Scott: ADU garage conversions may be the path to turning even California single family homes into cash flowing rental property investments. Our guest today, Mike, just completed one of those and is contemplating his second in Manteca, California, which is about an hour or so east of San Francisco.
Mindy: Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me as always is my flipping amazing co-host, Scott Trench.
Scott: I’ll permit that intro. I’ll permit it. Bigger Pockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting, as long as you have a garage. In a recent episode number 547, Bigger Pockets Money, we interviewed that ADU guy, Derek Cherell, a firefighter who reached a different type of fire through ADU investing. He has a mission to help average people make real estate investing possible and to increase housing stock in this country by helping people use ADUs to build wealth.
Mindy: Today’s guest is Mike Russell, who’s investing in Northern California. He sought the counsel of ADU expert Derek to help build his own ADU and put him on the path to financial independence even while earning a very modest salary. Mike, welcome to the Bigger Pockets Money podcast. I am so excited to talk to you today.
Guest: Thanks so much. I’m happy to be here.
Mindy: All right, Mike, before we hear about the power of the ADU and how you have harnessed it and how it has impacted your money journey, let’s establish a snapshot of what life is like currently.
Guest: Yeah, sure. So, um, right now I’m 26 years old. Um, I work in Southern California at a church and I help out in their music program. Um, I make about $52,000 right now, um, in that W2 income. Um, and I’ve got a few side hustles. Um, that I do, I write music on the side. Um, I also have a architect and design business that actually came out of the ADU, which I know we’ll talk about in a little bit. And then, um, when I first started going to college, my dad sent me up with a Roth IRA, so I started contributing to that and I’ve got about 20,000 into that account right now. So that’s slowly growing trying to keep maxi that out. And, uh, right now, um, kind of the main financial goal for me right now is to save up, uh, enough for, uh, another house here in So SoCal.
Scott: Awesome. Can you give us a snapshot of your current housing situation and what is going on there?
Guest: Yeah, right now, I actually just moved into uh, a little one bedroom apartment, um, about a week ago, actually. So I kind of just finally got moved in. Um, so I’m renting right now, which I know is kind of goes against everything that, you know, real estate investors right now, but it’s kind of the, kind of the in between spot for me right now until I get something else.
Scott: Renting is a wonderful decision, especially in parts of California and is probably much better than buying for someone in your situation, especially as you’re giving yourself the optionality and time to think about your next purchase here. I should have rephrased my question a little bit though because I was particularly curious about what was going on with this house hack situation at the end right before you moved out of it in the uh, with your with your ADU. Can you just give us the brief overview of that and then I want to hear the journey about how we got how we got there.
Guest: Yeah, yeah, yeah. So, um, I live most recently I lived in the in the house by myself. It’s a five bedroom house and then I had the ADU garage in the or garage conversion in the back that I have rented out. So not quite covering all the mortgage when I was living there. Um, but enough that, you know, where I could pay towards the mortgage and it was still cheaper than renting anything in that area.
Mindy: I think that’s an important point to note. Some people think that if they’re not living completely for free in their house hack, then it’s not a successful house hack. But every dollar that isn’t coming out of your pocket to pay the mortgage is a dollar you can put someplace else. And like you said, it was cheaper to own this property and pay a mortgage and live with a roommate than to rent something else. So a house hack is successful when you have money coming in and you are reducing your expenses. It’s a grand slam home run when you’re living for free, but I don’t think that it’s realistic in today’s interest rate environment to expect every house hack to be a grand slam home run. So still killing it.
Scott: Michael, let let let’s can we just preview the numbers on that real quick? What is the house worth plus house plus ADU? What is it worth? What’s the mortgage on it? What’s the income and what’s the expenses on that property?
Guest: Um so right now, um I have hopefully going to get an appraisal done soon, but I’m hoping the property is worth around 575 right now. Um I bought it for 405 um with 5% down. Um so when I first started out and I was house hacking it, I was making a lot more because I was doing room rentals. But right now, um the mortgage is 2500 and I have 1600 coming in from the ADU rental. Um so at the time, I was only paying about 900 bucks to live in a five bedroom house, which is pretty incredible. And the house did come with solar, so that has about 180 extra a month and give or take, um, about 120 for other utilities. So right now, all in all cost is probably around 2800 and I’ve got 1600 coming in every month.
Scott: And how much do you get for the main house or how much rent will you get for the main house?
Guest: Hopefully, um, anywhere between 2800 to 3, 3,000.
Scott: Okay. So you’ll be getting, if I’m doing the math right, you’ll get 1600 plus 2800 conservatively, which gives us 20 I’m sorry.
Mindy: Forty-four hundred.
Scott: Forty-four hundred. $4400 per month in income on approximately $2800 in expenses, but that’s before property management and vacancy and maybe some more maintenance and cap backs. But we’re still doing really wonderfully on this rental property and this is a, you know, post COVID transaction here. Is that right?
Guest: Yes. Uh, uh kind of in the middle I guess you could say because I bought it in 2021. So COVID was still pretty heavy going on back then, but now obviously we’re out of it.
Scott: Awesome. Well, let’s rewind a little bit and let’s go back to your money story. And can you tell us kind of the, the, the the what you feel are the most important history points in your money story leading up to this purchase. So, background with money growing up and how that translated and put you in a position to buy this house in 2021.
