The Beginner's Guide to ADU Investing (Accessory Dwelling Units): Shane Sanders and Free Real Estate

Hello and welcome back to Multifamily Strategy, the Owner Meeting Podcast. Today we have a friend of mine, Shane Sanders. He actually built a tiny home that I once bought and then gave back to him for my resort. I like this guy an awful lot. He's been doing something in business that is super unique. It's something that you can do in many, but not every state yet. This has been catching on like wildfire on the West Coast, the ADU strategy, but the way he's doing it is super interesting. He has a way to get free land, add to his income, and he did it all in a down economy. I am super excited to share the strategy with you guys, what he's been doing, how he's got there, and you guys can see if the same strategy can work for you. Shane, welcome to the podcast.

Hey, thanks for having me. Pumped to be here.

Absolutely. Okay. So give me a 30,000-foot view of what it is you're doing, and then we'll dive into it as we go along. What, what is the strategy we're going to be talking about today?

Okay, so basically the high-level view is buying a single-family home or a duplex on a large lot that's in city limits, that's either on a corner or an alley, and then building 2 ADUs on that lot and then subdividing if you can. Normally you can't, but it depends on the city in this situation. And when we can't do that, we can go through Washington condo code and basically subdivide without subdividing these properties. And that way we create, you know, a lot of value in the ADUs because now they can be sold or financed independently of the main house.

See, now that is impressive. Subdividing without subdividing. We're going to get into all of this on today's episode, but teaser, we're not getting there just yet. First of all, where did you start? What have you been up to the last few years before you stumbled upon this strategy?

Yeah, so I went to college here in Ellensburg at Central and went through the construction management program, got out, got a corporate job. And then wanted to make more money. And my first year, I got a raise of like 63 cents an hour or something like that after a year. And I was like, "Well, this isn't going to work out. It's going to take me 40 years to really start making money." So I started a fence building company on the side and was doing that nights and weekends for a few years. And then I quit my job and did the fence building thing full-time. Right around that time, I bought my first rental property. Just a single-family home when interest rates were 3%. Did it again. And then did the fence business for about 5 years. And then I'm pretty much done with the fence business now. I might have like one more job. And now I'm full-time on this strategy.

Oh, that's awesome. And I love the fact that it's always been an entrepreneurial— it's like, hey, I got out, I was in fences, I built this to a certain point, it ran its course, I found a new thing. I found a lot of investors and a lot of entrepreneurs have found strategies like this where you have something that you do to make money. It could be something that you enjoy. It could be something like, hey, this is just a need that I'm meeting, right? And as you're doing that, you discover this is the one thing that I do the best, or there's a change. In the case of Washington State, there's been a lot of changes to the ADU laws. I don't believe you could have done this 6 years ago, could you?

Yeah, maybe in Seattle, but I don't think so. But most of the towns I invest in, You definitely couldn't. Most of them only allowed one ADU and it could only be a certain amount of square footage and everything like that. So yeah, it's pretty much all—

When did the law officially change to allow the multiple ADUs? I know it was fairly recent, last few years, right?

Yeah. Well, it's a little bit of a gray area. It passed like 2 years ago and then June of this year actually, so just a couple months ago was cutoff for cities to adopt it. But like one of the cities I invest in, Ellensburg, They basically have a property where they're requiring I do street improvements if I build a second ADU because I've already done one ADU there. And the street improvements would be like $80,000.

Oh.

But the reason I bought that property is because in the new state code, I read the whole pamphlet and it says cities cannot require street improvements based on the fact you're building an ADU. But Ellensburg got like a 1-year extension. So it kind of depends on the cities. I didn't know that was an option. So that kind of sucks, but I'll just wait to develop that second ADU. So really depends on the cities if they got that extension or not, or if they even qualify for this, where most of them do, but some of the super small ones I don't think do fall under that category.

I've always thought that that just felt almost criminal for like the small— I mean, you're doing ADUs, right? You're not like a major developer in that you're built— you're not building a 200-unit apartment complex, right? I did a hotel where I had a beat-up motel, like really beat-up motel downtown Moses Lake. And they required that we replace all of their, the transformer boxes for the electric to redo our panels. I'm like, gosh, we have Zinsco in there. They're a fire hazard in your beat up hotel. I am cleaning up the main street. I'm adding a little sprinkle of retail in there. New roofs, new laundry rooms. We're taking out, we took out two drug dealing tenants and they were like some of the big drug lords out there. We cleaned this thing up. What is the reward? Hey, can you spend an extra $65,000 when you upgrade your panels to upgrade our transformers?

Yeah.

