How to Unlock Your Home’s Hidden Passive Income Stream (ADUs 101)

There’s a hidden passive income stream in your basement, backyard, or garage, and only one investing strategy can unlock it. More and more homeowners and landlords are using this strategy to pay their mortgages, pad their pockets with cash flow, and increase their home values significantly. Of course, we’re talking about ADUs (accessory dwelling units), the rental properties that states are begging you to build, and you can do so right now with the home you already own. To help you affordably (and profitably) build your first ADU, we brought on Derek Sherrell, AKA That ADU Guy, to give you the beginner steps to your first attached (or detached) investment. We’re walking through which properties have the best ADU opportunity, how much an ADU costs to build or convert, how much an ADU will make, how to fund and finance your first ADU, and how Derek builds an ADU from scratch in just 90 days! Derek often makes an infinite return on his ADU investments, and he’s teaching you how to do the same! If you’re in an expensive state like California, Oregon, or Washington, this strategy is even more effective as you can collect more rent AND do so without local regulations slowing down your ADU progress! In This Episode We Cover: How much an ADU costs to build, and the wild returns Derek is making in 2025 The most affordable ADU conversion that will boost your property’s cash flow Three crucial beginner tips when designing and building your first ADU How to finance your ADU conversion/build and why Derek loves HELOCs Best states for building ADUs and who to call BEFORE you decide to build And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Ask Your Question on the BiggerPockets Forums BiggerPockets YouTube Apply to Be a BiggerPockets Podcast Guest! Maximize Your Real Estate Investing with a Self-Directed IRA from Equity Trust Save $100 on Real Estate’s Biggest Event of the Year, BPCon2025 Grab Dave’s Book, “Start with Strategy” Sign Up for the BiggerPockets Real Estate Newsletter Find Investor-Friendly Lenders Is Building an Accessory Dwelling Unit (ADU) a Worthwhile Investment Derek's BiggerPockets Profile Derek's Website Connect with Dave Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1097 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Dave Meyer?

  There may be a hidden passive income stream in your basement right now, or in your garage, or your backyard. Today, we're breaking down one of the most powerful ways to add cash flow to your investment properties, or even your primary home.

• 0:19Dave Meyer?

  What's up, everyone? I'm Dave Meyer, and this is the BiggerPockets Podcast, where we teach you how to achieve financial freedom through real estate investing. Today, we're talking about accessory dwelling units, or ADUs. And if you're not familiar with this term, it just means a second living space on one property. That could be closing off a basement, or an attic to make it into an apartment. It can mean putting a tiny home in your backyard, or converting your garage into a separate unit. And this strategy has the potential to massively improve the earning potential for any property. Just think about it. Creating an ADU can be as simple as putting up a couple of walls, and it can add an entire new rent check into your pocket

• 1:01Dave Meyer?

  every month. Joining us on the show today is Derek Sherrell. You may know him as the ADU Guy. He's an investor who built his first ADU when he was still in high school nearly two decades ago, and has been leading the charge on this affordable and profitable real estate venture ever since. Derek is going to explain to us how to find properties that are undervalued because of their hidden ADU potential, share which ADU options can generate the most revenue for the lowest cost, and much more. All right, let's bring on Derek. Derek, welcome back to the BiggerPockets Podcast. It's great to have you here.

• 1:38Speaker 01

  Thanks for having me. Glad to be back.

• 1:40Dave Meyer?

  Could you just give our audience, for anyone who hasn't listened to some of your previous episodes, just a brief intro to you and your investing career?

• 1:48Speaker 01

  Yeah, real quickly, guys and gals out there, we plan, design, finance, build, and hold accessory dwelling units, also known as ADUs. Participated in my first ADU build in 1996, in this small Southern Oregon town. And our goal now is to influence as much housing as we possibly can. And then when I die, I'm going to give it all away. And we do this through open source. So we give away free plans all over the country. We teach people how to build the plans that we give away via our YouTube channel. And we don't sell anything. You're not going to get an email from me. We truly are just here to help people build more attainable and fill housing.