Guest: Yeah, for sure. Um well growing up, we didn’t really ever talk much about money. Um the two main things that we were my sister and I were taught is uh basically just work really hard and save as much as you can. Those are kind of the two factors that were instilled in both of us which are great, great um, you know, money money lessons to learn at such a young age. Um so I always had that mindset anytime, you know, I would work or do chores or something like that, it would just go directly into a savings account. Um and then I started to be able to make a little bit more when I got into high school. Um a buddy of mine who’s a couple years older than me, who lived in my neighborhood, had his own um lawn care business and he was graduating and um going out of state. And he said, hey, I’ve got a couple of them. Do you want to just take this over. So I’m like, sure, why not? Um so I ended up taking about three um clients from him and over the the remaining three years of I had high school, um I ended up with about 20 clients. So I was making I charged less than what I could have, but you know, I was just a high school kid trying to make some money. So I ended up with about 20 clients and then my senior year, I ended up getting a job at McDonald’s. So I was kind of working two jobs while I was in high school um to be able to save um enough to put money down towards college. So that’s kind of where my money journey began mainly in high school is when I I really started thinking about money and how much I could save and stuff like that.
Mindy: So what was your financial situation when you graduated high school?
Guest: Graduated high school. I ended up graduating with about $8,000 in the bank. Um so I went to a college in Northern California and that ended up paying for my first semester, which was pretty cool. So, and then I got a job and I was able to save up enough to pay for the next semester when the second semester came around.
Scott: What what did you graduate college then with in terms of your financial position?
Guest: Yeah, I graduated college with $28,000 in the bank. Um, so then I held onto that and then used that as my down payment to go into my house hack. So.
Scott: Awesome. So this is, this is a self-funded, you know, hard work, sweat, smart concept, you know, decisions there. Uh, and and you end up with $28,000. What year did you graduate college?
Guest: In 2020.
Scott: Twenty twenty. Okay.
Mindy: Oh, welcome.
Scott: And we know we know you bought your house in 2021. So walk us through what your career uh, was like post graduation. Did you start out immediately earning six figures and ballooning that to 250k annual salary?
Guest: No, not at all. Um so I like I said, I work in church ministry now and then I worked in church ministry directly after college. Um and I didn’t take that job to make money because you just you just don’t make money when you were in churches and I was fine with me. But when I found out how much I was going to be making, I thought, okay, well, I got to be able to do at least a little better than that at some point. Um so I started doing some research on just, you know, side hustles you can use to make other money. Um I started listening to a couple of YouTubers. Graham Stephen was one of them and he had a guy who was a guest on the Bigger Pockets podcast. So we started talking about Bigger Pockets a little bit. I can’t remember his name. Um so anyway, that what that’s what led me to biggerpockets.com and Brandon and David and the podcast. Um read all the books. Scott, I read your book which that’s one thing that really impacted me um back in 2021. And so anyway, um I decided that house hacking was for me and I really wanted to try and get into a house. So I knew that was only making, I was at the time, it was at 36,000 a year. I knew only making that much, I there’s no way I could afford a mortgage on my own. So I actually went in with my grandfather um and I used his name to help me buy the house. So I was able to use my own funds for the down payment. Um I ended up with about 5% down, um which actually funnily enough, David Greene’s team was the one who actually helped me buy the house. Um because they’re in Sacramento, which is about an hour north of us. So Kyle Ranky, shout out to Kyle. Um he helped me out a lot. He was my agent for buying that house. And uh great team, super knowledgeable when it comes to real estate. It was super comfortable working with them. So that’s how I ended up getting the house.
Scott: Fantastic. So use the one brokerage with David Green and Kyle uh and found this deal. Um, walk us and I love walk us I love the fact that you partner with with your grandfather to guarantee the loan. I’m sure your grandfather is very confident in your financial stewardship but just didn’t have enough income to qualify and that you provided all the down payment here. What was, how were you, how were you basically surviving in California on $36,000 a year because I thought that was not possible.
Guest: Um you know, my parents taught me good financial principles as far as saving, you know, managing a budget. Mom is a huge Dave Ramsey fan. so always budgeted every month. And so basically I kind of just lived on as little as I could. Um so just skimped and saved as much as I could basically and kind of just lived on rice and beans I guess you could say. Um and then I realized the potential with this house hack and so it was a five bedroom house. so I ended up renting out the rest of the bedrooms and lived in one of them. so I could save the majority uh of my income and then still, you know, keeping living expenses as low as I could in order to make it.
Mindy: When you were renting out these these other bedrooms, were you living for mortgage-free?
Guest: Yes. So I was, so the average room rented out for about 650. Um so I had four rooms available for rent in the house and I lived in one and then an actual guy actually ended up living in the garage too. So um I had about a total of close to 3600 a month coming in from those room rentals and so basically I was getting paid at at the time my mortgage was 2200. So I was making about 1400 a month and living for free.
Mindy: There you go. You had a grand slam home run house hack and then did you eventually stop renting out so many rooms?
Guest: Yes, I did. Um you know, the the saying is, you know, temporary discomfort for a long term game. So I was definitely willing to be uncomfortable, but it got to a point where I’m like, all right, I’m I’m kind of done um you know, living with this many people. And plus all the guys were a lot older than I was, so I they weren’t really friends or anything like that. So it was just kind of one of those things like, I got what I got out of it and I’m ready to move on to the next thing.
