, you, you're welcome here because you did something good. And just so that's how I got my O-1 visa. And then I started the whole, the whole thing.

And, and we met, and the reason we met was because you wanted to figure out what you wanted to do here, correct?

Exactly.

Yeah.

Yeah. And so I gave you some direction and you decided ADUs was what you were going to do.

Yeah. Yeah.

And then after deciding that, you went out and got your contractor's license.

I did. I did. And it was challenging because in the business in Brazil, I wasn't the engineer. My father was the engineer. I was more like the business side. I have my grad— I graduated in a master's business administration, not in engineering. So he was the guy that did. When I came here without him, I didn't have that expertise. So I had to study to get my license. And it wasn't easy because we have centimeters in Brazil and we got inches. You can convert in iPhone, but it's different when you give a solution to your client. When you see actual what is a foot is, what is a meter, takes time to process that, to give with the ideas.

Mm-hmm.

That was one challenge for me. The other one is the wood construction system with the wood, not with the blocks and bricks that we have in Brazil. That's something because the wood has a lot more components than the bricks. Bricks is just a size. And the wood, there's small pieces everywhere. So I had to study all that and learn, but it's kind of feel young again to learn all those things.

You know, on a side note, at one point this country was really, really, really being pressured to go to the metric system, centimeters and stuff like that. But we fought it tooth and nail and we won. Obviously, we're still on feet and all that sort of stuff.

And now I don't want I don't want to change because it took time for me to learn, right?

Yeah, now you learn. There's no reason to change now. But yeah, I know, I hear you that conversion could be a little bit difficult, you know.

Yeah.

But so anyways, tell us what's the secret sauce here? What do you suggest people do to make money?

Well, the most important thing is the information, right? Because the state, like I was telling you, Basically, a lot of urban policies fail with the big developments. And the only one that really worked was the ADU because it comes from an individual. But the problem is basically the state gave the homeowner the task to supply the housing inventory because that's what it's happening. But the homeowners, they don't know how to do it or the investors. So they're, they're super vulnerable when they're about to build an ADU. They rely on the architect information or the general contractor information or the real estate agent information. So there's a lot of confusion. And, uh, and what I— the secret sauce for me is to get the information before engage any licensed professional. And, and it's very hard because Normally the professionals, they have the information. So that's my first suggestion. Get the more information they can. And then when they know what they want and information, the crucial information is what I'm going to build in my lot. Because the land, there's a lot of land available in the homeowner's backyard. The land is gold. Like I call, and but they don't know what to do with their gold. And and and the and the most important thing in in real estate, the secret of success is the combination of the location with the right product. If you mess with this combination, even with the great location, you're going to ruin your investment. So you have to know exactly what you're going to build, and and that's the the type of information that the homeowner needs to know.

Oh.

It's a studio, it's a 2-bedroom attached, it's a 2-bedroom detached, is a 3-bedroom. Those are the questions that they need to know before they engage the professional because the architect will design whatever you want, but they don't have the developer vision for the development. Same thing with the general contractor. They're going to build the best general contractor, do the best work, but they don't have the vision for that. I'll give you an example that we're working on development in Encinitas, trying to get a property there, and we're looking to do different lots. One, and Encinitas is a good area. It's a coastal neighborhood. High dollars per square foot, but the same lot. One is close to hospitals, high school, the freeway. It's it's residential, but it's commercial at the same time. It's not fully residential. This is one thing, and the other lot that we look same city, same dollar per square foot, but it's more residential. There are houses there, not commercial. So you can mess when when you build in the commercial area, probably and the best fit will be an investor who wants to cash flow with renters, and then you maximize. You put three units on a lot, distribute well, make a nice property. Then you make more of it. You can rent it or you can sell it to to an investor. The other side, okay. We're going to have a big lot. Maybe we should split the lot, build 2 houses with ADUs and sell separate for homeowners just to live in. So that's the sort of thing that when you look at the lot, even in the same city, very close to each other, you have to understand what you're going to put in there. That's, that's my tip.

As you're talking about that, I remember back to the first time, you know, we met after you decided to do ADUs. And I know Things have changed tremendously since then. It was very difficult. I mean, there was a lot of cities that said, not in my backyard.

Yeah.

Correct. What, what, I mean, how dramatic has the change been?

Yeah, I think it's still, there's a lot of obstacles. This is one of them. There's also city, some cities they don't want to, you know, there's a conflict between city and state because it's a state law. Uh, but, uh, uh, yeah. And they, the, the, for example, the, the Not in My Backyard or the, the cities, they, they tell us that, uh, hey, we don't want to pink houses in my nice neighborhood. That's their argument to fight against it.

Mm-hmm.