• 2:24Dave Meyer?

  You were way ahead of the curve on ADUs because they've been getting popular, at least from my perspective in the last few years, but you were several decades ahead. But can you tell everyone how you got started on your first one?

• 2:35Speaker 01

  I had a high school wood shop teacher, John Wesson was his name, and he handpicked a group of misfit kids that he knew probably weren't going to go straight to college. And he taught us a skill and he got this group of kids together, me being one of them, and we built an illegal ADU for another one of our high school teachers. And I got the bug instantly. I started an apprenticeship in high school, became a licensed contractor shortly thereafter, and the rest was history.

• 3:01Dave Meyer?

  For those people who don't know what an ADU is, it stands for accessory dwelling unit. But tell us a little bit about this asset class in particular, Derek. Like what about it is so interesting to you and why is it getting popular right now?

• 3:14Speaker 01

  What's unique about this asset class is it's, it's really a hack to building small multifamily in A, a residential, low density neighborhood that couldn't be construed as maybe more popular place to live. B, it can be financed residentially. So you're not having to compete with, you know, resetting debt or variable rate debt. You can get long-term 30-year fixed rate mortgages on this product. And there's a lot of land and the biggest benefit to this strategy is it's the training wheels to development. And most of the utilities in most cases are already there. So you get this huge cost savings and then on top of that, you already own the land.

• 3:57Speaker 01

  So those are a few of the benefits. And I'd say one more kind of sneaker benefit is it's still an underutilized strategy. So there's, I think there's a lot of room for upside in the next five to 10 years.

• 4:10Dave Meyer?

  And just for everyone listening, at least in my opinion, the most common way that people employ an ADU strategy is you buy a single family house or a duplex where there is zoning upside. And we've talked a lot about this on the show recently. It's like trying to find opportunities and properties where the current usage of the property is not up to the maximum allowable. Buildable space, right? So maybe you have a single family and you're allowed to build two units, or they have a specific provision that allows for accessory dwelling units or detached dwelling units. And as Derek said, what's so cool about it is like, if you could buy a property,

• 4:49Dave Meyer?

  that's a rental property that makes sense, just as is, the incremental benefit to adding an ADU just seems so appealing because everything you just said, you already own the land, you already have the utilities running there. And so it just seems like the return you can generate on this incremental investment seems really compelling, especially in today's day and age where it's harder to find cash flow.

• 5:14Speaker 01

  Yeah, I couldn't agree more with everything you said, with the exception of one little piece, where the primary house has to make sense.

• 5:23Dave Meyer?

  Okay.

• 5:23Speaker 01

  And as I look back on most of our data, a lot of what we're buying, the primary house doesn't make sense as a rental. It doesn't cash flow. It doesn't even break even in most cases. And I have this argument all the time with people that say, never ever buy a cash flow negative house. That is unless the upside is so great, and your financial position can withstand a little bit of a loss on the front side, because the value add on the back is so great. Everything that you said, I agreed with, except for the primary having to make sense.

• 5:56Dave Meyer?

  Well, I'm glad you're disagreeing. Let's, let's dig into that a little bit. So when you're saying you buy this stuff where the primary doesn't make sense, given your business, you just know that you're going to do an ADU. So does that mean within a year, it makes sense, or two years? Like, what sort of timeframe do you give yourself to turn it into a performing asset?

• 6:16Speaker 01

  So everything we're doing is turned and stabilized and has long-term fixed rate debt in a year or less.

• 6:23Dave Meyer?

  Okay.

• 6:23Speaker 01

  And so I know my upside is, is soon. And the things that, that are really important for the upside, and why I care less about how the primary house performs, is the primary house in most cases is collateral damage to a few things. First and foremost, always is location. Second is going to be access, and then third- Is going to be infrastructure. So there may be a house that sat on the market for a while. That's way overpriced. It would not work as a flip. It would not work as a short term rental. It definitely wouldn't work as a long term rental, but it has alley access. It's a few blocks from downtown and there's a brand new sewer main with stubs to the sidewalk.