There should be a threshold, in my opinion, of the dollar size of your project. Mm-hmm. For what you have to do in improvements. You just paying for city stuff because they can pass it. Unfortunately, it's rampant out there. Grant County is right next to Kititas County. I mean, I'm just right down the right down the freeway from you. Some of these things, I don't think they should be allowed to do it on ADU. And it looks like they did address that in the incoming law. So that's exactly— that's good stuff.

Now they can't. Exactly.

So how did you get into the ADU build? You went from— I mean, it's not a huge jump right from fences and ADUs, but I mean, an ADU is not a fence. What was the— what was the inspiration there? What was the— what was the pathing to ADUs?

Yeah, so one, I've just always been in construction. And so, I wasn't that timid to jump into it, but I've just always been interested in tiny homes, ADUs, just kind of affordable living. Even like mobile homes, I've yet to buy or set up any mobile homes, but it is something I'm interested in potentially doing mobile homes as ADUs. I'm a big believer in affordable housing, creating that lowest price housing just because I think there's such a demand for it when the economy's good and when it's bad, honestly. There's so many people just struggling right now. I just really believe in that asset class.

I think it's particularly good in a down— I love entry-level housing, hence like the hotel conversion where you come in, you had kitchenette, nice flooring, you make a really nice space. But a lot of those rooms, they're like 400 square feet. It's not a huge— I mean, for a hotel, it's a decent size. When you convert it into an apartment, it's a pretty small apartment. You have a lot of resistance to a down economy. You're not going to move down from your affordable housing, right? You're not going to go from a tiny home to a tent. So your options there are fairly limited. And you can make really nice spaces. Like, they're small, but you can make really nice spaces in areas that that's an actual need. You're doing something good for the city, good for the economy, and you tend to make a lot of very stable money doing that.

Yeah, exactly. And I've always heard too, like from Chris Krohn and just other people, you know, when the economy does tank, it kind of compresses from the top. The bottom can only, you know, go down so much. And so, that's kind of why I like that. That and just the cash-on-cash return is better the lower I go typically. So, that's why I'm all about that.

Yeah. I'm a huge fan of it. And just as a business owner, I like that the bulk of my money is in entry-level housing, which means my money is boring, my money is predictable, there's not that much going on. I don't need to have this massive, ridiculous, crazy upside. I prefer stability over anything. Yeah, but you tend to also have more margin on those because for some reason people like to have trophy properties and Class A stuff, which has a lot more variability to it, and they'll pay a premium for it. So we'll take We'll take everything else. I love it.

Yeah.

Now you had mentioned there's a way to get the free land. You've hinted at this. You've talked a little bit about subdividing or subdividing without subdividing. For a new investor or newer investor, tell us first of all, what is an ADU? And then let's talk about how you're getting the free land.

Yeah. So an ADU is an accessory dwelling unit. And actually what I typically try to do is DADUs or DADUs, what I call them. And that's a detached ADU. So basically it's freestanding structure. It looks exactly like just a small house. And now with the new code, they could be up to 1,000 square feet. So basically, I try to get— yep, yep, if it falls under the new Urban Growth Act. So, and actually, I'm kind of figuring out a little bit more and more as I go. I don't believe closets are counted, stairways and stuff like that. So you can, if you're strategic, squeeze them up to like 1,200 square foot, which is pretty awesome because it's basically just a regular 3-bed, you know, smaller 3-bed, 2-bath house, which is pretty sweet.

I, uh, for my entire time living in Renton, Washington, so 7 years, my first 7 years of marriage with my wife, we lived in a 1,200-square-foot house in city of Renton. That is, yeah, an absolutely— that, that's a full, full-on house.

Yeah, it gets the job done, that's for sure.

Yeah. Oh, I love it. Okay, and now you can fit 2 of these. So how are you, um, how are you finding the land for these? Because that's— you have to have space to buy— you're buying a property with a house on it already. You have to be able to build effectively two— they're not even that small, like two full-on houses on the lot. How are you finding the land?

So I've actually never bought anything off market yet. I'm trying to, I'm actually looking at a couple this coming week, but everything's just been on Redfin, on the MLS. What I do before I even look at the house, every single thing that pops up in Ellensburg, Wenatchee, in my markets, I go straight to the map, zoom in, and just look at the house placement on the lot. And also if the lot, obviously it has to be on a corner or an alley. And then I'll basically zoom in. And if the house is right in the middle, sometimes it just kills the deal. It has to be all the way in the front or all the way in the back if it's smaller. And then you could turn that into an ADU and then build a single-family home in the front. So I'm just finding everything on market and, Yeah, house placement's huge. I look for, you know, access points for the other units because sometimes people do ADUs and they really do it like a mother-in-law to where there's a sidewalk in between the house and the ADU and they're not fenced off where I'm having separate tenants in all these. So I try to do it to where when you drive by one of these properties, you're not going, oh, it's an ADU to that house. It's just a regular small, new, nice house. So I try and do that just to, make it, you know, its own property.