And, uh, and every, when you, when you have one position, you try to keep your argument, especially nowadays with this Uh, yin and yang world that we live. Uh, but, uh, I think it's all about make them understand that you worry about matching one house with the ADU. You want to make it nicer. You don't want to make, uh, things differently. You want to keep the layout of the quality of the neighborhood. You don't want to— because at the end of the day, We are solving a big problem for the homeowner. If you consider that the housing bill or a rent or a mortgage is 40% of our monthly bills and the ADUs will solve this 40% of our problem. So it's a freedom. It's a lot of, you know, it's a good thing. We have to make it work. You know, we have to find a balance, say, hey, we're going to make this thing better. Yeah, that's— and because at the end of the day, we're adding square footage. We're allowed to add square footage in our properties. The question is how we're going to do it. It's what's important. But yeah, you're right. There's still a lot of obstacles.

Back in my day, A couple, couple years ago, back in my day, uh, we did have ADUs, but they were called granny flats. And they were called granny flats because you'd move in Grandma and Grandpa back there. Out of all the ADUs you build now, what are the percentage of granny flats versus I'm gonna put Alex in that room and rent it out to him for, you know, $5,000 a month? What is that percentage?

I think it's 50/50. Between young couples, try to make a better live because the young people they see the houses differently the way we see it nowadays. They want the flexibility. They want to be able to go to another state for a better job if they want. They they're not like us, and the other half is the retired residents older. that they want to have a place for a caregiver to live with them without living with them, or to have a house to have excuse to call the grandchildren to stop by and stay. So I would say half and half. There's a funny story about the granny flat because I was in Newport Beach. We had a network group in the Newport Beach Tennis Center. And I was there and I'm, I'm, I'm foreign developer. I want to adapt. So I start calling my ADUs granny flats, right? That's the name of it.

Yeah.

Yeah.

And then I was showing that there's this lady, older lady playing tennis in the super wealthy and nice. And then, oh, what are you doing? She asked me. I was in the table doing design. I said, no, I'm I build ADUs. I design and build ADUs. Uh, ADUs, what is an ADU? Casita, granny flats. She looked at me and said, don't call granny flats. We're not grannies. No, no, she said that to me.

Okay, point taken.

Yeah, I, I know how she feels. I, I, you know, most of our guests call me old, but I, yeah, I know exactly how she feels.

Experienced.

Yeah, I hear you. I hear you.

Yeah, thank you for That title, experienced.

That's better.

Yes.

Yeah. Well, and, and, you know, like, like Joe was saying, you decided to kind of jump into this right when the law was coming into play. And this is SB 9. And there's another one that has to do with—

Yeah, SB 9 came later.

Okay.

Because, and that's the thing that when you look the way to look to the future, if you look at to the past, because I, I, when we, when we, Joe and I first met, I, I kind of saw what was going on and what could be happened. But now I know that I, I was right looking back after all the things that, uh, happened. Uh, and, uh, and I'm sorry if I lost the—

Oh no, no, you're good. I was just kind of making a point like, This is for homeowners to sort of, they're putting it in the hands of the homeowners to create more housing. But it's always really gonna be an investor who takes these laws and sees it as an opportunity, as an investment to kind of push it forward. Then the cities kind of get on board. They see what they like, they see what they don't like. For example, I just saw a reel where I think San Diego, they've been pretty open about accepting you know, these ADU builds. And I think at one point you were allowed to put 10 on a lot, and now they just kind of brought it back to, I think, 6 on one lot.

Yeah.

So it's kind of a moving target.

I, I got back. Thank you. Uh, I was, uh, the first law was SB 1069, the ADUs. And, and, and the beginning with all the, oh, what was going on, the restrictions, people say, Oh, can you sell separately? No. Can you rent both without owner occupancy? No. There was a lot of when it started, and then there's a lot of amendment bills that came. Legislators tried to overcome those obstacles to move forward, and that when SB 9 came, which is the ultimate, I say the ultimate evolution of that, because now you can split the lot in 2. and put one, 2 primaries, one in each, and 2 ADUs. Okay, with a good-sized lot, you can make 4 houses in one lot.

Right.

But the biggest fear of the planners, the city planners, is that the developers will come and buy and do business, business, and without concern about the neighborhood. But, but I think, and that, and this is open a big window of opportunity for investors. It's because the big developers, they don't, they don't, they're not interested in ADUs. They can scale. It's so small developments. They're not in their need. They're not in their radar. So what makes the opportunity for investors to partner with developers, the smaller developers. Hey, let's do— how can we do this? And then working together to connect with the city, ask the proper questions, get all the things that you need, and then get money, access to capital with investors. That I think was the big asset for this whole chain is the people access capital to make all these small developments happen. That's one big part of the, of the game.

Yeah, absolutely. And I think there's going to be a window where investors will take more advantage of it until the homeowners kind of catch on and realize, you know, There'll be more guidelines, like you were saying, that maybe the architects will know a little bit more, the engineers will know a little bit more. As far as the valuation, the appraisals, all that stuff is kind of, I guess, up in the air. I mean, even when we go and talk to the city about doing these ADUs, they gotta run it around the horn and then they give you some vague answer about what's allowed and what's not allowed. Kind of a moving target.

