Being a first-time homebuyer doesn’t have to be daunting. Let this episode show you as David Sidoni interviews none other than That ADU Guy, Derek Sherrell, who shares the ultimate house hacks to make buying affordable. Together, they talk about the concept of Accessory Dwelling Units (ADUs) and their role in making home buying more accessible, especially for first-time buyers. From the historical context of ADUs to understanding local codes and legal considerations, Derek provides a great view to help you navigate the housing market. Get a glimpse as well into Derek’s background, his motivation rooted in personal experiences, and his commitment to giving back through valuable resources. Learn about the “ADU goggles” mindset, viewing properties as opportunities for value addition. Plus, discover retirement strategies and the transformative potential of ADUs in building wealth and achieving financial security. Do not miss Derek’s unique perspective and practical advice for affordable homeownership today!
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That ADU Guy Interview – The Ultimate House Hacks To Make Buying Affordable
First-Time Home Buyer House Hacks And Tips Using ADU To Make It Affordable
In 2024, housing affordability is going to be the biggest obstacle that first-time homebuyers run into. I am so proud, privileged, and honored to have this guest who has the incredible tricks to help you make buying your first home more affordable. Doesn’t that sound great? I’ve been talking to this guy for a long time. It’s Derek, That ADU Guy. That ADU Guy is a machine. There are so many great tips that can help you figure out how to make a home more affordable and be able to use the rent of an ADU to get you a higher loan approval so you can buy more houses, and it’s not that expensive.
My favorite thing about Derek is that he comes from the right place. He’s not selling anything. Does that sound familiar? He comes from the place where he grew up poor. He discovered this hack and has been doing it longer than anybody else. Some people have been doing ADUs for 5, maybe 7 years. This guy has been doing it for two decades. He’s giving you all this information for free.
I can’t explain to you how gold and how precious this next 50-minute interview is. Read this and you can set yourself up financially for life. More importantly, read this incredible interview with Derek and you might be able to afford 20% or 30% more home without that much of an investment. Check this out.
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I’m super excited about this. I have been talking to Derek Sherrell for what’s been a year or two that we’ve been talking about trying to get together and do this.
It’s been a while. It’s been a long time coming.
I’m always out there looking for stuff to help you because it’s not like buying a house like your parents did or your grandparents. It’s hard. Derek Sherell is That ADU Guy. I found him on social media. He and I talked. The great thing is he follows the same mission that we follow here at the show. He’s here to help people. It’s Derek Sherrell, That ADU Guy. I don’t know if you know, but I call the audience homies. Say hi to all the homies.
What’s up, homies out there?
Most of the time, when I listen to interviews, they ask, “Tell us your story.” The people who are excited about this have already seen the title. I’m going to start a little backward here. Give us one of your insider tips or your best tips about putting an ADU on a property and then we’ll go back and get your story. First of all, what’s an ADU?
Thanks, homies, for showing up here. An ADU is an accessory dwelling unit. The A is the most important piece of the acronym because it’s an Accessory to a house that’s already on the property. This is not to be confused with buying a multifamily property. The niche of this strategy is to buy a single-family home and either add and convert or value-add a second unit. Think of it as a duplex. It has a little bit of different nomenclature.
You’re buying a single-family home that’s got room to build a secondary unit, and correct me if I’m wrong, or convert a secondary unit like a garage or something?
That’s exactly right. The few options we have to get into our own ADU, especially for a first-time homebuyer where we can use 75% of gross rents to count towards our DTI. That’s a brand-new thing within the last few months on the federal level for Freddie Fannie loans.
Say that again because that’s super exciting.
This is a huge win for the ADU community. As of last November 2023, you can use 75% of the actual rent to qualify to purchase the home. In other words, if you are qualified for $300,000 and that’s a little bit out of your price range, but you find a house that has an A DU that may be $375,000, those rents coming in can count towards income for you to qualify to purchase the house. It is very similar to how we would treat a duplex, but that’s new.
Back to your first question, the conversion, the build, or the buy. These are my three favorite ways to get an ADU. You either buy a house that already has one, which is my favorite strategy. I’ve been building them for 30 years and my favorite strategy is still to buy a house that already has 1. The second would be to buy a house and convert a section of that house.
Most people think that for a detached garage, I’ll convert it to an ADU. My secret weapon for first-time home buyers on a tight budget is to buy either a 3-2 or a 4-3 and convert the master bedroom into a studio unit. I’ll do that legally by pulling all the proper permits, following the life safety code, and creating a 1-1 apartment. You still have either a 2-1, a 2-2, or a 3-2 house. I am chopping up a standard single-family house into a shared wall duplex.