Scott: Michael, this is super exciting. You found a home run house hack. Apparently, you decided to do even more with this house hack and build an ADU. And I’d love to hear exactly what led to that decision right after this quick break.
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Scott: And we’re back. Michael, we’re talking about your awesome house hack here. Can you fill us in on why you decided to build the ADU on this house hack that on paper already seems like a pretty good deal?
Guest: Yeah, for sure. Um it mainly came from wanting to kind of maximize the potential with the property. Um when I bought the house, I didn’t really intend to do anything with the garage. I just thought it would be cool to have extra storage space. Um my agent at the time had told me the potential of doing it, but we never really went into it. This is an agent I had before I worked with Kyle. Um but again, I didn’t really have that much information um about ADUs or what the potential of that could be. Um so at the time I was running out all the bedrooms, you know, I really wasn’t liking having so many people living in the house and so I started thinking about different ways that I could um, you know, figure out a way to still make this work. Um so I ended up listening to the Bigger Pockets podcast and um Derek Sherell was on and you know, he’s the ADU guy up in Oregon and I was really inspired by his story. um and how he just kind of rents and repeat and did the same thing over and over again with either garage conversions or building ADUs from the ground up. Um so he on the podcast, he ended up mentioning his website. So I as soon as I was done listening to it, I uh sent him a message on his website. He’s like, hey, I would love to, you know, chat with you a little bit more about how all this works. Um so anyway, I ended up talking to him, super great guy. Um I really enjoy getting to talk to him, super knowledgeable and was really willing to help me out. So he helped me out with a lot of information of, you know, how how I could design it, how long is it realistically take, how much it could probably cost. Obviously construction costs are different state by state and who you have working for you.
Scott: Tell us about how what the plan was, how much did you think it was going to cost and what did you think it was going to rent for and how did you, how did you come up with those estimates?
Guest: Yeah. Um so like I said, it’s a garage conversion. so I knew I wouldn’t be doing anything from the ground up and kind of based on what Derek kind of would advise on his numbers, he said we could probably do anywhere between 50 and 60,000 because the guys who actually r helped me renovate the main house were the same guys that were going to have to do this. And um there were some friends of mine who were also really good contractors. And so I kind of hoped that that would be kind of be the number um that it would cost to get this ADU done. And at the time I was looking around at rents anywhere between 13 to 1400, which is fantastic. Um and then obviously it’s 1600 now. So it jumped up quite a bit which we can get into all of that.
Scott: Okay. So we have 50 60,000 dollars in cost for 13 to 1400 dollars in incremental rent. Um it’s essentially all all pass through. Uh in most situations, yours is the one exception because there was a dude living in your garage prior to this project, which I find fun um on this particular analysis. But but that’s a, but for all intents and purposes, we can back on the ad it at like, hey, that’s a 20-ish 25% um cash on cash incremental yield because it is essentially all incremental. Maybe you can pull out a little bit of that cost for vacancy or whatever, but it’s pretty close to that. Um so that’s an awesome on paper analysis. What did, what did you actually predict it would do to the value of the property before the project began? You had this $50 $60,000 project. How much does the overall value of the home go up by?
Guest: Um honestly, I’m not super sure at the time I was hoping for maybe around 100,000 um just because ADUs are so new still a lot of appraisers don’t know how to appraise the property with them attached, especially with all the new laws coming out. you know, if your property is big enough, you can section off your property and sell just your ADU, which is kind of a crazy concept but which is cool. Um so hopefully I’m going to get an appraisal done soon to see exactly how much the property is worth. Um cuz actually my immediate neighborhood, there is about three or four people who are also doing ADUs right now.
Scott: Minus where this is again by the way?
Guest: This is in Manteca, California.
Scott: Manteca, okay. Can you for those who don’t know California very well, can you describe where Manteca is?
Guest: Yeah, for a share. Um we’re about an hour south of Sacramento and then an hour east from the Bay area. So we’re kind of in the central Valley area.
Scott: This is not like San Francisco market. This is a relatively more affordable part of California but still expensive. This is more than median priced home in the United States by a by a healthy amount.
Guest: Yes, for sure.
Scott: Okay. So you did all these estimates and then uh, let’s talk about the project. What happened? How’d it go?
Guest: Uh it went really well. So kind of start from the, back from the the drawing um portion of it. Um there’s actually a friend um in my Sunday school class at church, um she’s an architect and I told her like, hey, I’m thinking about doing this, you know, what do you think about drawing the plans for me, you know, how much would you charge? Um and she actually just moved to America about a year prior from Singapore. She’s like, honestly, I really want to get into this business. Um let me just do it for free for you just to kind of see how it all works. So I didn’t have to paying anything for the drawings. Um and we worked really well together. Um fortunately, the city of Manteca is a wonderful place to submit permits because I got comments back on under two weeks and then a week later, um, I had my permit. So it was that was a really nice um deal to be able to get the permit so quickly. And kind of a fun fact, we ended up working so well together that we actually started a business together. So now we actually do um architect and design plans for mainly for ADUs, um, but you know, we do all the all different kinds of residential um projects as well. But anyway,
Scott: That’s not what you think of when you think of California local government there. So that’s awesome.
Guest: Not at all. It’s insane.