Well, one of the fun things in today's market is there's stuff that sits around on market a little bit longer. So you have more time to shop some of these. So, so the main thing you're looking for is you're looking for the, you're looking for the, the actual physical space on the lot to build your project. And then you're looking at access. How often are you finding these? If I would, if I was to go to Redfin in my area today, how long would it realistically take me to find a deal?

So it really depends on which city you're in. I'm kind of lucky because in my markets, Wenatchee and Ellensburg, I'd probably say half the properties in this town are on alleys, which is great because that way we can get the access from the back.

Oh, that is fantastic.

Yeah, where cities that are, you know, 1950 and newer, you're not going to have alleys. They basically did alleys from like the '20s to the '50s roughly. Unfortunately, because I really don't like buying old, old properties, but with this strategy, that is one of the downsides. Is the existing house is typically 1920 to 1950, but then the ADUs are brand new.

So yeah, I was gonna say, so you're buying it, you're buying an old property, but then it ends up coming with two new properties. So it's your— yep, yep. That's a cool, that's a cool strategy. Now, uh, how's the subdividing work? I, I understand, you know, if people have done this before, been in real estate a while, but if you're newer, how does the subdivision work and what does the process look like with the city to get that done?

So I've actually yet to subdivide. I have had one property that qualified to do it, but they had so many fees and stuff. And it was like, I think they said it was going to take maybe 12 months. So I was like, I'm not going to do that. I'm just going to build ADUs and then condo-ize.

Okay. And this is, this is your strategy for subdividing without having to subdivide?

Yep, exactly. And part of the new code talks about like simple lot splits and stuff like that. And I've yet to dive down that just because the cities haven't quite adopted that yet where I'm at. So that's something I'm going to dive into and maybe it won't be condoizing in the future depending on everything else that comes with it, because a lot of times they're like, well, if you, you know, subdivide, you got to do street improvements and pay all these fees and this and that. So we'll see how that pans out.

Okay. Well, this is interesting though, because condoizing, different states and different cities have different rules around it, but condoizing works in a lot of markets around the country. So this could be a strategy that works for a lot of different people depending on what city you're in. This is really interesting. So what is, what does this process look like? Let's, let's say for an example, hypothetical scenario, I bought my 1920s house, I built ADU number 1. And let's say, let's say we got the second one up too. We have, we have 2 ADUs and an old house. What is your process to condo-ize the other 2 parcels or parcels? It's one parcel, but Yep.

Yep. So the whole time, it's kind of an interesting thing because it actually has nothing to do with the city. So in the eyes of the city, it's still one property, one parcel, or one property, I should say. But when we condoize, we go to a law firm and pay them, and basically they'll draft like a 50-page HOA and create a condominium map. So basically, there is an HOA, but it's like $30 a year or something for the for each property. It's basically just for like a tax filing and to keep things up to date. We go there, then we bring out a surveyor, and the surveyor surveys the property. I'll draw up a map exactly how I want it chunked up. We'll go through that process. It's about $15,000 to $18,000 and takes about 3 months. And then at the end of that, they're each assigned their own APN, and then we can finance them or sell them independently of each other.

That is really interesting. And so the ability to sell those individually, what, what do you— what would you expect for a profit margin on these when you're doing your math, what do the numbers look like for your target project where you're like, "Hey, here's my projections. This is a green light." Yep.

So the profit margins are great because I've basically created a couple of competitive advantages and I've actually yet to sell anything. I'm basically doing a modified version of the BRRRR. I'm going to sell at some point, but as of right now, I'll build them. Then I'll actually do 3 cash-out refis, one on each unit. So my lending fees are pretty expensive because I have to buy the property. Then I have to do 3 cash-out refis. Because I have to release the dirt as collateral of the original loan. I can't just do refis on the ADUs because when I got that loan, it was for the entire parcel. Doing this strategy, there's 4 loans involved doing the BRRRR method of this strategy. And yeah, so basically I try to buy these houses as cheap as possible. And the reason for that is because the house does take a little bit of a hit because we're taking away the land. And now the house is a condo. So they typically take about a 10% hit. So it's not 100% free land, but it's pretty close. I'm probably in each lot about $10,000 calculating in my loss and the condo, or maybe about $20,000 calculating in my loss and the condo fees. But yeah, so we do that and then build the ADUs. And since I'm the builder myself, because typically to go to a GC and have them build it, They're charging right around $220,000 or so depending on the size of the ADU, where I can do that for about $120,000 or so. Once that's all said and done, the ADU's worth about $330,000, and I'm owing to them about $120,000-ish each. So there's about $100,000. Yeah. After all the fees and everything, there's about $160,000 profit per ADU, and I'm doing 2 at a time. It's just over $300,000 profit just for one play.