The third strategy, the cream of the crop, and my favorite personally at this point in my career is the new standalone accessory dwelling unit. It is where we’re able to give our tenants everything that a homeowner wants, which is location, privacy, and amenities. With that non-shared wall piece, we can blow away our competition in multifamily. At the end of the day, if we have a choice in a similar price range of having a standalone place where we can have a dog or having somebody running around above us or beside us, we are always going to want that privacy.
Read that again because that was an excellent summary. There was some really important stuff there for you guys out there to understand Derek, what he does, and the mission. I was like, “That ADU Guy. You can only do it in the area where you live though.” In our conversation, I realized his whole thing is like my whole thing where he realized this is something that you can use, the house hacking availability of this.
Did you guys hear that point that you can use to get a home? An ADU does not have to be a separate structure. The house hacking for you to make a home affordable for you in these unaffordable times is incredible. Your mortgage is never going to be more expensive than the first three years that you own it. If you can figure out a way to stretch and use an ADU strategy, imagine if you got a co-signer or a family gift for a down payment. It was a stretch for the first 3 or 4 years, but then you either built an ADU or converted a new ADU and suddenly, you’re getting an extra $2,000 a month. Also, your mortgage is fixed and hasn’t gone up in the last 3 to 5 years. Tell us your story because it’s incredible. Why are you doing this? I find it so rare in real estate to find people who are as altruistic as you are.
Thank you. I’m going to air a little dirty laundry for our audience. When I originally reached out to you, I was like, “I like what you’re doing. You’re looking for the same people I’m looking for. How do we help first-time buyers?” He kept hitting me up with, “What’s your angle? What do you sell?” I’m like, “I don’t sell anything. I have no angle. I really want to help people.” It took me a few emails to get past his sniff test, so I want you guys to know I came highly qualified by the boss here.
My filter is thick.
I could tell.
I get so many people who come to me and want to talk to my audience because they’ve got something to sell. The great thing was you were persistent. Share the story that won me over.
My background is very blue-collar at best. I grew up with a single mom. We bounced around from apartment to apartment. I know what struggle is like. I know what it’s like to be a tenant. I know what it’s like to be the first person in my immediate family to get on the property ladder. I happened to get super lucky. If you show up, keep your eyes open, and pay attention, you can get lucky.
I was a freshman in high school. My wood shop teacher handpicked a group of misfit kids. We thought we were special, but that wasn’t the case. He picked a bunch of kids that he said, “These probably aren’t going to go to college. Maybe I should teach them a skill.” We built an illegal accessory dwelling unit for another one of our teachers. This was in 1995.
Within a year or two, my small Southern Oregon town, Ashland, Oregon, this little mountain town right over the California border, adopted an accessory residential code. In other words, we had one of the first legal codes in the country where you could build this second dwelling in a single-family neighborhood. I started building accessory dwelling units. I participated in my first one in 1995.
Right after I graduated high school, I got my contractor’s license. I became a builder. I started building houses and accessory dwelling units for other people and then for investors. I bought my first house in the year 2000. I have always been on the house hacking train. I’ve got a portfolio. We have a really high equity position.
I live off the cashflow of my rentals. I have been buying a house and building an ADU pretty much 1 at a time for 2 decades. That’s what I teach people because it’s relatable. I grew up poor. We didn’t have a house. I bought one house and house hacked it. The house hack on steroids is maybe you have a little bit of separation, and then I kept doing it. It was luck. It was a good mentor I had early. I’ve had a ton of lucky breaks my whole life because I showed up.
There are so many wonderful things there. Don’t you even think for a second, and I’m going to let that slide though, that you thought you were special but it was the wood shop rejects that he wanted to make sure didn’t end up in prison. That’s awesome.
That was exactly it.
For those of you who have never known of this before, let me give you a little realtor insider information. You guys know I’ve been doing this since 2005. I started as an investor in 2000. I didn’t start hearing ADUs here in Southern California until mid maybe even 2010-ish. The fact that Derek has been doing this for this long. If you want to talk about a unicorn or an experienced person, Derek is the ADU unicorn. He’s that ADU guy because he’s been doing it that damn long, and there’s a reason for it.