Yeah.

We were talking before. I think the, the exit strategy is always important when you look for a property. For example, you, you try to maximize everything, but you have to have a plan that, hey, if something goes wrong, I'm— I still have a good lot in a good neighborhood that if I don't build what I want, at least I can get away with that without any loss. That's, I think, is, is the safe way to do it.

Yeah.

Going back to the granny flats, it used to be where you had to have a 20,000 square foot lot to even the city consider building something back there.

Oh, wow.

What, what are the new rules and regulations? Let's say, let's say I do have a 20,000 square foot lot, 3-bedroom, 2-bath house. What can I build there?

Yeah.

What additional structures, whether attached or detached, or can I do both?

Yeah. The— and, and that is a— it's a good question, Joe, because you allowed me to answer and explain, because people think that the bigger the lot, better for more ADUs. And sometimes a bigger lot could be a big problem because the site improvements that you have to build around and not so many units because at the end of the day, what we sell it or rent it is the house. And if you have a big lot and you can only put like 4 or 5, you have a big cost, a big impact in your cost. And I have a few investors that, oh, I'm going to buy this lot, raw lot to build ADUs. And then you go there, there's a big slope. You have to pump the the drain system, the sewer system all the way to. So start adding retaining walls. You start adding cost that the ADU is not going to pay for that cost at all. So the first thing you have to do is when you have a big lot like that, you go to the city, say what is the zoning treatment for my lot? Is R1, R2, R11? Whatever, and with that zoning, you know exactly what you can build. And if you can build X amount of units, and you calculate how much you're going to spend around it with the site improvements, and that makes sense in ROI, then go for it. But for me, the tip that I give to investors is go. for residential lots with residential areas that already had a sewer system, drain system, that's flat. So you don't have to spend site improvements, then they'll have less impact on the return on investment.

When you build ADUs and you build a separate one, because yes, you can attach it to the house. Are all the ones that attach to the house called junior ADUs or no?

No, the most popular ADUs are attached to the house.

Okay.

It means that you build the ADU attached, literally attached to the house. You, you have a wall that connect— not connect, but next to the one wall for, for both houses. You have a detached, totally separate, and you have above garage. You can build above the garage. And garage conversion. We have basements, but we don't have basements in California. Other states, you can convert a basement, but those are the most popular ones. And and I'll say the garage conversion is the cheapest one, but there everyone has his own challenges construction-wise, different ones. And I had the privilege and the lucky to build all types, so I know. What I'm talking about. But the cheapest one is the garage conversion, and the most expensive one would be the above garage because it's a 2-story reinforcement, all that. But even the, the, the garage conversion, if the garage is all drywall, you have to remove the drywall because you have to insulate and put the drywall back. So it has extra cost. Sometimes the garage is in the same level of the street and flooding, so you have to sometimes raise it or redo the concrete to raise the— to prevent from that. So there's a few extra challenges even for the simple one, but those are the most popular types.

When you're building Obviously, if you're building on top of the existing structure or attaching something to existing structure, you're using, you know, the electricity, the plumbing, the sewer from that structure. When you're building separate, do you recommend all that utility stuff be sent out to the street so that you can bill that separately so that it's not You know, with, with the main house? Is, is that your recommendation, or do you just get it from the main house?

Uh, depends on— in the beginning, uh, uh, now there the city start to demand that, uh, all separate utilities. Okay. But, uh, there's some cities you, you can choose if you want or not. If you're gonna rent it out, uh, most likely people will separate Although you can put a reader, a digital reader to the 1 meter to measure who's going to spend what. But most, most like people like to separate when there's a guest house. They, they don't worry about this. But my suggestion for cost-wise, because depend, depends on every case. The first thing you should do is consult with the power company, ask them to come to the job site and, hey, what is— what can I do here? Because sometimes you're next to a pole in the alley that is a lot cheaper to bring another meter instead of trench all the way to the house. So you just put an overhead and that's it. And you have 2 separate meters, which is the perfect scenario. Sometimes you don't have that option. Sometimes the power company requires extra this and extra that. So you have to— that's why before we make decisions about what is the best way to do it, it's called the power company, the water company, and hey, what do we got here?

Wow.

And then Propose the best solution because again, the big backyard sometimes again could be a problem because you're going to build a detached unit 100 feet away from the street. It costs money to, and if you have a nice concrete driveway going the side, so that costs money. So sometimes the closer the unit is from the street, It's better. That's why you have to play what, what you have.

Yeah. I mean, and it's, it's great for investors, like, as this could be another play because there's a ton of these houses where it's like a 2/1 in the front on like a 10,000 square foot lot. And you're like, what am I gonna do with this? You know, maybe fix up the front house, junior ADU, ADU detached. Depending on what the city will allow, that's 3 units right there. And maybe you could get into it less than a triplex.