That's amazing. How many of these have you finished so far?

I've done— so I've built— I've only built two that are completed, but I have two going on right now. And then I've also bought a house with an existing ADU and then condoized that.

That's so cool. What a fun strategy. And One thing that I like about this, and this works really well for most of the West Coast, you can do this. Yeah, you get to do this in your home market. You didn't have to go stretch out to, you know, far out cities or find somewhere like, oh, the tax code was better over here. This is something that anyone can do in their own backyard, which is what I find so interesting about this ADU project.

Yep, exactly. And now, like, the first one that I did was just one ADU on that lot. Now I'm only doing projects where I can do 2 because my condo fee is basically the same and the duration is about the same because I can have a sub hop from this one to that one. Yeah. So it's basically, you know, twice, twice the amount of profit in almost the same amount of time to do 2.

Oh, that's so cool. That's so cool. So this strategy, one, so there's another thing I like, and this is the lesson that I think I would take away from this. I talk a lot about doing things where you have a competitive advantage. You've done a fantastic job of identifying this is like, you have the construction background, you can build these, you can coordinate these teams for this. So you can have, you know, yourself, your subs, you can get out there and you can save about $100,000 a build based on the math you just shared with us cost you about $100,000 less to build it yourself than it would for a contractor to do it. So you make an extra 6 figures every time you do this. You can do deals that other people can't do in this market. You can find a lot and you can find deals that might have a little bit less margin where it wouldn't make as much sense for a builder to do it. And you can come in and still say, hey, I'm going to make a bonus 6 figures on this.

Yep, exactly. And yeah, it's kind of tough if you're not building it yourself in this market just because the ARV of the units are, say, $330,000 at the end. So, if you're into it, $220,000 plus your condo fees and financing fees, there still can be profit to buy a property and hire a GC, but the margin is just a lot more slim in this market where in Seattle and stuff like that could be a lot higher. But yeah, having that competitive advantage helps a ton. And then obviously, getting the land for almost free. So, it's basically the same principles of developing. Your two biggest expenses are buy land and build, and I can almost get free land and then cut my build cost almost in half.

So, which is definitely, which is a very sustainable model. And the nice thing is you can expand this because it's a statewide law. You can expand outside your county. You can expand this as big as you want, which is the next thing I look at in any business is like, number one, do we have competitive advantage? Can I get in here and actually compete? Two, is it scalable? To the extent that you want to scale this, you can scale this about as big as you want. You can add more people, you can add more teams, you can add more acquisitions. Like, this could be as big as you want it to be. There's no lack of large lots that could be condominiumized or condoized. I don't even know what the term is, but yep, exactly. You can turn these things into condos just about anywhere with the state-level laws, which means Washington State is your market. And if you got really crazy with it, Oregon and California have basically the same law.

Yep, exactly.

Yeah.

But yeah, that's it. That's the plan now because I'm still, you know, I've only been doing this strategy for about 2 years and I really wanted to prove it. So now I'm kind of working on building up a team and probably going to get a full-time employee here soon with a truck, a full-time like builder who can go between these projects and get multiple going at the same time. Because as of now, I've only done one at a time, but I want to start stacking that and hopefully start doing, you know, 5 or 10 of these projects at a time and just scale a lot faster.

That's what's the— what is the end goal? What do you want the company to look like? I always try to start with the end in mind. So what is the target for what this company becomes or what this vision becomes?

I want to go big. So I'm hoping to do 10 of these projects or more at a time and stock up, you know, honestly, 100+ of these ADU units and then potentially start selling them as I go. Just to keep whatever leverage ratio I want. So, I'm not getting too levered out but also utilizing leverage. So, I'm planning on scaling it big.

Awesome. I found a really good holding ratio is if you can keep your portfolio above a 1.5 DSCR, the debt service coverage ratio. That is usually a very, very, very safe place where, especially if you have a lot of properties, sitting on about $47 million of debt. If you can pay yourself half of what you're paying your lenders and you have a lot of payments to lenders, it ends up being a lot of money that you end up paying yourself is what I found. That seems to be the sweet spot is 1.5 or higher for a holding DSCR. Banks like to see about 1.25. If you can push that a little farther, it is very hard to lose your portfolio when you have that much fluff in there to pay your expenses and pay yourself.