I read Malcolm Gladwell’s book about how there are certain people who have a certain affinity for something, but it has to do with the fact that they were in the right place. Steve Jobs was in the right place in Northern California. Bill Gates was at MIT with one of the only computers in the country that did computer programming back in the ‘70s. This sounds like you in Oregon. You were there from the start. Where has it evolved to?
The house hacking stuff is the really interesting stuff. Since the people have it, I’ll let you get into the nitty-gritty. Do your stuff. Tell us about ADUs and how first-time home buyers can use this even if they never buy another home in their life to take their largest financial investment and turn it into something incredibly financially lucrative for them.
Starting from the beginning of your question, which is how long has this been happening and what’s new, there have been some amazing state legislations. We have amazing ADU laws in the West Coast States, California, Oregon, Washington, and Montana. About the mid-tens, states started coming up with their own legislative laws that said, “Cities, you’ve done a crappy job with zoning. We have these housing crises. We’re going to start implementing statewide overarching code that’s going to tie the hands of the local city planners and zoning officials to allow this.” It’s really been the mid-2017, 2018, 2019, and 2020 when we started to see the laws back it up. I’ve been talking about this stuff for 27 years and it’s only been the last few that people have listened, so that’s a really good point that you brought up.
I was way off then. It feels like I’ve been hearing about it forever, but it really has only been within the last couple of years.
Statewide. Accessory dwelling units are nothing new. In the ‘30s and ‘40s, we built a lot of these. They were carriage houses, back houses, alley houses, mother-in-law cottages, grandma flats, casitas if you’re in the south, or ohana if you’re in Hawaii. It’s a new surge of state law. What’s so important here is that the state says you can do this. For all your audience in California, Oregon, Washington, and Montana, this is an outright, allowable over-the-counter use that you can go in and pull a permit for almost instantly.
The house hack piece of it, I always want to give this disclaimer to our audience out here that may think, “I’m not in one of those West Coast states,” or, “I’m not in Austin, Texas,” or, “I’m not in some of these hot markets in Florida where ADUs are coming.” If you’re in a market where rents are high and affordability is low, which is why you’re tuning in to this show because you want to buy your first house, you might be in a market that allows these. If you’re not, we can still do this strategy. It just doesn’t get to have a stove. This is really important. If you think, “I can’t buy a house and convert the garage to an ADU because my jurisdiction doesn’t allow that,”
What you can do is buy a house, pull the permits to legally convert the garage from a non-condition, non-habitable space to a living space, and you can put in a kitchenette, a fridge, and a two-burner induction cooktop that has a 110-volt over-the-counter plug-in appliance. It will be like a hotel suite or a kitchenette suite. It’s not because you don’t have ADU law in your state, it means you cannot do this to buy your first house.
In my home, if the stove goes out, we’re rocking and rolling with the microwave and our big, fatty toaster oven. People in New York know all about this.
What qualifies as a dwelling in the regional national code language is a kitchen. You can’t have a 220-volt stove, an oven, or a range hood, but you can put a break room in any section of your house. You can put a wet bar in any section of your house. The house hack that I talk about and teach these new first-time home buyers is to look for a house that has some kind of split floor plan. Ideally, we want the master bedroom to be on the opposite side of the house as the other two bedrooms or any section of the house that has a toilet that would be easily dividable. We can take any portion of a house and put in a 10-foot, 1-wall galley kitchenette. We can take any section of a house and make room for a bedroom and put an egress window in.
The most expensive piece of this strategy is the three-inch sewer line, the toilet. Wherever the toilet is in the house, that is where I’m looking for anywhere from 300 to 600 square feet to convert into an apartment. Something that’s worth noting again is we do this legally. We pull the proper permits. It doesn’t take that much longer and costs that much more.
We legally do this. That way, we have our first rental. We bought a 3-2 that nobody else wanted that wasn’t a good deal and wasn’t anything special. We go into these projects with these different lenses. I want everybody to think of ADU goggles. I want you to look at properties differently with your ADU house hacking goggles. That’s a longer answer to your question.
That’s amazing. I have my own version of that. When people are getting hung up on the furniture, the paint, and the carpet, I tell them to squint. I say, “Stop looking at the stuff. Squint. Look at the walls and the floor plan on the inside.” For the past couple of years here, especially in Southern California, I’ve been looking like crazy at lot size. Is the garage in the back or is the garage in the front? It’s so darn expensive. You said earlier that if my audience is in areas that aren’t on the West Coast or aren’t in those places but are finding their rents are high and housing’s unaffordable, that’s everywhere.
