How To Build An ADU And Start Generating Passive Income

Hey, it's Mark Podolski, land geek with your favorite niche real estate website, thelandgeek.com and on this week's podcast, we have a really interesting guest, something Scott and I, a topic Scott and I have not addressed in years and years and years. Scott, how many podcasts have we done?

I don't know, man.

Let's see.

Well, we're like on year, what, five, five times 52 or more? What? I don't know, 200 and some. 300, 400. I don't know.

A lot, A lot. So, but this is really interesting. So before we talk to our guests, you know, let's properly introduce my co host, Scott Todd from Scott Todd.net landmodo.com learn anything about anything investor ninjas.com Scott Todd, are you ready for this?

I am, I am. Yep. Let's go.

All right, our guest today is Ryan o' Connell from How to adu. Okay, Ryan, what the heck is an adu?

You know, law people love coming up with complicated acronyms for simple concepts. This is the whole idea of a backyard cottage, a guest house, an in law suite, a granny flat. And they've existed for a long time because people have a big plot of land and they want to create an extra space to live in or for a family member. But now a lot of cities and states, states are developing these regulations that make it possible to do it legally. And they're usually, they're often using this term accessory dwelling unit.

Accessory dwelling unit. So, okay, so let's say, for example, that, you know, I've got, I've got a big lot, right. And I want to build a casita.

Yeah.

And I go ahead and I get permits, I go ahead and build it. What else do I need to do to either do this correctly or even make a profit from it?

So it's going to be different in every jurisdiction. And I'm famous on my show if you're always saying, I'm not your lawyer, I'm not your mom, but go talk to the planning department about whether you can do accessory dwelling units in your zoning in your neighborhood. But broadly, once a city or a state adopts these regulations that make it easier, then you could be generating passive income by renting it out. You could be saving money by moving a family member back in. Some people are buying houses that might be a little outside their comfort zone, mortgage wise, but when they go, actually, if I can carve the garage into a rental unit, then this mortgage on this higher property, now I can compete on that listing price. And they get in that way. And so there's a lot of different ways to kind of people say house hack. If you, you know, it's, it's sharing, it's sharing your house with another tenant. And there's a lot of different ways that you can, you can make these work for you.

All right, Scott, Todd, what are your thoughts?

All right, so I go and I do this thing, okay, in my own backyard. No problem. I set up whatever. I get some income coming in, but I, I'm not gonna, like, I'm not gonna retire off of my own backyard. So what, can I go and buy another property and rent that unit out and I'll rent out two units? You know, Is that the strategy here?

It's a great question. And it's, it, again, it's going to depend on the jurisdiction. So you always want to check, like if I'm talking to people in California a lot of the time and you're good to go in California, it's a state law and it is very permissive. But there's some areas like D.C. austin that are starting to open up. Minneapolis, when you start seeing the ordinances come through, then you go, I should start looking at this, at this real estate market. Because that's exactly right. You're going in and buying a property that everybody is valuing as a single family residence, including the banks. You're looking at it knowing that within six months, if you're, if you're good and you know, you know what your system is to get that unit converted to an adu. You're looking at it as a multifamily. And so you have a completely different framework for evaluating the potential return on these properties. And that's, that gives you an edge when you're competing with, with people who just aren't thinking ADUs yet. It even goes so far as, like, the MLS setup doesn't have a box for ADU yet. So half the time they're getting listed, when they are built, they're getting listed as multifamily. And then other. And the other half the time they're still being listed in the single family with like granny flat in the description. And so it's all over the map. It's the Wild west, which means opportunity for somebody who's educated and looking for that opportunity.

Interesting. Okay, so, Ryan, walk us through a real life example of an area that you know of where someone took a single family home, made it an adu, and walk us through like a case study, if you would.

Sure, sure. It's an interesting. Because there's so many different examples. Let's pick one really exciting one that showcases some of the things that happen when the market starts to. So in the South Bay in San Jose right now, you can go in and buy a property with a big backyard. And it's one house, virgin land, not a conversion at all. You're going to build from scratch. There is a prefab company called Prefab ADU that does analyzed. ADU builds in under six months. They are pre approved for permits for three of their plans in that city. And so you buy the, you buy the property, you go to the prefab ADU, they hook you up with a 0%, 0 payment 6 month construction loan. You get the entire thing permitted and built within the zero payment period of that construction loan and then you do a takeout and now you've already got a revenue generating rental. That's a hypothetical and you ask for a real one. We just finished a property in Oakland for a homeowner who knows that she is not going to have full mobility for the rest of her life. And she wants to age in place in her neighborhood. And so she showed us her backyard and said, what can you do? And we developed a 737 square foot ADU for her back there. That's all universal design, completely accessible, zero threshold, curbless shower, great lighting. And she knows that that's her dream retirement home. That's where she's going to live and age in place. In the meantime, she's still able to move around her two story up in the front. So she's renting it out a week after putting it on the market in Oakland. The 737 square foot unit is renting for over $3,000 a month. And that's the kind of market we live in.