• 7:05Speaker 01

  And there's already a water meter in. So I come in there with what I call my ADU goggles. And if you guys aren't watching on YouTube right now, you can see these if you're on a podcast. I'm putting on my $5 science class goggles and, and what I want people to take away from this, this point is that you, you have to look at properties different. These are my ADU goggles. I show up and I look at a property through a different lens. And most of it is how do I save money in the long run by good infrastructure, good access and good location? So that's why the primary house is less important. And then for kind of the icing on the cake of this strategy, if you're in an area that has a zoning upside, as we go through this sweeping zoning reform

• 7:46Speaker 01

  across many states right now, a lot of states are now allowing you to sell these assets. So having the upside of potential, a lot more value add when it's on its own tax lot is, is also a big piece of the puzzle of why the primary has less value in the initial underwriting.

• 8:05Dave Meyer?

  Yeah, I think with that case, we agree. I, I've been saying on the show for the last couple of months now, talking about upside and different ways to find properties right now, that if you could stabilize something within a year or so, like that's a good deal. It's not any different than doing a BRRRR, right? When you buy a BRRRR property, it's not going to perform right away. And so it's just about getting it to perform in a reasonable amount of time. And if you're doing that within a year, that's I think a pretty good timeline. If the numbers make sense at the end of the day. So can you just tell us a little bit about the sweeping zoning changes? You kind of alluded to just a minute ago, and one of the main reasons we wanted to have you back because it's in the news everywhere right now. Can you just tell us a little bit more about like,

• 8:49Dave Meyer?

  what's driving this renewed or sort of increased interest in ADUs nationally right now?

• 8:55Speaker 01

  Yeah, for sure. There is, like I said, sweeping zoning reform coming across the Western states. It's in the Sun Belt. It's on the East Coast as well. Right now we have eight states with overarching outright awesome ADU law and the main driver is, is pretty blunt.

• 9:14Speaker 01

  Cities in high-priced areas have done a crappy job for the last 50 years when it comes to their zoning laws, when it comes to their comprehensive plans, when it comes to inclusionary areas. And it's basically made housing more and more and more unaffordable, based on the premise of trying to keep riffraff, the poor, the black and the brown, out of lower-density, higher-class neighborhoods. And it's been a massive fail. And we've seen that. So now what's happening is state legislators are coming in and they're saying, hey, cities, you've done an absolute, insert cuss word here, job of managing housing, and we're going to tie your hands and we're going to make some model code for the state and you're going to have to follow it.

• 9:56Dave Meyer?

  Yep.

• 9:56Speaker 01

  So overarching state law is the biggest driver and it starts with the unaffordability of housing. And I am a proponent of more affordable. I've been a planning commissioner. I'm an amateur planner. I've been literally obsessed with housing for close to three decades. And I'm really careful about affordable housing. So we're creating more affordable. There's two kinds of housing in my mind. There's subsidized affordable, and then there's more affordable, more attainable. And because an ADU is on a smaller piece of land and it's a smaller footprint, it therefore is a more affordable, more attainable option.

• 10:35Dave Meyer?

  That's a really important distinction. I like that you're calling it a difference between affordable housing, which is often used to describe, like you said, subsidized in some way by the public sector, by either local, state, federal government, that sort of affordable housing. But this ADU development strategy that you're talking about is more of a private sector-style solution to affordable houses, just by increasing housing supply, which in theory will at least moderate price growth or just sort of fill a void in the housing market these days, because traditional developers just are building fewer and fewer smaller homes, fewer and fewer traditional starter home-style properties. And so ADU has seemed to be filling that void for a lot of people.

• 11:20Dave Meyer?

  All right, Derek, I want to hear a little bit more about how people can implement an ADU strategy. But first, we have to take a quick break. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes 10% below market value in the best markets across the country without making real estate your second job? That's exactly what rent to retirement does. They're a full-service turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets

• 12:04Dave Meyer?

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• 13:39Henry Washington?

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• 14:52Dave Meyer?