I am doing the 2024 predictions and forecasts. The numbers are astonishing. The unaffordability factor is kicking in. It’s only going to get worse when the inventory starts to pick up and the industry rates start to drop. Everyone thinks, “I’m going to wait for rates to drop and prices to go down.” It’s going to be the opposite. Having this type of strategy is incredible.
I’ve got to harp on this again. You did this on your own. I found you after your persistence when you finally kept going, “I’m for real.” What is the deal with this? Are you enjoying teaching this fact? Do you have partners with other people like I’ve got the unicorn team? Are you, at this point, giving the information to people as something that you do because you’re making money with the rent?
I’m giving back. This is my thought. I grew up with housing insecurity. A lot of people do. Nobody taught me about credit. Nobody taught me how banks work. Nobody taught me about leverage or about how to build wealth through real estate. I skipped over 25 years. There have been a lot of dark days. I still work sixteen-hour days. I was a full-time fireman and EMT for a structural fire department for fifteen years. I retired a couple of years ago from my real job. I was working 48 hours for 2 days on and 4 days off at the fire department and still building, so I had a lot of breaks. I was a poster child for lending for a lot of years.
Since I live beneath my means, drive old cars, and buy assets, not liabilities, I have a really comfortable lifestyle that pays for me. I don’t have a sale. I don’t have to sell anything because rents pay my way. I put together about a seven-and-a-half-hour video series. There are seventeen videos you can find on my YouTube channel. We gave it all away. It is How to Build an ADU with Cost Breakdown.
I came up with an idea to do this. I thought, “I could sell it to maybe 1,000 people a year or I could give it away and tens of thousands of people would see it.” It really came down to me like, “How can I share? How can I teach? How can I give back and teach people who grew up poor and didn’t understand money like me? How can I teach how real estate is an amazing gateway to change your life?” I gave it away.
Real estate is an amazing gateway to change in your life.
I do a little bit of consultation, but when people call me for one-on-one consultation, I always try to talk them out of it. I say, “I’ve got 400 videos on my YouTube channel. All of those are questions people have asked me.” I’ll send them a link like, “Go watch this.” They’re like, “How do you do a garage conversion?” I’m like, “Here’s a whole playlist on it.” They’re like, “How do I build an ADU?” I’m like, “Here’s a whole playlist.” They’re like, “How do I find a contractor that I can trust?” I’m like, “Here’s a playlist on that.”
I try to give it all away. The more I give away, and I don’t understand how, the more amazing opportunities come my way. It’s like I’m working in this realm of relationship capital that I’m completely getting overpaid in. That’s the long and the short of that. I have a couple of affiliates. If people need to find a contractor or they are looking for an ADU-specific lender, I’ve got two people that I partner with. There’s a tiny bit of YouTube revenue and a tiny bit of Amazon revenue, but those are peanuts compared to the rent that pays for my lifestyle.
Do you see why Derek and I gel? It is the same kind of thing. It’s exactly the same story as what I’m doing. I keep saying this is my third act and my chance to give back because I saw something that was pissing me off. You saw something that was an opportunity for people and based on your own life. This is incredible. People are like, “We got it. We trust everybody.” First of all, we’ll do this again at the end, but what’s the YouTube channel?
All the socials are that too?
Yeah, @ThatADUGuy. I’m most active on Instagram and YouTube. I share everything I’m doing. We give it all away for free. It’s all open source. Check it out. If you go to my website, ThatADUGuy.com, I have a bunch of free resources. We give away free plans. I give people access to all the subcontractors in my area that I use. The number on the top of my website is my phone. If you call that number, I will answer it. I am trying to create as much value.
Everybody says, “I’m in this business to help people. I want to add value,” but they have a sale. Honestly, we’re trying to help other people buy their first house. I call the ADU the gateway drug to real estate. W ith federal lending regulations, you can buy a house with a 3.5% to 5% down conventional mortgage, but you have to occupy it within 60 days and live in it for 1 year. After that, you can put it into service and repeat the strategy. If you do this maybe 5 times, in 5 years, you have 10 units and you’re retired. This is something I’m really passionate about. I am still building a new house with an ADU. I move into the house or the ADU, live there for a year or two, and then go repeat it. I’m still practicing what I preach. You should seriously consider this.
ADU is the gateway drug to real estate.