Now.

She spent a pretty penny, so that's an important thing. I'm going to say she spent over $400,000 building this ADU. But that's the East Bay. It's a crazy place. It's a crazy time to be alive.

Right?

But she is instantly renting that. Right? So that's kind of two examples. Do those help illustrate how people are using these spaces?

Yeah.

Scott. Todd, what do you think?

Yeah. So did I hear you right that you said that this ADU costs are $400,000?

Yeah. Yes. God.

All right, so I mean, okay, I. Look, I know it's California, okay, we're talking about California there. But I'll tell you, okay, like I'm laughing because I live In Florida. And I'm trying to think like, okay, I could buy a whole dang house for. For like 300,000, brand new house, $300,000 in Florida. Is. Is the 400,000 only because it's California, or is the 400,000, like what the ADU is really going to cost me, say, in Florida?

That's a great question. It's really the California market driving that. In the East Bay market in particular, you go down to LA and people are completing these for under 200,000. If it's a conversion and they can use the foundation and walls, then they're very reasonable. I don't want to set bad expectations because it's still an expensive process to build a house with a bathroom and a kitchen and all the utilities and a Foundation and Kettle24 in California. But it is uniquely East Bay that it is in South Bay, that it's just crazy right now. The thing that I will say in terms of cost is that a lot of the ways that ADUs are getting regulated and allowed. The planning code is very progressive. So the planning department has done a lot of innovation in Portland and California and these other metros that I was mentioning earlier, like Minneapolis. But the building code is a little archaic. And the building code is designed for larger houses the way that the Title 24 energy calculations are done on small homes like ADUs, because these do tend to be smaller. They're very. It's just not designed right. The ADU surface area is very small, but we tend to put a lot of windows in them so that they feel big. But that ratio of big window to small footprint means your energy calculations are really bad. And so you have to do a lot of insulation and things to make up for that design element of it being a small or tiny house. And that ends up with really heavy two by six construction, tons of insulation, a lot of insulation under roof, things like that. And that does drive the cost up a little more than you're used to. Also, small spaces in general have higher cost per square foot, but the astronomically high cost, that's because it's the East Bay. And I spent a lot of time letting people know. I'm sorry, but these are expensive projects in California. Got to keep your eye on the prize.

Right? Right. But I can imagine, like, you know, let's just pick on Scott, right?

Sure.

He's married, he's got kids, you know, the kids and his wife are not going to be thrilled about him building an ADU in his backyard, having a stranger living back there and Using his amenities. Would they?

Yeah, that's. That's one for Scott to answer.

I'm not, I mean, you know, is this a trend? Like, I don't know, is this a gener, a gen Z? I don't know what gen it is. You know, millennials are that are in the sharing economy or is it more investors? I don't live there. Here's the house I rent. And here's another house I rent.

Yeah, you're spot on. And this is. A lot of the people like me who kind of got come into the ADU market have it all backwards. They think that it's all investors. Investors are very important audience. And that's why I'm speaking here today. Right. I want the message to get out because investors develop infrastructure and that ends up helping the homeowners who are trying to do one offs. But the truth is, 85% of the people I talk to who are trying to develop an ADU are not renting it to a stranger. They plan on keeping it for themselves. They plan on renting it to a family member or a very close friend or the new one in the past year is they want a home office. And this is the lightest way to get a permit without public notice, without all the discretionary planning process in California. And so it's usually people creating space for themselves.

I see, I see.

But then within the tree, it's like you want an office in like you want to upgrade from the grofus into the space in the back. And it's. I'll tell you what, it's exactly what I, in a way, I kind of dream of. I tell my wife all the time, I would love to have a little bit more space so that I had something that was outside the house, that was this other unit. And, you know, I could work back there, have a nice. I could see like having a nice little walkway path to it. Think of my own Oval Office, Mark. That's what I think of is like my own oval office. It's on the, it's like close by. I have a little garden path there. I can have the photographer like taking pictures of me as I'm walking to the office every day with you, you know, when you come to visit, you know, it's Landmodo headquarters.

I want an oval office. My wife wants a rose garden, but she keeps spelling it rose.

Right, Right. Okay. So, you know, I've been thinking about this for a while. I could build a casita in my backyard, but I don't know how to do It I don't even know where to start. So is this for someone like me? When I go to how2edu.com when am I going to get there? How's this going to help me?