Scott: Well, I I just want to say I I don’t know this, but I’d be interested in more anecdotes from the community around this of whether with these additional dwelling unit opportunities, whether that’s so heavily encouraged by states that others are going to experience similar speed to permitting, right? If you want to build, you know, a development of fancy homes, probably not going to have this experience, I’d imagine or may not have that experience even in Manteca, which might be a friendly place, but if you want to build an ADU, which is being super encouraged by state and local governments, maybe you have a very pleasant experience with the permitting process.
Guest: Yeah, absolutely. I will have to say, I will say though that it kind of depends on the type of construction because if it’s a garage conversion that definitely is a lot quicker than getting permits for a new build because depending on the type of building you have to get your architectural stamp and a lot more calculations have to go into it. Um and hopefully the process will go a little bit quicker as time goes on. Um as I was about to say earlier, um a lot, a lot of the cities that we’re dealing with right now, we have one client in Newark that we’re working with and we submitted to get their permit in July of last year and here we are in July of 2024 and we still don’t have it. So it really just depends on the jurisdiction of what you’re trying to submit your permit because that has so much to do with how quickly you’re gonna get it. So I lucked out in finding out that Manteca was so quick, but there are there are few and far between for cities that are that quick.
Scott: Yeah, my dad doesn’t like New Jersey either.
Mindy: No, that’s one of uh, one of the states on my list of I will never invest here for several reasons. Um, the the permitting process and the the legal red tape and the bureaucracy involved in doing something that’s literally bettering the city can be really, really daunting. So if you’re thinking about doing any sort of construction projects, take a trip down to your local permitting office. In my city of Longmont, I have a really great permitting office and there’s a guy there who I think he either memorized the permit book or he wrote it himself. You can ask him any question and he has the answer. You know, do I need a permit for this? Yes, no, maybe so he has them all out there. But here’s a tip. When you go into the permitting office, lots of people don’t like the people that are working at the permitting office because they are the difference between you getting your occupancy certificate and having to jump through more red hoops. So be nice to them. Nobody’s nice to them. So go in with a smile on your face. Do as much research as you can before you get there and butter them up with the treat. Nobody ever brings them anything. So stop at your local bakery, drop 10 or 15 bucks, bring them a nice treat and then ask them all the questions that you can think of also have them all written down in advance, but you know, doing a doing a bit of research ahead of time can help you out. And if you haven’t yet bought the house, go into the permitting office anyway and see if you’re going to be able to do it. Uh Newark, New Jersey is not a place I want to buy because it’s taking a year to get a permit for an ADU. No, thank you. I go into my permit office and I’m on the phone with my contractor. Do we want this or that? I forgot to ask this one question because they’re ready to write me the permit right then. So it’s and if you’re thinking about skipping the permit office, don’t. That always comes back to bite you.
Scott: How did you finance this fifty sixty thousand construction project?
Guest: Part of my grandpa coming in with me was he also provided um 100,000 dollars to invest in the property. So I used um a portion of that to renovate the house first when I first moved in. Um and then it was about a year and a half in between when I finished renovations and when I started on the ADU. So I took what was left over and plus the money that I had been saving um by from the extra that coming in from the room rentals that that was how I was able to finance the construction of the ADU.
Mindy: Mike, we’d love to get into how the ADU conversion went and some of your lessons learned after this quick break.
Scott: W- pockets money listeners, please during the quick break, hit that follow button if you’re on Spotify, follow us if you’re on Apple Podcasts or hit that subscribe button if you’re watching this on YouTube. We really appreciate it and that is the best way to uh let us know that you’re liking what you hear.
Mindy: And we’re back.
Scott: Okay. So we get permanente in a couple of weeks, construction, it sounds like goes fairly smoothly for fifty sixty thousand dollars. And what happens next? How do you stabilize it and how long does it take you to to put this property get this property into its end state?
Guest: Well for my situation, a lot longer than it could have gone. So, um it could have gone about four months from breaking the concrete to installing or attaching the sewer lines. um, to having someone rent it out. But instead, it ended up taking about a year and a couple of months. And the reason for that is is PG and E um was not able to come out and install power. So PG&E is Pacific Gas and electric, is that right? Yes. sorry, Pacific gas and electric. It’s the power company right here. Um so as soon as I got my permit, I started doing construction. I thought, I don’t really need to call the power company right now because ‘m I’m a ways aways from getting a meter installed and you know, I’ll think about that when I get to it. So I get to the point where we’re ready for the meter to be installed. The guys ran all the the electrical already and an inspector comes out and he tells me that the transformer that services my street is already at 90% capacity and my ADU would bump it up to like 97%, which what they don’t want it to get that high. So basically he told me we’re going to have to reconstruct two power poles. I’m like, okay, great. So what’s what’s that going to look like time wise? And he says, well, we’re about eight months out from being able to do anything like that.
Scott: You did not buy this gentleman donuts prior to this meeting per Mindy’s earlier suggestion.
Guest: No, I did not. I should have. That was the red flag. That, that’s why. So anyway, that was a real gut punch because we were about a month out from being able to have this completely done. So that was in December of 2022 when I got that info and I rented the garage out in April of 2024. so actually a year, a little bit longer than a year, a year and five months or so. Um but they came out and they did it in a couple of hours. So I’m like, man, I had to wait over a year for like six hours worth of work in order to get power to my garage. So, but now now I know as soon and for anyone out there who’s looking to do this as soon as you get your permit, reach out to your local power company to see what it’s going to take to get a meter installed because you just never know what the current state of electrical lines are around or even how long it’s going to take it.