Yeah. Yeah. And it's pretty much like flippings. Well, the, the most rewardable thing on flipping is turn an old house into a nice house, right? When we— oh my gosh, well, look what I did. So beautiful. I think doing a comparison with that, is because the problem of housing in California, not only the lack of inventory, the inventory we have is outdated. Because people in the past, we live in a 700-square-foot house with 3 kids, 1 bathroom. I shared the bathroom with my sisters. And we had a big house, but even this. So the inventory we have is not— didn't follow what people need nowadays. So sometimes you go there and say, hey, let's convert to what we need nowadays and make a nicer setup with this. That's, I think, is the greatest reward that we have, that the investor can have when do those kind of developments.

Yeah, no, absolutely. Well, there's that. And then, I mean, obviously it's It's got to make sense cash flow-wise. But I guess another play could be just teardowns too, you know, and some, some houses are beyond repair. Tear it down, build a new one, and then—

Yeah, that's a— it's a good thing to remind that because some cities there's a percentage that allows you to tear down. This could be a deal breaker also if you can't tear down. a holding structure in the middle of the lot. So it's something that I'll add to the checklist when you go to a city planner, say, hey, can I tear down entirely? And yes, you can. So then you can do what you want.

And the benefit of that, I guess, would be there's already utilities there, that there's already utilities at the site so that you at least know that part.

Yeah. When an investor send me a, a lot, a raw lot. Uh, I, oh my gosh. A lot, a raw lot. No, because you can't see much with all the ve— vegetation.

Mm-hmm.

Normally it's a big slope.

Yeah.

Sometimes on septic.

He's like, but it's only 50 grand, so it's good.

Yeah, yeah, yeah. But, uh, it, it's, it's all good, but you have to put there on the—

Oh yeah.

On the, on the numbers.

No, I know. And it's just like when you start listing off everything you do before you even break ground. And all those start adding up and you're like, okay, well, the lot's actually like half a million dollars. Do it like that. So a lot of different plays. I mean, we were looking at one, I know we play him on here, Thatch. He's like Thatch Nguyen.

Yeah.

So he's getting big into it and his strategy is basically you buy a small property, burr out of it so then you can have the land for free and then, and then, you know, build your 2 ADUs.

And that's why it is so popular, ADUs, because option 1, buy a million-dollar house. Option 2, build the $200K ADU in the backyard. So people start doing more and more.

I know as the laws have progressed, I know that you have told me that LA has a ready-to-go ADU plan, correct? And I know you're doing that yourself in San Diego, correct?

Yeah, yeah, yeah, yeah. The, the, uh, that's one of the— I, I say finance is a big obstacle. That's why it opens opportunities for investors, for homeowners or developers. And the other one is the permit process. I know people say you can do this, you can do that, but in reality, the permit process is still a big problem, is a big obstacle. I feel that this is going to be better and better with the time because it's exactly what happened, but it's still a problem. One way to overcome this is to— because the city, the state, Create this pre-approved plans program that every city can have it. But I research a little bit around Orange County and San Diego and Los Angeles, and there's I think it's just a few here in thirty-four cities in Orange County. It's it's it's not there yet. But the idea is to pre-approve you you. You send a set of plans, a package, and they review the whole thing. And all you have to do when you build the ADU is connect what is already pre-approved with the site. That work still needs to be done to the site due diligence and connect the utilities. So yeah, that's one of the things that it's happening and we're doing. We start doing in the— 2023. In San Diego County, like you said, and I think that will be. But even even and that's another tip that I give to investors and homeowners if they want to build the ADUs when we go to the city to check what they can do or cannot, to ask if they have a pre-approved plan program, and because instead of hire and start architects start from scratch, they can. check what they have available and short it to speed up the process. And that's one thing that we do for our clients. Even though we have our own plans, we do our own plans, we don't want to be— do obstacles for that. So we review existing pre-approved plans in order to get going, to get it going. They don't have to do with us. So just do it what we have.

So it's, it's more like pressing the easy button then? Yeah.

Yeah.

Okay. Yeah. Yeah. And that saves money, obviously.

Hope so. Yeah.

I hope so.

Yeah. There's so many moving parts. I mean, when it comes to working with utility companies and, and all that kind of stuff. I mean, I was seeing on Twitter the other day that there's these huge— X, sorry— that there's these huge buildings these developers created affordable housing And some of 'em are going on like 9 months, 18 months for the, the whatever it's called, DW, the power, the, the power company up there to just hook up the power.

Mm-hmm.

And, and there's like, it's ready to go, completely good to go.

Mm-hmm.

And that's like the last thing holding it back.

They're on their lunch break. Yeah.

And so it's frustrating when LA will just cry about not enough housing. Yeah. And then completely just shut down The, you know, the solution.