  Welcome back to the BiggerPockets Podcast. Here with Derek Sherrell talking about ADUs. Before the break, we were just talking about why ADUs are getting so much attention these days. Derek, tell us a little bit about now how you see investors taking advantage of some of these trends? And if there are investors listening who want to turn a profit and help provide more affordable housing in their communities, how do you recommend they get started?

• 15:18Speaker 01

  I would say the best way to get started is to familiarize yourself with the zoning regulations in the market you're trying to invest in. And this goes back to one of my friends, Henry Washington. He says, "This is a people business. People think it's a real estate business, but it's not. It's a people business. So you have to know the people." And when I say people, I'm talking about the planners. Okay, call the city planning and zoning office and say, "Hey, I'm a local investor new to this market. I'm looking to do the ADU strategy." What areas would you shop in? Can you say? Send me a zoning map that shows areas that would be a good spot for what we're trying to do. So I would always tell investors to build relationships in every single market you go into.

• 16:00Speaker 01

  There's somebody in that market that's doing what you want to do. Find those people, whether they're in the public sector or the private sector. Add value to them if they're private, if they're public, just go ask questions and familiarize yourself with the zoning regulations. Again, I don't want to put anybody to sleep with the Z word, but that's where it starts. I mean, you could have the best location, you could have a suitcase full of money. But if the zoning regulations don't allow you to complete your strategy, you're barking up the wrong tree.

• 16:30Dave Meyer?

  And is there anything in particular people should be looking for in the zoning regulation? Obviously you're looking for permission, right? That ADUs in general are permitted, but are there certain states or regulations or provisions that you think make ADUs easier than other types of implementations right now?

• 16:50Speaker 01

  Yeah, yeah, I'll go for some things to look for. So we're looking for codes that don't have off-street parking requirements. We're looking for codes that don't have residency requirements. Those are a couple of poison pills in the ADU community. And then the best way to figure out if the city is really ADU friendly is just to ask them how many accessory dwelling unit permits they've granted in the last year or the last biennium or whatnot. If it's two, that's going to be a tough market. If it's Seattle and they're like, we gave out 25,000 sets of plans last year and 19,000 of them were for ADU related builds, you're in the right spot. Another thing that I always tell investors to look for is look for cities

• 17:33Speaker 01

  that already have pre-approved accessory dwelling unit plans. And what that allows you to do is completely streamline the process, save time and save money. And it may not be your exact design and you still have to go through the zoning process of plotting that footprint on the land that you want to build it. But when cities have free, pre-approved ADU plans, you know they're ADU friendly.

• 17:58Dave Meyer?

  That's really good. And can you just find that on a, on a local website?

• 18:02Speaker 01

  Yeah, you can find it on a local website. If I'm looking at, let's just say Austin, I'll just, I'll just type in Austin ADU program and it'll usually take you to a city site. And within 30 seconds, an average intelligence person such as myself can find out if they have a program or not.

• 18:19Dave Meyer?

  For sure.

• 18:19Speaker 01

  But never be afraid to call the planning and zoning office and ask them for advice or ask them for resources.

• 18:26Dave Meyer?

  Awesome. That's great advice. And I would imagine when you, when you do find these places, they're supportive, but are there contractors or builders who specialize in these plans? Cause I'd imagine as a contractor, you can make a pretty good business, like really getting good at these pre-approved plans.

• 18:41Speaker 01

  There should be. I, I will say unfortunately, the public-private partnership is pretty sparse. And that's because a lot of cities, probably rightfully so, don't want to endorse any individuals.

• 18:53Dave Meyer?

  Sure.

• 18:54Speaker 01

  But always ask the planners, you know, what architects do you like? What builders? Get their plans submitted with just one try. So they're not supposed to tell you, but again, it's a people business. And if you're personable and you ask good questions, they'll help you.

• 19:07Dave Meyer?

  So that, that's great. That's awesome to know on the zoning side. What about on the property side? Because it seems to me, you know, I live in Seattle now, that there is all sorts of different things. Like when I was investing mostly in Denver, you saw a lot of basement conversions or simple stuff like that. Whereas here you see full-on detached 1,200 square foot houses being built as ADUs. So what do you find, Derek, is the most economical way for people to get into the ADU game?