Mindy: That’s a great point.
Scott: So this is an awesome story here. We buy we buy the property in 2021. In you begin the project in late 2022. The project is completed in 2024. You’re out $50 to $60,000, um several dozen donuts and 18 months to get this thing done. And now you have $4400 a month in income when the property is fully stabilized against a mortgage of $2500, um and you’ve increased the value of the property quite substantially during this time period for that. You’re now renting and I presume in process of getting the main house rented out that you just moved that you just vacated. Is that right? That’s the current situation? Awesome. So what comes next for you? What are you what are you looking to do and how are you going to repeat this kind of success if that’s where you’re headed in the context of a higher interest rate environment today?
Guest: Yeah, absolutely. I’m still trying to navigate that. Um what I’d like to do would be able to utilize the equity that I’ve built into that property. Um but the thing is, I have a 2.75 interest rate on that property. So I do not want to get rid of it. So refinancing is kind of out of the option. I’ve looked into Helocs. Um a little done a little bit of research, not much yet. But the idea is to just save up right now as much as I can for another down payment. Um probably around 5% and then just kind of rent and repeat. I would love to be able to um you know, convert another garage or even build one from the ground up just because I’m I’m very confident that ADUs are going to become more and more popular as the years goes on, especially here in California. Um and I know and you know, but at the time when I first got into real estate, um you know, you have you have the bug for it, right? It’s kind of like a little addiction like, oh man, I can’t wait to make so much money like instantly. And I had kind of not lost sight, but I never really thought of the long-term play when it comes to real estate investing. And so right now, I’m not necessarily looking for a home run right out of the gate, even though it’s possible because I just went through it. Um and it would be harder in today’s interest rates, but I’m trying to keep the long-term picture in play how it might be kind of difficult to get something right now. I might not be able to make as much as I made on the last house, but in the long run, if I hold onto the property, it will benefit me greatly. Um so that’s kind of my mindset right now into the next purchase is, you know, obviously want to purchase smart and something that makes sense. Um right now I’m just trying to figure out how I can, you know, either find a property and also how I’m going to pay for the renovation by, you know, hopefully using the equity in the property that I have.
Scott: Michael, this is like a this is a big problem I think that a lot of early stage investors are running into right now is buying a property with 5% down means you have 95% leverage and that leverage is now at 7 and a half percent instead of two, three or 4% like it was in years past. And I think that this is the primary hurdle that would um that knocks people over essentially and prevents them from getting started, especially in the state of California, although maybe not specifically in Manteca, which seems like it has more opportunity than a Bay area property here. Walking through your deal you just did, would it have worked in today’s environment, if you bought it today, could you have repeated at the 7%, 7.5% interest rate? And what do you think that buy box will be?
Guest: I think it could work um in today’s um numbers and interest rates. It just depends on what you want to do with the property. So if if you have 3600 a month coming in from room rentals, I think you could afford a mortgage um for 405,000 at a higher interest rate. Now, I’m not sure the exact numbers I’ve pencils out on that, but if you have the income coming in that enough to offset the mortgage, I definitely think it’s still worth it and I definitely think it’s doable. it just depends on what you’re comfortable with um for a house hack. Now as far as the ADU goes, I think I looked out too um with having two friends who are contractors who helped me. um because I definitely ended up paying a lot less than I could have for a garage inversion which actually wanted to bring this up to. I know I had estimated around 50 to 60,000 for the renovation but actually in all in all, I ended up at around 83,000 for how much I I paid to convert the garage. Um which the way I kind of looked at it where if I have 1600 coming in a month, I’ll have paid off the construction for that in about five years, um which is pretty cool. Um but anyway, you just got to look at, you know, what you can afford construction loan wise or just reach out to your local network of people that you know to see if they can help you with construction. Just think of ways to get the cost down. Yes, the higher interest rates are intimidating, but you can make it work. It just depends on how uncomfortable you want to be for a room rental and things like that.
Mindy: Yeah, I love Dave Ramsey’s phrase, live like no one else now so you can live like no one else later. And being young, not being married, not having kids, not having these these constructions that really can prevent you from feeling comfortable doing rent by the room, you embraced it. I’m going to have all these roommates and they’re not even going to be my friends. they’re going to be like random people that wanted to rent a room and pay 650 a month for it. And that really propelled you down. But I think we’re glossing over one of the biggest things that you did. Uh so many people are reluctant to part ways with a real estate agent that isn’t working out. And I am a real estate agent. I’m here to say if your agent isn’t working for you, ask them how to cancel your contract and get an agent that does. If you’re looking to invest in real estate, you need an agent who understands what’s going on in real estate and how to invest in real estate, not just the stock market. They’re two different things. So, uh Mike, you mentioned that you moved recently and you’re saving up for a house hack again. Are you currently looking for the the are you currently getting listings sent to you from an agent or are you just in like hold mode right now?
Guest: I’m in hold mode right now. Um I still got a little ways to go before I can save up enough for um for a down payment. So the market will probably change with it within six months to a year. Um so I’ve just kind of done a little bit of research on my own um right now. But that’s kind of where I’m at.