Yeah. And I think that one makes the homeowners scared to move forward sometimes because not the lack of knowledge, but they hear all those things and that it does encourage them to move forward.

Yeah. And California is notorious for it. I mean, it's probably one of the worst states for developing as far as like permits, utilities, Yeah.

And, and, but that's the— I'm an optimist guy.

Yeah, that's good.

And, uh, I see always the half full of the cup.

Oh yeah.

And, uh, uh, by doing this for a few years, uh, I think, uh, we got a, a knowledge enough to, you know, play those, play the game and help the, the home— because it, again, the end of the day, we need more housing.

Mm-hmm.

We need to make it happen.

Oh yeah. Well, the flip side of it is the more that these get built, there's gonna be more comps. There's gonna be more like, you're gonna have the price per square foot of appraisals once they get built. So the chance of you making wealth or creating wealth and cash flow out here, I guess, will, will be pretty good.

We're definitely gonna need more housing.

Yeah.

For you.

Oh, that's right. And producer.

That's right. Yeah.

I was just planning on keeping it.

Congrats again.

Thank you. Congrats. Yeah.

So yeah, I know that she would prefer Hawaii, but we need to find you something closer. I don't want you guys going to Hawaii.

I'm good with Dana Point too.

Yeah.

Okay.

Dana Point's good. Gotta have the grandmas nearby.

That's good.

Yeah, we need the grandmas.

Granny flats. A couple granny flats in the back.

Yeah.

For sure.

Yeah.

Um, this is the part of the show where we've curated a few videos and I want to get your raw, uncensored reaction right now. Okay, cool.

Let's go.

Let's go, producer. What do we got?

First up, we got, is building an ADU cheaper than buying a duplex?

So if you're a first-time home buyer and you're thinking of putting maybe 10% down, I would consider maybe 5% down and Save that other little bit of cash to convert this part of your house to a legal rental unit, and a couple advantages over just rent by the room roommate situation is you have privacy. So everybody says, "Why would I buy an ADU or convert an ADU when I could just go buy a duplex?" And this strategy is basically just doing the same thing for cheaper. So if you're a first-time home buyer and you're thinking of your house to a legal rental unit. And a couple advantages—

Okay, sorry.

She's back.

I'm back.

You have to go computer first, hit computer, and then you can do the close.

Okay.

Oh, hasn't been here. Thoughts on that? Is it cheaper than buying a duplex?

Uh, the first thing that came to my mind when I was watching is that, uh, I think it's not about how much it is, is about how much stomach you have to do the investment. Like, sometimes you don't have any experience, you feel safer doing the duplex, do the duplex. That's nice. That's an opportunity. But if you're willing to create something from scratch, the new house that you're gonna make it nice, I would say go do ADU. I, of course, you know that I love to build those houses.

Yeah.

But, uh, I, I, I, I don't wanna say that is this or that. It's, uh, it could be both. Why not?

It could be both. I mean, I think from that standpoint, it's like, it's just a numbers thing really. I mean, if you're gonna, you know, I mean, if you get a duplex, well, I was gonna say you get a duplex. I mean, a San Clemente duplex is $1.5 mil. I saw one for $1.5 mil.

Oh, you're shopping, huh?

I should have bought it.

So, I mean, can you beat that with just buying a single-family home and then putting an ADU on there? Can you, can you beat that?

I don't know.

Yeah, maybe. It, it depends on— it's hard to say that. Uh, yeah, depends on the, the, the duplex you have, depend on the, the deal you have.

Let me give you the experienced outlook. I like what he said about privacy.

Right.

Okay. Like, build something back there that, you know, Granny can go back to, or, you know, even rent it out. And it's separate. I still love my home. I love the privacy. But then I also want to make some money. And so I'm going to do ADU. Buying a duplex, you're really— it's, it's like you said, it's kind of an investment approach to it. And then like you're literally living next door to somebody, um, not that much privacy, right? So yeah, I think you're right, you know, that, uh, just I guess it depends where you're coming from.

Yeah.

And, and even with the ADUs only, depending on the numbers you have, you buy and hold or you buy and sell it. It all depends on the numbers, how the numbers come, right? Even in the same strategy, you have decision based on numbers.

Yeah, yeah, yeah, absolutely.

I learned with this guy here that it's a numbers game, right?

It's a numbers game, yes. Yeah, yeah. But there's, there's also some emotions in your decisions as well. It's like Sorry, I don't want anybody living with me. I still have a big house because I raised 3 kids in it. But there's no reason for me to sell it. But then there's also no reason to have anybody move in with me because I value my privacy.

What are you hiding, Joe?

If I had the room in my backyard, I would consider an ADU. But my backyard's like 20 feet to the slope. And obviously I can't build on the slope because it's not mine. And I'm not hiding anything. I just don't want to share.

Yeah, I hear you.

Yeah.