Yeah. So I think everybody wants to know where to start. And if you've never developed a project before, then it's crazy. You've got to figure out financing, you've got to figure out construction, you've got to figure out planning and permitting. And I ended up having the same conversation with people over and over about just how to start, how to look up your local laws, who to talk to when you run into some challenges, how to budget these things. And that's why I built this website. I'm giving all this advice away for free because if I can get you started, a lot of the time, you can finish this project without a lot of professional assistance, outside a builder and architect, that kind of stuff. Now if you do need some help, because people run into some pretty sticky situations, that's kind of my specialty. And I do some consulting with you. But for the most part, almost everybody who uses my website gets to learn it for free. And I'm just happy because I want to reduce the housing shortage in the US and even if you're creating this for yourself, one day it's going to house somebody. And that's what I'm about. So please check out the website, use it all for free, share it with friends, get as many people free help, accurate help as possible. And if you find something that's not in there, email me and be like, Ryan, you're all about California. Don't you know we need this help? In my city, there are tons of people and I'll, and I'll start researching, I'll start writing those articles for your town and that would make my day.

Okay, but the investors, so the investors are only 15% of this. Why do you think that is?

You know, the infrastructure isn't here yet. It's when you go to your bank, if you go to Fannie or Freddie and they hear adu, they just say, sorry, you need a portfolio lender. We are not in the ADU business yet. And those traditional institutions are where all the money comes from. So right now investors have fast tracks. They're used to going to their broker, their lender, their builders. And ADUs are not integrated into that fast track yet. I've started seeing architects who specialize in multifamily dwelling conversions where they're adding two units to it, to a six unit there and you know, they're creating a lot of value, but they're, that market is still developing and I think it's largely because of the banks. But that'll change. You know, three years from now, the banks will be lining up. And when today you go, the lender says, I can't count your future rental income. It's a resident, it's a single family residence. I can't assume you're going to have rental income until you already have years of rental income on the books. To show me, that's going to change. Right. Once, once. This is a real trend. It's, the banks are going to, even if it's smaller lenders, they're going to be bending over backwards to pick up more of these types of loans because they've got a lot of the benefits of commercial loans with a lot of the benefits of residential. So, so it's, that's, that's my theory anyway.

Yeah, I mean, I can imagine if I'm a short term rental person, like using Airbnb, this is really an interesting play.

Now I'm going to put a big asterisk here because I do talk a lot about California. And in California, the state law specifically says you can't do short term rental of the unit. It limits you to only do 30 days or more. The enforcement on that, and you didn't hear this from me, but when I anecdotally interview people in LA who are building these units, they're very quickly appearing on Airbnb. You could do a permit lookup and see and like, that's, that's what's happening. But in an effort to create more housing, the state is kind of letting it roll that way in, in other jurisdictions, Airbnbs are still completely viable. And so like you look at some of the progressive laws around tiny houses or ADUs in a place like Austin or a market like Dallas Fort Worth, like there's some cool stuff happening. And yeah, vacation rental, you're turning one, one vacation rental into two, sometimes more if it's multifamily. And so that's really exciting.

Scott. Todd.

You know, Mark, that's, it's funny because there's all these rules and regulations, but how do they enforce it? That's, it's all good until you get your hand slapped. And then what?

There's a really funny one here in California. You can build an adu. You can also build a junior adu. Let's not even get into it. It's a whole thing. But the jad, the normal adu has no owner occupancy requirement. The JADU has an owner occupancy requirement, and you can build both. And I'm like, what are you gonna do once. Once it's built, even if it's deed restricted, if I have to move out, are you gonna evict the person in my jadu? Like, why. This is supposed to be a pro housing policy. Now you're evicting tenants? Cause I moved out. That. I don't. I don't even know how they plan on enforcing some of this stuff. You just kind of, like, move fast and break things. It's not just Silicon Valley, you know, it's the government too, now. But. But yeah, that's. That's the game we're playing.

Wow. Scott. Todd, could this. Could this end the homeless crisis in this country?

No, because think about it. It's $400,000 to pull one of these things in. What will.

That's in the East Bay.

Let me tell you. Let me tell you what. What. Listen, if there's any leaders that are listening to my voice right now, here's what you need to do. You need to go over to landmoto.com you need to buy some land from landmoto.com especially that. Like, un. What. Unregulated, unrestricted land. And then let's go and take these tiny home units that are affordable. And I don't know, like the glamping tents, for example. We slap. We. You. The government should buy 20 acres from me. Okay. I can point them in the right direction, and I got a lot of it. Then they put in, like, multiple tents in there, like almost like a tent city. And you know what, man? Talking about affordable housing, it's affordable. That's how we solve the affordability prices. We love some of the restrictions that you have. That makes it $400,000 to put one of these things in there. That's it.

That's all. Hallelujah. There's an amazing project down in Oakland. Again, pretty crazy cost, but what they did is it's transition housing. Once you leave the foster care system, you have two years or four years where you can live in these tiny houses. And what they did is they took all of the expensive parts, the kitchen and bathroom, and made really beautiful, centralized, communal kitchen and bathroom.