Mindy: I would challenge you to go find an investor friendly agent in your area. And if you don’t have one already, you can find one at uh this little website called Bigger Pockets. It’s biggerpockets.com/agent and we can match you up with an investor friendly agent in your area just to start learning the specific market that you’re in. Maybe you think that a property is going to be 600,000 but it’s really 700,000. Well, now’s the time to know that so you can start saving up or maybe you’re looking at the 600s and here pops up something for 500 that you can afford right now, you know that the market is good, you know that this is a great price, then you can jump on it instantly because you’ve been looking and you understand what the market is. So I would encourage you to start looking now just to get a feel for the market. I think that’s a really important factor that especially when you’re moving to a new market, but is if you’re just starting the process of investing in general, it’s sometimes difficult to remember that other people aren’t as immersed in real estate as uh maybe Scott and I are. So I just want to encourage you to talk to an agent sooner than later.
Guest: Yeah, thanks for that. That’s really helpful. I think I’ll do that.
Mindy: Um with regards to section eight, uh have you listened to episode 356 or episode 575 of the Bigger Pockets Real Estate podcast? Both of those features Joseph Asamoah who’s kind of like the I don’t want to say king of section eight, but he really, really, really understands section eight and has a great way to look at it and a lot of great tips on how to navigate the uh rules and regulations of the program.
Guest: Yeah, I have remember listening to his podcast. It was a a while ago, but um if that’s the route I’m going to go for my main house, I think I’ll definitely listen to that and get some more research done on that.
Mindy: I think there’s some bad information or misinformation about the Section eight program. It’s a pretty great program for landlords so long as they follow all of the rules that come with it and Joseph really breaks down the pros more than focusing on the cons.
Scott: Yeah, if you do it, if you do it the right way, it’s almost like government sponsored rent, like what’s more recession proof strategy than than that in a lot of ways. Um well, Michael, I I would love to hear, I you’ve mentioned this casually, but you said a client in New Jersey was not having a good experience. Uh and you alluded to this earlier, but can you I think that you you mentioned like a business or other opportunities have emerged from your your ADU project here. Can you tell us a little bit more about your side hustle or side hustles and how they relate to your overall financial goals?
Guest: Yeah, absolutely. Um so like I said, um my friend of mine who drew the plans for my ADU for me, um she had talked to me about, you know, wanting to get into this um architecture business. um and you know, I was into real estate or I am still into real estate and we kind of thought it might be a good match um to try and start something. Um so she’s kind of the brains behind the business, you know, dealing with the the client specifically of design of different construction, uh different types of construction and I kind of handle more of the the back end on the financial side, you know, systems and processes and stuff like that. Um we’ve been in business, we started in October of 2022. um so we’re just almost at our two year mark. um and it’s gone a lot better than either one of us thought it ever could. Um you know, California is a great market to be able to do this kind of stuff. Um and yeah, we’re still we’re still going strong. Um we’re basically service all of California right now. And uh just to correct you, I might have misspoken but I was actually in Newark, California. So it’s a city in the Bay area that’s relatively close to close to Manteca up there. So it’s a Bay area city that’s given us problems.
Scott: Awesome. So, so, yeah, I, I think that’s a really awesome, I, I, I think you’re going to have a market tailwind for years here because the state is clearly encouraging this type of project and it’s just good work. It’s, this is how housing units are constructed. This is how you house more people is you allow the process to work and you allow entrepreneurs like yourself to go in and build more housing in a lot of these areas. I’m super excited to see what the value creation is when you’re allowed to subdivide the lot because that says, hey, the person that owns this ADU long term won’t even be a renter, they’ll be a homeowner on this on this property in a future state. So, I mean, it’s just, it’s just like a great contribution to society and to your market in general sense and a major profit.
Guest: Yeah, absolutely. And it’s it’s pretty cool with some of the clients that um that we’ve gotten to work with. Um you know, as the interest rates have skyrocketed, um some people, you know, wanted to live in our house and wanted to buy something else, but that didn’t become possible for them. Um so then they turned to how could they make more money on their own properties? And now that ADUs have become more accessible and easy to work with, people have just decided to stay in their own property and build either for family or even build for rentals. So it’s kind of cool to see that mindset shift of, oh, I would rather go get another property, but here’s what I can do with what I currently have and still make it work.
Scott: Michael, walk us through the rationale between long-term, short-term and mid-term rental uh and your in your choice with respect to that on the ADU.
Guest: Uh yeah, absolutely. Um I’ve done a little bit of research on mid-term. Um it’s just really wasn’t something that really interested me all that much. I would much rather just kind of have one tenant to kind of deal with for again, said for the long term. Um short term, I knew I wouldn’t have the time to be able to manage it. um that well and plus Manteca is not really a destination city or anything like that. So, um the market, the, the little, what little research I did, I didn’t think it would be worth um, you know, renting trying to rent that on on Airbnb or VRBO or like that. Um like I said, I did a little bit of research into the mid-term rental which obviously you can get a little bit more. Um but thankfully I lucked out. I’ve got a great tenant in there who’s going to be there for a year. Um he’s fantastic, better than honestly than I could have hoped for. So um it’s worked out pretty well for the um as far as the long-term aspect. That’s kind of why that made sense to me.
Mindy: Mike, you just said my agent at the time. So this makes me wonder how did you meet your agent? how did you decide that it was time to part ways with your agent and how did you actually uh put that into action? Because I think it’s great that you did that and I think that a lot of people would struggle with that.