• 19:39Speaker 01

  The most economical way to get into the ADU game is by far to buy a primary, single-family house.

• 19:49Speaker 01

  With some sort of functional obsolescence or split level layout where you can convert a section of that primary house into a legal separate unit. My favorite is look for a house that has a master bedroom and bathroom on one side with an exterior entrance. You simply do some fire and life safety wall work. You do a fire separation wall. You pull the permits and you can easily turn a standard house into a shared wall side by side duplex. That is by far the easiest.

• 20:21Dave Meyer?

  Very good.

• 20:22Speaker 01

  If the basement already has exterior access, egress windows and a bathroom, that's not a bad option. So that's by far the most affordable. That's where I teach all the first time home buyers to look. You're literally shopping for a duplex that nobody else can see. Again, ADU goggles come on. So that's the most economical. And I would say the most economical and then like the most upside are complete different sides of the scale. So the best investment, in my opinion, is going to be to buy a property that has room to build or convert a standalone detached accessory dwelling unit. Okay, folks?

• 21:00Dave Meyer?

  Okay.

• 21:01Speaker 01

  Tenants want the same things that homeowners want in this order. They want location, they want privacy, and they want amenities. And I'm telling you, we're seeing this already in lots of markets. There's more multifamily than ever being built. There's all this absorption that's taking place. There's major concessions. If you have a shared wall or an over/under ADU, you're competing with most of the multifamily. If you have a standalone product with privacy, they have their own little sitting area, maybe they have a fenced yard, you are going to have what we like to call a really high demand, low supply product. So although it's a lot more money to build a new standalone unit, it's going to be way more valuable, you're going to have way more tenants, and you're also going to potentially,

• 21:44Speaker 01

  if you don't already have the option, to split it off and sell it, or to split it off, refinance it on its own note because it's its own piece of land and really scoop massive leverage.

• 21:55Dave Meyer?

  Awesome. Yeah, I see these popping up all over in Seattle. They're very popular here. But you see them in other markets too. And I'm always just curious like how much they cost to build, and I'm sure it's very regional, but do you have any ballpark numbers for us?

• 22:09Speaker 01

  Yeah, I'll give you some really good examples. So I'll give you the spectrum. So I'd say in high value markets, let's just say Southern California, San Diego, Austin, Texas, Seattle, Washington, we're seeing three to $400 a square foot.

• 22:23Dave Meyer?

  Okay.

• 22:24Speaker 01

  As kind of a semi-custom builder grade. For example, a lot of places allow you to build up to 1,000 square feet and we're seeing those costs anywhere from three to $400,000. And that's hands off as an investor, hiring a contractor through relationships to get decent volume pricing.

• 22:41Dave Meyer?

  Okay.

• 22:41Speaker 01

  And then on the other end of the spectrum, we owning construction and planning, designing, financing, building and holding affordable, simple designed ADUs, we're building ADUs for $100,000.

• 22:55Dave Meyer?

  Wow.

• 22:55Speaker 01

  And bigger isn't always better. You know, our number one unit, and this is a unit that we give away. You can go to thataduguy.com. The free plans are on the top of our website, big red tab. And we're building these 600 square foot ADUs for $100,000. They're valued around 350 to 4.

• 23:14Dave Meyer?

  Wow.

• 23:14Speaker 01

  And they rent for anywhere from 1600 to $1800 a month. So.

• 23:18Dave Meyer?

  What? That's insane.

• 23:19Speaker 01

  The spectrum is 100,000 to 400,000. Bigger isn't always better.

• 23:24Dave Meyer?

  Derek, I do want to ask you more about those numbers because let's dig into those and just like actually figure out what kind of returns you can get here because they seem crazy. But we do have to take a quick break. But before we do go on break, I wanted to ask you, we just put BPCon tickets for sale up. Early birds are out right now. And I understand you're coming this year to Vegas and you're going to be speaking. Can you tell us a little bit about what your session is going to be on?