And yeah, that's one thing with this strategy. It's kind of tricky because once I do this and I basically do the BRRRR and do my cash-out refis, if I pull all that or 75% of that money out, leaving 25% equity, it's a great equity play and equity builder, but I'm really not having any cash flow on those properties. A couple hundred a month, right? Enough to cover CapEx stuff and maintenance. Not that there's a lot of CapEx because they're brand new. But that's why I'm trying to kind of figure out what I want to do. But I'll probably sell every other one or every third one, or hopefully keep doing this without selling and do one project where I do all the cash-out refis and then the next, maybe leave a couple of those owned outright and then kind of go like that just so I can start building up some cash flow because that's one thing I don't have is a lot of cash flow right now because of these cash-out refis.

Well, and on the strategy, you're ending up with new buildings, right? I mean, that's what's— So the strategy here, the cash flow of the business, because this is what you're doing is it's, you are doing buy and hold real estate, but it's much, much, much more development, which means as a business, you're a business that is heavily involved in real estate, like a straight multifamily investment. I learned this buying the resort, by the way, but it's like resort. I own a bunch of real estate in the resort. It's a business that is associated with real estate and has some real estate involved. This is kind of the same thing. You have to have the cash flow of the business, which means, yeah, you might have to sell something to keep the capital up so that you can keep building because your, your limitation is how fast can I build these? Like, that is the floor of how much you can make. As a bonus, you get to hold some real estate. So this is one as an anti-sell-things guy, your business requires or may require.

Yeah.

You buy one, you sell one, you keep one, you sell one, you keep one, sell and keep one. Either way, you amass a massive portfolio, but you have to keep cash in the bank because you're developing, and development is a cash business. You eat cash and multiply it. That's how it works.

Yep, exactly.

The model makes sense to me. This is a legitimate reason why one would sell real estate is—

yeah, exactly—

you can scale faster with cash. The business needs to be fed as much as the real estate needs to be held. So, you have the right balance in there. I think that's absolutely the right way to run this.

Yep, for sure. Very good. Like I was saying, it builds a lot of equity and I'm kind of also living off that while I'm doing these cash-out refis and whatnot because I don't have basically any other income other than I have a few thousand a month in cash flow and then just doing these cash-out refis because They're basically a perfect burr plus like an extra $150 grand. I get all my money back out, leave in the 25%, and then get a chunk. So I'm just trying to kind of figure out, figure out that balance of what's, what's best.

What, what you're in right now and what I'm— I went through this phase. Lots of people go through this phase. It's the hardest part of business where you have to pay yourself and live on your business, which means you have to eat some of the profit for yourself. I found, especially as there's the, you know, all the levels above me. I just, I just went, uh, I just walked a property with a property manager, private company that manages 80,000 units. They are titanic. When she starts a business, she's like, I can just run it at a loss for 5 years out of, you know, I can just pay the payroll and we can just add all the employees immediately. We can do all the, I'll go buy an office for the company. The companies start so much faster because she's like, "I don't need the money. I don't need to draw from it. I can run it a negative for an extended period of time." When you're starting a business, especially in a small town, it's like, "Yeah, your biggest drag is you also have to live while you're doing your business," which slows down the growth of your business. It's very frustrating. You're going through all the steps. You're doing it right. I look forward to when I don't have to take a draw from any of the stuff. You bank enough, you're like, "Yeah, okay. Let's just—" Let's start at the end. We'll skip all the build steps. We'll skip building with profitability. We'll just— I know what I'm doing. Let's, let's run it and see how it goes. Yeah. That's a different level that you and I are both not quite at yet. Yeah.

Seriously.

The, the, the taking a draw, it's like, I have to make a living on this and I have to hire more people to scale it. Yeah. One of the most frustrating pieces. As you, as you scale this, what do you think is the biggest hurdle that you're going to have to overcome over the next year, year and a half to start adding some dimension to this and up your volume?

Yeah, my biggest hurdle is probably going to be building a team. And that was one thing I struggled with, with the fence business. I went from 0 to 5 employees and kind of bounced all around there and just had massive turnover. And that one was a little bit trickier just because you can only pay fence builders so much because the profit margins are fairly slim with the fence business. Depending on how you go about it. But with this one, there's a lot more meat on the bones. So I'm hoping to build out a team and I am still going to sub pretty much everything out, but that doesn't mean I don't need, you know, a full-time experienced builder who's in a company truck with a dump trailer or that sort of thing driving around between the sites. So I think my biggest hurdle is going to be finding the right people.