Guest: For sure. Well, that’s something I definitely struggled with. Um so a little bit of a backstory. Um I had mentioned to a few people, you know at church was like, hey, you know, I might be buying a house soon, just kind of just in casual conversation. Anyway, word end up spreading um to this real estate agent who was at the church. um and so she approached me, said, hey, you know, I’m a real estate agent here in Manteca, I’d love to work with you. And again, this is my first time working or dealing with a real estate real estate agent at all. um, and so I said, sure, why not? Let’s, let’s do it, you know, I had no idea what to expect or what questions I should have asked. I just kind of went for it. Um Turns out she wasn’t an investor. Um so that was one thing that was kind of a red flag when I found that out. Um because obviously I’m trying to get into real estate too invest and having an investor friendly agent is extremely helpful because they know what potential the property has, what the right questions you should be asking, um and that’s just nothing that was really provided by her. You know, she’s a sweet lady of course and I’m still friends with her and her family to this day. Um so I ended up through listening to the Bigger Pockets podcast and through a different couple of people, I ended up getting in touch with Kyle. Um and he said uh he showed me the contract that I would need to sign for working with him. Now, I didn’t have to sign a contract with this other lady. It was just kind of a verbal thing like, yeah, let’s just do it. Um and I’m not super great at conflict. So I wasn’t really looking forward to that conversation but I basically just said, hey, you know, I found this other agent who’s really good with investment properties. Um I would really like to work with him and I just, you know, I don’t think this is a a good fit for me right now. And she understood and we were able to move on, you know, like I said, I’m still friends with her and her family to this day. So thankfully it didn’t end in bad blood or anything like that. Um that was just kind of one little difficult conversation I had to have, but it was 100% the right decision to make because Kyle on this team were so awesome. they made the home buying process so easy and it was definitely worth the awkward conversation for one minute.
Scott: I, this is a great anecdote. I mean, we like this is a fundamental problem in the industry is investors work with random agents in their network like mom’s referral or sister’s referral or friends referral or and it’s it’s just they have no idea what they’re doing often the investor is way more experienced and knowledgeable about real estate, even if they’re a rookie because they’ve listened to so much content, have so many good frameworks around this, um than the agent. And so that I mean, I love the fact that you found an investor-friendly agent and it was off to the races from there. I do you do you think that that’s just it? Like that’s like the first step is to find an investor friendly agent to kick things off. Like is that would you go as far as that?
Guest: Yes, I would say absolutely. um especially if you are someone like me who was just starting out, you want somebody who is very well educated in the real estate space because they can ask questions that you don’t even know you’re supposed to ask. Um and they can really help guide you and kind of mentor you through the home buying process and hopefully if you’ve built up a great relationship with them, you can keep you utilizing them over and over. And plus, you know, having a good investor friendly real estate agent, they have their own network of people that they can recommend who can also help benefit you um and your team to propel you forward in in home buying and investing property buying. Um you know, as far as contractors go, appraisers, you know, architects and design, you know, the network you can, when you’re connected in with the right people, the possibilities are kind of endless because you want the best people working with you so that you can succeed in real estate. And if you succeed, those people also succeed as well. You want to, you want to be in partners with a team where everybody wins and everybody helps each other win.
Mindy: Yeah, absolutely. As an agent, I don’t want to work with anybody who I am not a good fit for and I want to know as soon as possible that you don’t feel we’re a good fit. I would be mortified if somebody said, well, I signed that contract with you, so I felt obligated to finish it. In fact, I don’t make people sign contracts with me until we go under contract uh on a property itself because I don’t even want to make you feel like you have to work with me if you don’t want to work with me. And but ultimately, it’s your project, it’s your property, you’re the one who’s going to be out of money, out of luck, buying the wrong property, if you don’t get somebody who is giving you great advice. So you need to advocate for yourself. And like you said, it’s a one minute uncomfortable conversation. Hey, ma’am, I’m really sorry but I don’t feel like this is working out for me. I’m going to go get another agent who is more knowledgeable about investing because this is what I want to do. You could have bought a really awful for an investment property that is also a great home, but it’s not a great home for you if it’s not fitting your needs. So absolutely find an agent that you can work with who understands all of the things that you might not even understand yet because you’ve never done it before or because, you know, you’ve done it once a while ago. So, again, you can find an investor-friendly agent at biggerpockets.com/agent.
Scott: Yeah, I, I, I couldn’t agree more. This is wonderfully sponsored by the biggerpockets.com/agents matchmaking service. Definitely go check that out. But I I’ll even go two steps further on this and I’ll say before you reach out to the agent, be a serious about, be serious about this intent to buy. Don’t waste anybody’s time with this and, you know, Michael, if I could go back in time and give you advice, I’d say interview a couple of investor friendly agents. You got a great experience, maybe locked out by getting this great relationship with Kyle. But I think that if you if you interview three to five, you know, agents in a local market, you’re going to be able to now have some comparisons and at least you’ll make an incrementally better choice. Ideally, you’ll have if you go to biggerpockets.com/agents, five great agents to choose from and now you can choose the best one for you from that interview process. But you should show up with a hypothesis and these folks should be able to tell you, oh yeah, yeah, a bunch of people are buying house hacks right now. Here’s what’s working here. This is this is going to work. And in a place like Manteca in a place like Denver, if they’re telling you, oh yeah, you can buy a duplex and just do long-term rentals about 25% down, no problem. Get out of town. That doesn’t work right now in certain markets like those. They’ll be telling you, here’s the sacrifices or here’s the creativity that are being applied by clients in the recent past that will actually help you transact on this deal in real time. Here’s the approach to the ADU that a recent client has taken that could work. It’s a lot of work. It’s 60 grand. It’s risk, it’s time that go into it. But there’s awesome opportunity and hundreds of thousands or millions of dollars to be made um through these strategies. So that’s the, the the pitch for the investor- friendly agent program and I’m glad you found one of the agents on Bigger Pockets, Kyle to help you buy your property. We did not know that ahead of time. That was that was that was news to me on this one. So that’s awesome.