• 23:50Speaker 01

  I'm going to be talking about ADUs, everything about them, how to look for them, how to build them, how to find properties and how to drive profit while adding needed infill housing. So I'm really humbled to be asked back for the third straight year and I can't wait to meet you in person.

• 24:07Dave Meyer?

  Awesome. Yeah. Well, very on brand for you. Still talking about ADUs. If you want to check out those early bird tickets, make sure to go to biggerpockets.com/conference and get your early bird ticket today. We'll be right back. For my wife's birthday, I wanted to make her a new website for her landscape design business. So I researched a lot of different options. I tried out a couple, but honestly, it was really overwhelming. It was pretty time consuming and still, the site wasn't coming out the way I wanted it to. Then I tried Hostinger and everything was super simple. I asked Hostinger's AI to build a clean site for her business and it had a working version up in minutes. No coding or designer needed. Plus, its AI

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• 28:55Henry Washington?

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• 29:40Dave Meyer?

  Welcome back to the BiggerPockets Podcast here with Derek Sherrill talking about ADUs. Before the break, he shared some insights into numbers and just as a reminder, you're saying that sort of high-priced markets, you could expect to pay 300 to 400 bucks a square foot, but you're able to build some properties at $100,000 that were renting for 1600 to 1800 bucks a month, which is crazy, right? I mean, that, those are just remarkable numbers. Even if you bought that for cash, that's a 20% cash on cash return. So can you just tell us maybe first and foremost, like, how do you finance these deals? Are you building them and buying them for cash? Or are you able to get a loan to build an ADU?

• 30:21Speaker 01

  Multiple ways. And I want to say this for our new investors out here. I want to give some clarity. So I'm still, to this day, house hacking. I could live anywhere I want and any neighborhood and any house and I still house hack. So the best way is Is to just buy a primary house.

• 30:40Dave Meyer?

  Yep.

• 30:40Speaker 01

  And then find a way to get the money. There's a ton of products that are popping up every day. Similar to a construction loan or to a bridge loan. There's some really good ones where they'll give you maybe a hundred percent loan to value on the unbuilt ADU. Based on your plan set and appraisal when it's finished. The hardest part is, is getting the, the project done. Once you have the asset. It's really easy to get your money back. I mean, it's the simplest burr ever. Yeah, it's the simplest refi ever. I mean, we're, we're able to build so much equity into these. And as long as you don't over design, over build and overspend. I mean, we're, we're getting a hundred percent of our money back every single time on assets that still cash flow.

• 31:23Speaker 01

  So when you mentioned the 20% cash on cash, if we were going to use just a cap rate model where you're paying cash. Well, we're making infinite return because we have no money in the deal. And it's also a brand new asset that has very little to no capex or maintenance for a long time. I'm not trying to be biased here, but I'm super biased.

• 31:41Dave Meyer?

  So you are trying to be biased.

• 31:43Speaker 01

  Oh, yes. And more people need to hear about this. And again, folks, I've got nothing to sell. Like I literally trained my competition for free. I just couldn't be more bullish right now on this asset class.

• 31:55Dave Meyer?

  In my head, I'm trying to think about the order of operations here. So does that mean if you're trying to get a single family? Do you buy the single family and finance it and then try and get a secondary loan? Are you saying that maybe you bring your plans to your purchase mortgage? And try and get all the financing done at once upfront?

• 32:16Speaker 01

  My theory is put as little as you possibly can down with the primary purchase. Three and a half percent FHA or 5% conventional or 0% if you're a service member, thank you. And then use the cash reserves you have to build the ADU. Because you're really going to want to refinance out when you're done with the ADU, especially if it's on the same lot. Yes, there are products. You can show up to a closing table, talk to your lender. If your lender doesn't know anything about a two or three K loan or a construction improvement loan. Or what we call like a, a bridge build. The fixed rate loan, which is where you close a loan with one closing fee, one signing, and you have renovation money and like maybe a year long time to do that. And then you have

• 32:58Speaker 01

  the long-term fixed rate product that it rolls into. You're going to have to use a combination of one of those. But I just want to tell people that the good old fashioned, hard work way is how I started and is how I still do it. So buy a house low down, save up to build the ADU. You might have to get creative. Call a family member that has money. A lot of employer-sponsored plans will let you borrow 50% up to 50K from your 457 or your 401k. You can also use a private loan. You can use a credit card. If you have good credit and you can get, you know, no interest for 18 months. Do whatever you can. It's usually a financial stack of multiple different sections of money to build that unit. And then when you're done, you have this new value, just like a burr. I call it, call it a build burr.