Like to walk around in your—

Yeah. I mean, I share it right now with my grandkids. It's so funny because my daughter, she's the youngest, she came over the other day. And she took a two-hour nap, and she says, "Well, I took a two-hour nap in Trenton's room," and I go, "You know that was your room before you you gave it to Trenton." You know, it's like I still consider it your room.

Yeah, exactly.

Okay. Yeah.

Don't forget where you came from.

Yeah.

What do we got?

All right. Up next, we have.

Hold on.

Let me find my mouse here. There we go. How much profit can building an ADU make you after one year?

And what would you do?

I'm curious.

If you did it tomorrow, would you, would you build to sell that or would you build to rent it?

Both. I would rent it for a while and do, do some Airbnb and kind of get some of that principal down and then eventually sell it.

Okay.

But my property, for instance, I make— after I built my ADU, it cost me $298,000. I get about $3,000 a month from Airbnb. That's after cleaning and all that and the taxes, of course. So I can keep doing that and keep making $36,000 a year plus for my family, which helps me live mortgage-free. Or we actually use it for daycare.

Sounds about right.

It's more expensive than my mortgage. But we're also thinking about, because we have the second kid now, we're thinking about selling. And so I got it appraised by a few different real estate agents and they evaluated the ADU around $450,000 and I built it for $298,000. So you're looking at a $150,000 add right there. So you make $150,000 in a year if you build an ADU.

And what would you do?

I'm curious.

If you did it tomorrow, would you build to sell that or would you build to rent it?

So if you're a first-time homebuyer and you're thinking of putting maybe 10% down, I would consider maybe 5% down and save that other little bit of cash.

So I—

that's music to my ears because when I started, It wasn't that. The appraisal was super different. Remember, Joe?

Yes.

They appraised an ADU like a garage.

Yes.

Right.

Yeah. And that was ridiculous because the homeowner paid like $200K for ADU and all of a sudden they say it's worth $70,000, $50,000. So now when I hear that, it's like, oh my gosh, that's one thing on top of the 1,000 advantage benefits that the ADUs can give to the homeowner.

Well, real estate is so slow in that way to where if there's anything new, they need their comps to go off of. So if there's no comps and you're the first guy with an ADU, how are they justifying that?

And, and that's what I told Rafael from the beginning, is that, you know, you have to look at the appraiser's side as well. It's like What I was telling him at the time is, you built a 1-bedroom ADU back here. It's a 3-bedroom house. The appraiser is going to go find 4-bedroom homes in that neighborhood. And that's how he's going to do the evaluation. Where now there's more ADUs in that community, he can actually use that to compare. Okay, and then maybe come up with this $150,000 additional. So it's a lot better today than it was before, but we had to grow into that pain.

Yeah. And what Joe's saying also, I went to the big Disney development in the desert, Cotino, just curious to see the finishes, learn what they're doing. A big development company with all the money in the world in marketing to research for what products is selling more. So I, you know, I'm, I'm not— even if I spend all the money that I have, I'm not gonna match and beat, uh, Disney.

Mm-hmm.

That's why I like to see what they're doing. And guess what, what they had in the big, uh, gate community? Well, there's different size lots in the same gate community, gated community. And the bigger ones, the 14,000 square feet lot, a nice house with an ADU. So that tells me that, uh, that's—

there's demand.

It's not— there's no way to go back, you know. Yeah, new houses with ADUs.

Yeah, I agree.

Yeah, yeah, good to know. Can you get one built for $200,000? You're saying $200,000, is it possible?

Yeah, depending on the area, depending on the finishes. Yeah, and, uh, it's a good question because if you build for— as a business, You have to think about maintenance. You have low finishes that durable but low-end finishes. And then depending on the size, there's something that you can do it.

But for you, he's got a family and friends price.

Oh.

It's $250.

Buy one, get one free.

That's right.

It's $250.

Yeah, it's $250, family and friends, because those are the most difficult to work with.

That's true.

It's true.

It's worth that ache.

Yeah.

Or you can do that. You can say, you know what, this is worth $250,000, but I'll give it to you for $200,000.

Yeah. That's fair. I'll let Joe negotiate the price with you. There you go.

All right, we got one more video.

Okay.

Are ADUs actually worth it or a hidden headache?

First, I wonder how permitting will play out at the municipal level. Like, true, ADUs are allowable by right, but there's still a permitting process at the town or city level, and I have a feeling that there will be some that will still try to limit ADUs. But also, I hope that there's some towns that will try to embrace it. Now, for those that unreasonably restrict them, which would go against the law, I wonder what qualifies as unreasonable. And what resources do homeowners have to challenge the reasonableness of a decision? Next, I question how lenders will handle ADUs. So currently, when you buy a multifamily, the rent is added to your income so you can qualify for a higher purchase price than you would a single-family with no rental income. Since ADUs will be legal, I would think the rent collected would now be counted in your qualification to purchase a home, even though it's technically a single-family. So this would make it much easier for some buyers to qualify for a home purchase, especially given rates now, and also allow others who already qualify to be able to purchase a larger or nicer home. So these are just a couple of many smaller issues that need to be ironed out. So in the early stages of the rollout of the Affordable Homes Act, I'd expect to see some technicalities being worked through, which could delay ADU projects in certain towns, those that choose to push back. So It's just something that we'll have to monitor here.