I have found that that is always the hardest part. Yeah. You end up doing as much firing or more firing than you do hiring. If you do a lot of the, uh, the business acquisition, I usually have to clean house every time we acquire a company. Yeah. So I, I feel you there. I will be, uh, I'll be doing a set of fires this, this, uh, upcoming Friday. That's already— geez— scheduled. They have some equipment that I need back, so I'll be doing that in person, which is my least favorite. Yeah.

Good luck with that. That doesn't sound—

It's all, it's all part of the business. But as you're doing that in the fencing business, in the real estate business, and in all that you've done since college, what has been the most expensive lesson that you've learned? I call this the stupid tax, but what's the, you know, whenever we're new at anything, there's a price to pay for being new. What's, what's been your most expensive stupid tax so far?

So I knew this stupid tax question was going to come. Good, good.

I always ask it long so people have more time to think. Yeah.

So the stupid, the worst stupid tax that I've made or mistake I've made was I bought a sub-2 deal in North Las Vegas and I'm still not completely against sub-2, but I would only do it. I would never scale that model and I do still have that property, but I would try to keep that much in reserves like in the stock market or something. That way, if that note is called due, I could just pay it off. But basically what I did is I bought that property and I rented it out without meeting the tenant, which I've never done. And I didn't hire a property management company. I just posted it for rent on Zillow, got a bunch of applicants, went through everyone, found this one lady that I was looking at, and she was a single mom and she uploaded pay stubs, background check. Company phone number, everything you could imagine. And I looked through the pay stubs. She said she was like an HR director at a company, all this sort of stuff. I called the company to verify and it went to a voicemail and no one answered. And I was like, you know what? I talked to her a couple times. She seemed nice and normal. So I rented it to her and basically come to find out she was like a full-on con artist. She even had like an Instagram account promoting that sort of stuff. And she paid first. Yeah, she paid, got RentReady, and that's what I use now. And I allowed credit card payments, didn't really think much about it. And she paid first, last, and damage with a credit card. And then after like 44 days, I get an email from RentReady saying that she's banned. And I'm like, what the heck's going on? And I look into it and turns out she used someone else's card. And then on the 44th day, because there must be like a 45-day limit to report if someone steals your card or something, they report court it, pull the money out. And then I had to go through that whole eviction process and the place was trash. It ended up costing me like $30,000. I had to fly down there twice and schedule all the repairs and stuff. So that was a stupid tax is not following through with all my due diligence for screening tenants. Sucks.

Well, good thing it's only on one tenant. So that's positive. Yeah. You want to keep the stupid tax to a minimum, but oh my gosh, that's terrible. So she had an Instagram account about scamming places? Is that what you did?

Yeah, I was actually down in Vegas with a couple of my buddies and I was telling them this story and they start like typing in Instagram and stuff and I still don't know her name. That was a fake name, but they somehow found the Instagram account, like with her phone number or something. It was called like Fraud Junkie or something like that. And she did not have that job and just, just a whole deal. Wow. Apparently there's like companies that you can hire to who already have a website of a fake business and like all this sort of stuff. As a landlord, like obviously I should have got a hold of someone, but it's, it was pretty, it looks super legit. Everything looked good. The fake business had a website. Her pay stubs looked perfect, all that sort of stuff. But I just never actually got a hold of people and moved forward anyways.

There are thieves and scammers at every single level. Yeah, I just found out I was underwriting a deal and the PM that the owner was— this is, this is why you visit your properties. The owner was paying for renovations for over a year and what their property manager was doing was logging all of the— logging all of their work orders. And this is a big campus, the 100-unit-plus campus. They're logging all the work orders. They told the tenants, you only get one repair per year. That was not from the owner. And so every other repair, they're going, oh yeah, nope. Uh, repair completed. They paid a fake contracting company that one of their family members owned. They were getting paid to not fix all of the problems in the building. And so of course, when we come in for inspection, there's hundreds of work orders. I'm like, We can't buy this. And I was like, no, I've paid for all of this to be fixed. We found out their PM had been stealing from them since 2023. Wow.

That's crazy.

So the good news is you only got scammed by one tenant. They got scammed by about 112 tenants accidentally at the same time because of one bad manager.

That is crazy.

I just saw that happen. It was not on the deal I'm buying right now. For those who are like, wait, aren't you buying a 144 right now? It is not that building. It's another building out in— it's in Waco, Texas. Yeah. Wild how much fraud there is out there. It was a lot of money. It was an actual lot of money that they stole. Yeah.