• 33:41Dave Meyer?

  It is. I mean, the idea behind it though is exactly.

• 33:44Speaker 01

  Yeah. And it's, it's a slam dunk. It's so much easier than a remodel. Some of my big investor friends, you know, that flip 200 houses a year, they're getting into development and they're, they're sending me texts just like, oh my gosh, now I get it. Like, it's just so much easier. There's so many less variables.

• 33:58Dave Meyer?

  Cause it's repeatable, right?

• 33:59Speaker 01

  Oh, it's a lot more scalable. It's a lot more repeatable. And there's just so many less variables. You don't have surprises when you're building new standalone construction.

• 34:11Dave Meyer?

  Yeah. And I imagine it's awesome that you give away these plans for free. I'm looking at them right now. They literally, you can just go get them on Derek's website. Well, if you're just doing this in a neighborhood, you're building the same thing over and over again. So like you obviously learn how to do it well. The people who are building it learn to do it well. And you just get much more efficient, I imagine, over time.

• 34:30Speaker 01

  That's exactly right. I'll give everybody my three tips to saving money on your ADU build. And it's, it's, it's easier than you think. It's, um, one is start with a simple design. Okay. Rectangular structure.

• 34:43Speaker 01

  A single, you know, gable roof or a flat shed roof. Every corner we deviate from a rectangle is a minimum of $10,000. So start with a simple design.

• 34:52Dave Meyer?

  Wait, say that again.

• 34:53Speaker 01

  Every, every corner we add to a rectangle is a minimum $10,000 costs. So if you have a rectangular ADU and you're like, well, I want mine to have a bump out or I want it to be an L shape or I want it to look like a snout house. Or I want to do a pop out. You know, you've got more siding, more corners, more trenching, more gutters, more roof line, more labor, more everything. And just because it's a simple design doesn't mean they don't look custom or cool or tenants don't love them.

• 35:19Dave Meyer?

  Sure.

• 35:20Speaker 01

  So anyways, start with simple design, self-manage the project if possible and do as much of the physical work as you can yourself. And again, for the non-builder people, that doesn't mean you can't do dump runs on the weekends. It doesn't mean you can't do the landscaping or paint or do a bunch of things to save costs. But yes, to your original question, by building the same thing over and over and over, we get this kind of economy of scale. We don't have any decision fatigue and then we're building property management into our units. So we keep all these and if somebody calls in with a leaky faucet, we don't have to guess what cartridge it is.

• 35:57Dave Meyer?

  That's a good point.

• 35:57Speaker 01

  We use the same faucet all the time. We give away all of our, our resources there too. There's a shopping list on our website where you can see all the fixtures and knobs and appliances we use, but we just keep it simple. The crews know how to build them. We know how to manage them. And then the only thing we change is the location, orientation and the color.

• 36:16Dave Meyer?

  Yeah, I would imagine that you and your team can build these things in your sleep now because you've done it so many times.

• 36:21Speaker 01

  Yeah, our goal always is 90 days. We build two at a time in 90 days. We just did four in just over 120 days. But if, if we're breaking ground and we're not handing keys to a tenant 90 days later, I'm not happy.

• 36:37Dave Meyer?

  Wow, that's super impressive. That's faster than any flip that most people can do. When you annualize your return there, I'm sure it's very, very good. One thing we haven't talked about, Derek, but I assume it's sort of same principle here is adding an ADU to properties that you already own. Cause this is sort of what at least personally has attracted me to it because I own some properties that do well right now, but have the ability to add ADUs. And I'm thinking to myself, I could probably build this for $150,000. I can probably use a line of credit to finance it. And I can lease it out for probably 1,200 bucks a month in this market.