Thanks for—

I don't know what like music he picked. It was so like, um, sorry. Thoughts?

Yeah, 100%. I agree. And, uh, and that's why we're now, we're, we're ready to the next step because the, the, to, to start building ADUs and, and have them ready to the homeowners to buy it because the, the biggest problem is the construction. All the permit thing, all the process. If you don't choose the right people to build it, it could be a big headache. So the idea is to, because we know how to do it, to do it and have them, hey, instead of building an ADU, why don't you buy a house with the ADU and enjoy the benefits of the ADUs? So that's something, but I agree 100%. And regards the finance, the lenders back then when we started, they didn't know how to do it because you have one house as collateral and all of a sudden you have 2 houses in one collateral. How we can do that? So they try to figure out, but with time, they, you know, learn, and like everybody in this, uh, uh, ADU journey, and now they're more, much more easier on the, on the finance part of it.

Once they start making money off of it, they're like, we love ADUs. It just takes those people in the beginning.

Yeah, the, the, the count the rent as a, as a collateral and valuation. It's a good thing. Yeah.

Who's the hardest person to work with when you're going into a city And you're trying to pull permits and figure out feasibility, is there one particular—

Gavin Newsom.

Yeah, it all starts with him.

Yeah, no, the, the basically for the audience understand, when we, we go to the city to ask if we can build an ADU or not, we have 3 different departments. We have the planning department, which is the first one. It's about the setbacks, Layouts, design, how, how, where the ADU is going to be, and, and it's going to look like they want it to be. And once they approve that, then you go to building department to check for the construction of the ADU. And then there's a third department, public works, how you connect sewer. And I wouldn't say there's one there. It's all based on the— it comes from the top. The, the, the guys that work there are super nice. They do their jobs. But the thing is, all the cities in California need to provide a certain number of housing to the state by law.

Right.

And all of them, all of them are behind that number.

Right.

But some cities are in a worse situation than the others. The cities with the worst situations are the ones that Facilitate the ADU process. So that's come from the top. Say, hey, we need to brand friendly ADU. We accept everything. We ease this and that. So those are the cities that help to the other ones create more obstacles.

Okay.

If that's what I you you have, you can go to the the housing. I forgot the That's the website now, but you can consult which cities are providing the number of housing to the state.

I saw some articles where I think maybe it was Newport or Tustin or something and Huntington.

Huntington.

Yeah, we're behind.

Yeah, they're at the bottom.

And so the state basically shoehorned in a big development like, hey, you guys aren't, aren't like, you know, keeping up with your numbers. So we're going to approve this project that these developers have. And it's just like a giant freaking—

Yeah, but Huntington, there's There's one thing, special thing. I built my first ADU in Huntington in 2019. And because of the hotel, hotels, the hotels see ADUs as a big threat because of the Airbnbs. There's nothing to do with the homeowners. It's something to do with Airbnb and hotels battle or something. So they see ADUs as a potential Airbnb. Bro, so that's, you know, have to step in eggs.

It's kind of what happened in Anaheim too, right? You know, they, they started to do the Airbnb stuff and then Disney says, yeah, no more, and they stopped it. So you can't do anything Airbnb in Anaheim. Yeah, for a long time. Yeah, yeah, money talks.

Yeah, he does talk.

And he said Disney has more money than God, you know.

Yeah, yeah, possibly. Wow. So where do you see this all going? What's the future of this?

I think the future of this is homeowner houses with more and more ADUs. If you don't have an ADU in your property, you might lose some market value because it's going to have— it's super popular, super cool. It feels all-purpose, like it's a multi-generation property, what we call. You can use for grandfather or children, or it's, it's going to happen and it starts to add value. People selling houses with ADUs, which is super new, like a bonus. You know, you have an ADU, have more bargain, more value. starting this, and it's going to be more and more. Just to give you an idea in terms of numbers, the ADUs started in Vancouver, and today, uh, 35% of single-family homes, there's an ADU on it. And here in California, we have barely 1%.

Wow.

So that gives you the size of the market, the billion-dollar market we have ahead of us. And again, if we think, project in the future that we're going to have a lot of ADUs, the most important thing is the way you set up your ADU. It's like the cars, like the T Ford, all black. People have cars now, they want a different car.

Mm-hmm.