Geez. Unfortunately, not surprising though. It's just kind of crazy. Like I'm just learning how involved I have to be. Like on that Vegas property, I get a call from the property management company because now I work with a PM company down there for that property. They're like, oh, the AC unit's out. We need to get this fixed immediately in the next 24 hours because it's hot. And I'm like, okay, gotcha. They send someone out and the bill was like, or the proposal was like $12,000 for a new unit. And this house is only 2 years old. So I call because it said the unit was 9 years old. So I call and I'm like, you guys need to replace a 2-year-old HVAC unit for 12 grand? They're like, oh, it's 12 years old. So I'm like, what the heck? So I don't know if someone, because we've had to get it repaired before. So I don't know if someone, one of these contractors stole it and put an old HVAC unit there or if there's just like, I have no idea what's going on, but I ended up getting someone to fix it for like $2,000. Grand.

Was it worth flying? Just shocking. Uh, property that I met, funny enough, also in Waco, but the property I managed down in Waco, Texas, the ACs would go out too regularly. And what we found was the guy, and this was, I had someone else in the market hire some of the vendors I work with who had had a ton of experience already in Waco. So I, I merged with another manager down there. What we found is the AC tech that they hired We caught him on camera breaking the ACs. So he would, he would fix them and they come back a week later and he would, he would do some, some minor damage to where he'd have to come back and keep repairing them. So he was generating his own business. We caught him. We had just installed the cameras. It was the first week. I see his truck there. I'm like, wait a second, we don't have any, any work for him. Sure enough, he's in there messing with the ACs. Two days later, we get a report and AC's out. I was like, son of a bitch. Oh my God. Wow.

You see him rolling up with a baseball bat, you're like, uh, that should be a wrench, like, to fix it. What are you doing?

Is it wild? He knew just what to mess with in there where it's like, that is crazy. He knows I don't know ACs. Like, an AC goes out, I'm like, okay, well, we need to, you know, we need to do something with Freon or we need to fix a condenser. Wow. For me, it's all just words. I'm like, I don't know. I don't know the first thing about an AC. I know about buying real estate and managing it. I know the cost. Yeah. But dude, yeah, it's, uh, the amount of fraud in every industry has been shocking for me in the last 5 years of being in business. It's just, it's rampant and it's everywhere and it's all the time. If you're, if you're not watching everyone, your employees, your contractors, your property manager, it feels like someone's going to try to steal from you. Yep. Very frustrating. Yeah. No, it's grand for an AC, really. Yeah.

Yeah. And then I— yeah, I know, couldn't believe it.

Oh, that's wild. Right? If you had one piece of advice to a newer investor who wanted to either get into the ADU thing, just get into BRRRR real estate, get into development, any of the things that you've done, if you had one piece of advice to a new investor, what would it be?

I would say Gosh, it's hard to say just one because there's so many, but I would say find your competitive advantage and just go for it. Stop analyzing the deals like crazy. I mean, definitely do your due diligence, but do your homework, do your research, listen to all the podcasts, all that, and then just take action on it and get going.

There we go. Think less, do more. Yeah. That is great advice. And I think that's where about 95% of wannabe investors or small investors are stuck. Yep. You are overthinking this and you will find that most of the stuff you're doing is not relevant yet. Yep.

Exactly.

Go out and do the thing. Create some problems. Get that bad tenant in there. Pay your stupid tax and move on. Exactly.

Yeah. And don't want, don't think it should be easy and don't want it to be easy because like, you know, the harder it is, the better you're going to get. You're going to get bigger, better, faster, stronger, the more problems there are and harder it is. So.

And the harder it is, the more of your competition is not going to do it. Exactly. You want to be in something challenging. If it's easy money, it's not going to last long. Yep, exactly.

Yeah. Because I'm getting hit up all the time now from people who want to do this strategy or build ADUs or anything like that. And I'll talk to them all the time and it's like, "Hey, have you listened to 1,000 hours of podcasts and just learn everything you can as fast as possible?" And it's like, Oh, I listen to one podcast and then talk to them for however long and they just take no action and just always want to do it but never actually just pull the trigger and do the deal. Yep.

It is one of the most common things in the world. Well, if someone did have questions for you or wanted to connect with you, what is the best way to reach you?

You can find me on Instagram @sugarshane_sanders. Sugarshane Sanders.

There we go. I like it.

And I might, yep. And I might be rolling out a course soon on like how to, how to implement this strategy. I've actually been talking to your good buddy Caleb about it, but, uh, been putting a lot of thought into that and might get something like that going here pretty soon.

I've wanted to see someone enter the space and really go all out on teaching the strategy. There's groups that teach it as a part of what they do, but all the best operators, all of them have said they don't want to make a course. I've actually been reaching out to some ADU guys, uh, over the last 2 2 years now? And a bunch of them are like, yeah. I mean, one of them's like, hey, I give away all the information for free and here's my plans for ADUs. And that's fine. You don't have to make money on everything. That's awesome. But there's no one who's like, hey, I'm dedicated to building a community who's actually doing this. Yep.