• 37:20Dave Meyer?

  And so, you know, even if I finance it to keep 20% down, that's 30 grand I'd have to keep into this deal and I'm going to be making 15 grand off of it a year. It's like a 50% cash on cash return for that portion of my investment. It's crazy. So is this taking off as well? Investors with existing portfolios are doing this too?

• 37:39Speaker 01

  Yeah, yeah, it is. A lot of the calls I get and emails and DMs daily are for, for that same exact question is, hey, I've got a couple of properties in a good spot that are flat with good access and as opposed to going out and trying to buy something else, I'm just going to improve what I have.

• 37:53Dave Meyer?

  Yeah.

• 37:54Speaker 01

  Yeah, that's a great investment. And, you know, a few years ago, I would say just do a cash out refinance, lock it in and get your build money there. But the home equity line of credit is amazing. It's, it's my secret weapon. When I say I'm building with cash, a lot of my cash is just interest only home equity secured to properties that I own. So, you know, we've got a big HELOC that's at like seven and a half percent. It's, it's prime, it's at prime rate and it's interest only. So we'll go, we'll pull the HELOC on a build and because it's a month late, we'll build the unit. We'll occupy the unit, we'll refinance the unit, and a lot of times, we only pay debt for two and a half months.

• 38:34Speaker 01

  So on $100,000 ADU at 7.5%, it roughly costs us $3,000 to build a $100,000 asset that appraises at $400,000.

• 38:45Dave Meyer?

  It's insane. Wow.

• 38:46Speaker 01

  You know, I get a lot of flack for giving a lot of stuff away and like in my mind and in my heart, like I just sometimes feel like I'm cheating. It's like, how could I not give all this stuff away? I can't believe we're able to do this. So the, the home equity is very, very, very, very powerful, but you have to have a plan on the backend to refinance it. And more importantly than the plan, everybody can have a plan, you have to be able to execute. You've got to be lendable. You have to have a good debt to income ratio. Don't go build your first ADU, get this big rent check and go buy a brand new Toyota Tacoma and crush your DTI.

• 39:19Dave Meyer?

  Yeah.

• 39:19Speaker 01

  So the, the relationship with the lender is really, really important. So when you're using the HELOC, how do you pay the HELOC back? Cause we don't like interest only debt long-term. That's a short-term play.

• 39:30Dave Meyer?

  Great, very practical advice, Derek. Thank you. I think that financing piece is going to be super important for a lot of people who are thinking about how to do this. HELOC is a great way to do it. I highly recommend thinking about that. This is kind of a perfect situation for when you want to use a line of credit for these like short-term types of investments. Derek, this has been super helpful. Thank you so much for sharing all of your knowledge. Before we get out of here, you know, you mentioned that a bunch of states have done this and they might be coming to more near you. Can you tell us, do you know, like off the top of your head, the states where this is more achievable than others?

• 40:06Speaker 01

  Oh yeah. Home run states right now, Oregon, California, Washington, Arizona, Montana, Connecticut.

• 40:16Dave Meyer?

  Oh wow.

• 40:16Speaker 01

  Most of Texas, not state of Texas, but most of Texas. So there's, there's about eight right now that have overarching state law with about 10 or 15 in the works. And my prediction is that in the next maybe five to eight years, it'll be half of the country.

• 40:34Dave Meyer?

  Yeah, the trend just seems to be going in this direction. Like you hear more and more, even if they're not at states, like you said, local levels, a lot of municipalities are encouraging this because honestly, people don't have that many other ideas to create more affordable housing. And this is one that has been proven to work. And so I would expect that people will scale it. And as Derek has shown us today, it makes sense on both sides, right? It makes sense from an investor standpoint, and it hopefully is going to also create some more affordable housing, as Derek had said. Well, thank you so much for being here, Derek. We really appreciate your time and I look forward to seeing you at BPCon later this year. Awesome. Thanks for having me, folks. Thanks again for watching. We'll see you next time.

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