So the, what matters is, okay, this ADU, it's, it's well set up privacy-wise, the way it blends with the property. That's the very important thing because nowadays people just, I call Frankensteins, and then we just put a prefab. Yeah. Yes. But sometimes not only prefab, like sticky build also. But that's why important to think the property as an ADU as part of the property. Something that an old friend of yours arrive in your house, say, Well, you can tell that there's an ideal here. Oh my gosh. You see the, that's, I think is the, the future and more and more investors helping to do that. More and more homeowners willing to do it, paying for their bills. I think that is, is the future.

Love it. How can people get ahold of you if they wanna work with you?

They can email, Rafael@plushomeadu.com or Rafael, R-A-F-A-E-L, @plushomeadu.com.

Perfect. Yeah.

Awesome.

Cool.

That was great, man. Thank you so much for coming on today.

Thank you so much, you guys. I love to talk to— I like the dynamic, like the vibe, and it's my favorite subject.

Yeah, master.

Thank you for coming. Appreciate it.

Yeah.

Yeah. And you didn't call me old the entire time, so I'm grateful.

Yeah.

I, that's one thing that I wrote in my mirror today.

Yeah. Don't call Joe old. Calling, call me experienced, but not old.

That's right.

Yeah. Do we have any people?

Oh yeah.

We forgot.

Sorry.

We have a couple in the chat. We got Liz asking, What got you inspired to start building ADUs in the first place?

Uh, the first thing was that, uh, uh, I saw this big problem, uh, the, because there's a necessity of housing. Uh, and I think coming from outside the States, it would be something that I could help, I could add. to what already is going on here. Also, I, as a real estate developer, I learned with my father how to design houses. We used to have millimeter paper and the furniture was part of this millimeter paper. We put the like—

Inches. Inches.

In inches. Yeah. Sorry.

Not millimeters, inches.

So I love to design this. this is small. I'd love to create small space, make more out of it. That's— the best part of my work is when I'm designing the house for that space. And then after a few months, you have your thoughts, your ideas into reality. That's why.

Thank you.

Nice.

Great.

We got one more. Stephanie asks, do you think buyers are reluctant to cohabitate? Is the general population too independent or private?

When I start, I think the ADU is a success because the people used to cohabitate. It's a cultural thing here. I remember when I started, I visit a property in Santa Ana. There's 5 bedrooms on a Sunday morning. with 5 different people living on it, sharing the kitchen. That's kind of a roommate culture we have here in America. I think the ADUs is— I heard a student, I participated in a podcast with the students, they call ADUs primary, prime accommodations. Because instead of sharing the whole house with a lot of people, you have like only one with a nice house separate.

Mm-hmm.

So I think this co-living is also something that will come with the ADUs and they're perfectly made to each other, you know, better accommodations for cohabitants. That's what I think.

Plus cash flow.

Yeah. No, and it's, uh, Alex, the homeowner is the end user. If the homeowner is happy, uh, that makes sense for the investors. Otherwise, yeah, right. So, and I, I can see over the years my clients, the homeowners, they're totally happy and they making money out of it. So it makes sense, you know.

Love that.

I actually have somebody living with me right now and I'm getting ready to kick her out. She was snoring last night in her cage and if she keeps it up, she's out.

Yeah.

Okay.

I doubt that.

I'll give you idea that, that property with the slope you have, you can build on the bottom of the slope.

And push her out and push her over.

Yeah.

You would never.

Yeah.

You would never. I know.

You wouldn't even let her sleep outside. You'd be like, I think she's cold right now.

Let her back in. She gets wrapped up in her cage and stuff. She's very warm in there. But she's the type of dog that snores.

Yeah.

It's like, wakes me up in the middle of the night. You know, it's like, oh my God. You know? And of course, she's literally sleeping right outside our bedroom because when we first got her, she was downstairs.

Oh.

And then she'd bark.

Mm-hmm.

Because she was lonely.

Yeah.

So we had to bring her upstairs. So that's how spoiled my dog is. Yeah. Yep.

It's funny you say that. Our pre-approved model, there's a, a room that is, uh, we call flex room. I also got the idea from the guys in the desert.

Yeah.

The flex room that you can do whatever you want with that room. Okay.

Yeah.

One of the options is a pet Okay. Yeah.

Yeah. I've got 4 flex rooms in my house, but she, she wants nothing to do with them. She wants to be right there.

Of course.

Right. You know, next to us. Yeah.

You know how you fix it, right?

Yeah, I do.

You let her out of the cage.

Let her sleep on the bed.

That's even worse. That's worse because like, I can't move around, you know? She's a small dog. I don't want to push her off the bed, you know. So, you know, she's in her cage, but she's definitely snoring. Not a good thing. Well, thank you again. Appreciate it. That was all of them, right?

That was it.

Yeah.

Okay.

Thank you guys so much. Uh, we'll be back here next week, and then we have our meetup on Monday, so we'll see you there.

Meetup on Monday. If you want some more advice on real estate investing, reach out to us one-on-one.