I know. Exactly. Yeah. Because high level, it is pretty simple, right? Buy the property, build condo-wise, But within that, there are literally thousands of details and so many things you got to watch out for, like all your due diligence with, you know, utility easements. And it just goes on and on and on. So it is pretty technical, but, you know, not rocket science by any means.

By the way, for those people out there who are listening to this being like, wait a second, why do they— why do these guys want to sell all their knowledge? For context, over the last year and a half, I think I've spent about $480,000 in ad spend. It is not free to build an excellent community. If you want to share stuff for free, you can touch a couple people and that's fine. You can do that. The one guy who wants to do that, awesome. If you want to build an awesome company that impacts a lot of lives, turns out you're in an industry that has a lot of obstacles and you have to spend a little bit of money to build the thing. Yeah. It's not that it's not, it's not about making a bunch of money. It's about having the biggest impact. Anyone who wants to do that, just so you guys know, that's what it looks like with these paid courses. The biggest ones cost millions and millions of dollars to run. The mid-sized one can still cost hundreds of thousands of dollars, which means yes, you have to pay to play to get a quality mentorship in today's economy. It's just how it works because if Shane doesn't do it, someone else will spend $1 million a year and become the guy in the space. And guess what? You're going to have to pay that guy instead of Shane. So, Shane, I'm a fan. You started a community. I like the fact that you started in small-town America and you're making it happen. Ellensburg is a cool freaking town for those who haven't been. My wife went to Central Washington University, their remote campus over in Des Moines, Washington. Yeah, but it's a cool college. It's a cool town. You guys have— what is the— what is the brewery there? They, they make that Irish Death, which is like the best. Iron Horse. Yeah, Iron Horse Brewing. They have the best brewery in the state. That was all of my college. That was— you go to the Burger and Blues bar and you get a pitcher of Irish Death. That is like the thing.

That's the stuff right there.

Great beer, great area. But this is the type of stuff that I really do want to see. Someone who's like— I don't want to see another Seattle guy with a course, quite honestly. Small town, came out of Ellensburg. Hey, guess what? We're making a bunch of money. We're getting some free land. We're building houses. We're doing the BRRRR method in a new way with the state law. I love everything about it.

I appreciate it. Yeah, I love what you're doing too. I've been, you know, following you for a while now. It's, it's really impressive. Just to see how much you have going on. As soon as I think you're kind of capped out, it seems like you just keep rolling and going and going. So, I like watching what you're doing.

You're doing the right step. I found I do tend to cap out. And whenever that happens, we need to find more people. And it's a hard push. Right now, I think I'm going to make 6 hires next week and 2 fires. Wow. But it is a constant like, "Okay, if we want to get to the next level, what people do we need to get there?" I have an org chart for everything. My whiteboard, every time we have a mission, I write the mission on the whiteboard and we just do the little branches of, okay, if we got to this scale, we need someone here and then we need these people in acquisition and we need these people in management. Within management, we need these roles. Now we have to map out, okay, who do we have in our org who can wear these hats? Who's already tapped out and who else do we need to hire? And that, that is how, in my experience, that's all you do to build a business. You're like, I am tapped out. We need more humans. Let's go, let's go find our humans.

And I'm taking notes. I'm taking notes because this is what I need to do to start building this up.

It's, uh, it is, it is fun when you build something that expands beyond yourself. I would have never guessed 5 years ago, I left the CoStar Group as an employee. I never guessed that I would have 40+ people in my various orgs 5 years later. And I'm excited to see where this goes 5 years from now. I've, one thing I know, it never looks like how you map it out. But it's a good first step. You go, hey, here's what I think I need. And then you find out, you know, if you're lucky, you were half right and you'd adjust and you pivot and you'd grow. It's fun. It's fun. But guys, this is an awesome entrepreneur. I love that you're taking advantage of the new laws as they come out. That is the— you can play in blue ocean, which is open ocean where Shane got started, or you can play in red ocean, which is where everyone's going. Everyone's advertising. I want less competition. I want something that's new and fun and exciting. You found that here. You're on the front end of it. Absolutely fantastic. Everyone reach out to Sugar Shane here, Sugar Shane Sanders on Instagram. Sugar Sean O'Malley, he's the— what would he— O'Malley's a lightweight, I think. I don't know the— yeah, he's the guy with the colored hair. Yeah, yeah. Shane is the, uh, Shane is the, is the scrappy young fighter in the space. I'm betting on him. You guys should bet on him. Guys, thanks for hanging with us. This is the Owner Meeting Podcast by Multifamily Strategy. We'll see you all in the next episode.