Mindy: Kyle was actually on our podcast episode 37 of the Bigger Pockets Money podcast. You can hear Kyle’s story and how he became an agent. He’s a great agent, he’s got a great money story. So go check out episode 37 of the Bigger Pockets Money podcast. Mike, remind us of the numbers for your rental property, your first purchase.
Guest: So I bought it for $405,000. Um it’s a five bedroom house with a detached garage of 1400 square feet. Um so I rented out all of the original bedrooms for about total of 30 $600 a month um with a mortgage of $2500. Um and then right now, as it stands, I’m going to be renting out the house soon and I’ve got $1600 a month coming in from my ADU rental.
Scott: And the expected rent from the main house is 2800 to 3,000 as the range you’re expecting.
Guest: Yes, correct.
Mindy: Awesome. Michael, where can people find out more about you?
Guest: Um so I’m mainly on Instagram with my side business, um M P builds C A. The M stands for Michael and the P stands for Patricia, who’s my partner. Um we also have our website MP builds CA dot com. And if you need help uh drawing plans for your project, we’d love to help you out.
Mindy: Mike, this was such a great show. Thank you so much for sharing your numbers with us, sharing how everything works, and sharing tips on how to break up with your agent. I really appreciate your time today.
Scott: Thank you so much, Michael for coming on today and sharing your awesome story. Congratulations on the huge success with this ADU and definitely tell us about the next one that you do. Um And when you need your next investor friendly agent, um definitely try Kyle again and if he’s not available, try one of the guys at biggerpockets.com/agents.
Guest: Yeah, sounds like a plan. Thanks so much for having me. It was a great opportunity. I’m glad I was able to be a part of it today.
Mindy: Thank you, Mike. This was a lot of fun and we will talk to you soon.
Scott: All right. That was Mike. Mindy, what’d you think?
Mindy: I love this story. Uh depending on who you’re listening to, America is between four and 8 million housing units short. And that’s not going to go away anytime soon. We stopped building way back in 2008. We didn’t build 2009, 10, 11, 12 into 13 and 14 in some places. So there is a real shortage of housing in America. That means that ADU laws have started coming into effect with local state, with states and with local municipalities trying to ease the burden of our housing crisis. ADUs are an excellent way to generate income from your house. Scott, we’ve said it a bunch of times, your home is not an investment. Well, you know what? If you put an ADU on the back, your home could turn into an investment. Change your garage into an ADU. There’s a lot of different ways to do this and your state and your city are helping you do this. If you live in the right city, obviously, not uh not some other cities that we won’t name. Uh if you live in the right city, if you live in a city that has a lot of really great ADU laws, you could turn your primary residents into a cash flow generating investment property just like Mike. So I really had a great time with Mike today.
Scott: Yeah, I love it. This and and, you know, just because we’re here and we can wax a little bit about this, the the housing affordability crisis in America has many root factors. One of them is the fact that uh residential land in most American cities is 80 to 85% depending on the city, zoned single family only. And nobody likes it in their or most people don’t like it in their backyard when the neighbors are all of a sudden allowed to be build an ADUs. So states are coming in over the top and saying, nope, we’re just going to essentially rezone huge swaths of land. Like that’s what’s happening in Colorado, it’s happening in California, it’s happening in Washington State, it’s happening in Oregon. It’s a very crude way to increase housing stock, but I think it’s going to be very effective. And most ADU construction is going to be relatively affordable housing as well. So this is a great path. If you’re thinking how can I contribute to reducing the housing shortage in America, building one ADU in your backyard profitably is a great way to do it. It’s capitalism at work. Go check it out. This is where I’d be looking for opportunity if I was starting over today with my first house hack.
Mindy: Absolutely. And I don’t have any room in my backyard personally. Um I have a big swimming pool back there of a previous owner decided that it would be great to take up almost the entire backyard with a swimming pool. But if you have the opportunity to do so, definitely look into it. Some of the factors that contributed to Mike’s success were that he kept his expenses low and he saved as much as possible. And that is how he was able to get into real estate investing. And that just ties back into the message of our overall podcast is that when you keep your expenses low and you save as much as possible, all of a sudden, all these amazing opportunities pop up for you. And what is what does Dave say, live like no one else now so you can live like no one else later. He was a little uncomfortable for a while and now he owns a house that’s cash flowing big.
Scott: Love it. Well should we get out of here, Mindy?
Mindy: Scott, that wraps up this episode of the Bigger Pockets Money podcast. You are the Scott Trent and I am Mindy Jensen saying goodbye pumpkin pie.
Speaker 2: Bigger Pockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Kason, copywriting by Calico Content, post production by Exodus Media and Chris Micken. Thanks for listening.