Yeah.

And then trailers or tiny homes all around the outside perimeter so that you have privacy for a bedroom, a little place to work, study center. And that is really, really affordable because you've moved all of the wet costs into a central location, and then you've only Got bedrooms and closets out in the private spaces, and that's cheaper and it's brilliant. And the city is creating really permissive regulations to allow for this kind of housing in a very regulated state, mind you. And I'm so excited every time I see a project like that, because this is a situation, a housing shortage that has been created by a thousand different regulations, and it will take a thousand different solutions to undo it all. So, yeah, I'm stoked. I will second, I will put public comment on any politician who wants to buy land from. Todd. Just got Todd.

Yeah.

You know, here's the thing. You know, California is going through a recall. Yes, I'm a Florida resident, but, you know, if you guys want to write my name in, you know, I can. I got some ideas. All good.

There it is. Well, Ryan, this has really, really been a fascinating subject. I've learned a lot. Thank you for your mentorship, your leadership in this area. But now it's that time in the podcast where we're going to ask you for one more tip, one more kernel of knowledge or wisdom. Your tip of the week. A website, a resource, a book, something else actionable for the art of passive income listeners to go improve their businesses, improve their lives. What do you got?

I comment this with a lot of humility because I'm new to housing and I learned a lot of what I know by reading Backdoor Revolution by Cole Peterson. He has been doing adus up in the Portland area for years and years and years. He's very generous with his information. He cares about housing, cares about you, and I highly recommend his book or his online course in addition to all my free stuff. So Backdoor Revolution by Cole Peterson. If you're watching the video version of this podcast, I'm holding it up. Sorry, like my Vanna White, but I really can't recommend it enough. And then obviously check out the other tip, which is maybe spend some time on my YouTube channel or on my website.

All right, well, fantastic. Before we get to Scott Todd's tip of the week, I just want to give a shout out to our sponsor this week, which is Flight School. Learn how the next 16 weeks can literally transform your life. Go up that mountain of land investing with Scott Todd as your Sherpa who's done it thousands of times. He'll take you up that mountain quickly, safely, efficiently. Oh, yeah, that flight school tuition ain't gonna cost you nothing. Guaranteed you're gonna make it back 180 days or less in terms or cash deals. Learn more. Go to landgeek.com training thelandgeek.com training get on a call, see if this model is right for you. All right, Scott, Todd, what's your tip.

Of the week mark? I know you love slide beam, and you know what?

I love Slide Bean.

Slide beam is so like 2020, maybe 2018. Check out, check out story doc.com and in the chat, I gave you a link to a template. For example, think about what slow slide beam is like. Your old school slides. Look at what you can do with a service like StoryDoc, which is you can turn slides, old PowerPoints or slides into kind of an interactive thing that almost becomes like its own web page. So you don't have to worry about. Can you send the slides out? How about I just send you the link to the. To the story docs? Wow, they're pretty. You know, it might be time to up the game, man.

It might be time to up the game.

Okay, the other thought on this is, could you use this as a landing page? That's my other thought on it. So check out the story doc and see what's there.

Yeah, okay. I mean, I'm seeing a story here. Like a. Looks like a case study for RF Keeper. Yeah, it's pretty cool.

Yeah. So, you know, you just scroll so I can just see, you know, like presenting. And you just keep scrolling. Right? Like, instead of having to, like, up, change, slide, up, change, slide. It's more like a scroll. And if you're cool, like, I don't know, somebody on this podcast that has a surface and you can use your finger and slide up, baby. You don't even need a computer.

Yeah, okay. Yeah, yeah. No. Anyone who's listening to this, it doesn't have a surface, by the way, but it's nice that you're the one person that is proud of it. My tip of the week is could change your Life. Go to how2adu.com there's tons of free information there. There's the blog, there's a Facebook page, there's YouTube. You're going to learn a lot in there. And then you got Ryan, who's going to help you with any sticky situations. Ryan, are we good?

I love it. Thank you so much for having me on. This has been a wonderful experience and I really appreciate being able to speak to both of you and the audience.

Great Scott. Todd, are we good?

We're good, Mark.

I want to thank the listeners. Remind them the only way we're going to get the quality of guests like Orion O' Connell from how2-edu.com is if you do us three favors, you got to follow us. You got a rate. Review the podcast. Send us a screenshot of that review to supportlandgeek.com we're going to send you for free the $97 wholetailing course, how to double your money, 30 days or less. Scott, you ready to do this?

Let's do it.

1, 2, 3. Let freedom, freedom ring.

All right.

Thanks, everybody. Thanks, Ryan.

Thanks for listening to the Art of Passive Income Podcast.

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