This is such incredible information. I’m so blown away by your mission and what you’re doing because it’s something that I seek in the real estate business and it’s very hard to find. On the investing side, I don’t even get that deep into it anymore. There are a lot of people out there trying to sell webinars and things. It is @ThatADUGuy on YouTube and ThatADUGuy.com.
My mind is racing. I’m thinking about the hundreds of people that have bought their first home and some of them are sitting on 2% and 3% interest rates. They’re calling me and we are helping them with their second purchase. Every single one of them, we’re trying to figure out if they can stay in their home before they buy another home because they’ve already got an incredible loan. What are some of the other things about the A DU world? If you’re looking to buy a property, what are some of the other things that people need to know about the process?
Those are two different questions. I’ll start with the latter. If you are looking for a property, we’re looking for a secret way into a duplex. Everybody wants a duplex. They’re priced to the tilt. Everybody’s going to be competitive on the duplex. Usually, a duplex is side by side or over under. A lot of times, they share a wall. I would recommend that if you’re a first-time buyer, you would tell your unicorn agent , “My buy box is this. I want to be in this neighborhood or this ZIP code. I want a house with alley access, a corner lot, or an accessory dwelling unit.”
Either legal or illegal, it doesn’t matter because we’re going to get a discount on the one that’s not permitted if we can. I would make sure everybody in your network knows that you are looking for a house with an ADU, a house with a guest house, or a house with a converted garage. That’s where I’d start. I send it to all of my realtors and all of my friends. Every email I send has my buy box in it. I want people to know what I’m looking for. Your students and audience should too.
I am not buying any property ever again anywhere that doesn’t have room for what we call infill housing. They’re not making any more land. It may not be the favorite house. You might have to squint because it’s got wallpaper and shagged carpet. Does it have alley access? Is it flat? Is it good infrastructure? I’ll give everybody my secret weapon when I’m buying houses. I want a big lot that has access to the front yard, side, yard, or backyard. I want it to be a flat lot and I want there to be good infrastructure.
I’m looking for places on alleys or corners that are 1970s and newer because they already have a plastic sewer line. They already have good water lines. There’s already copper wiring and probably a breaker panel, not fuses or knobs and tubes. I pay retail. We don’t get good deals. We’re not sending mail or trying to get grandma’s house for half price. We’re paying retail because the value add is what we’re going to do.
Whether we convert the garage, convert the master, or build an ADU in the backyard, everything we’re buying has extra land. What’s happening, and you know this in California with the passage of SB 9, is that not only are we allowed to build infill units, but we’re able to either A) Condo them off or B) Do a fee simple lot partition and split them and sell them.
All of a sudden, you have this first-time buyer who’s looking for a house. They’re qualified for $300,000. They find a house that’s $450,000 but it already has a legal ADU in the back that’s going to rent for $2,000 a month. It’s on an alley and it’s a half-acre lot where they could hire a land use planner. They don’t have to know anything about planning. They could hire a land use planner, maybe pay $5,000 to $10,000, and split off that back piece. They could sell it to a developer or a builder in their network or their neighborhood, and they got their whole down payment and the whole rehab paid for and they bought a new car. That’s all off of buying the right properties. We want to buy the right properties. That’s what we’re doing and that’s what I’m sharing.
Getting back to the 75% rent that you can bring into your equation to maximize your approval, those are for legally permitted ADUs, correct?
No. That is not correct. I would recommend everybody do their own due diligence. I’ve been really deep into the Freddie Fannie regulations. I’ve gone back and forth with lenders. I’m not a lender. I’m not a realtor. I’m not a financial advisor. I’ve been doing this for a long time and have made lots of mistakes. This is what I’ve learned. Freddie and Fannie are a little bit different in how they view accessory dwelling units. With one, you can have two ADUs. With Fannie, you can only have one. There are some rules. It may be hard to finance a house that has two ADUs. This is a fact. The appraisal is based on marketability.
It’s a workmanlike manner. That’s the phrase we get in our appraisal. If it’s done in a workmanlike manner. If you have an enclosed patio on an appraisal and it’s tin and falling apart, if somebody built it and they look at it and say, “That’s a workmanlike manner. This is an accessible part of the home,” then you can count the square footage.
The term that they’re using is it has to be marketable, and then the appraiser also has to be able to find a comp in your area that’s also not permitted. We see this all the time. Upwards of 60% of all ADUs are what we would call legacy ADUs, which means they were either prezoning or unpermitted. We can show that marketability. It’s not because it’s not to code or not up to proper zoning where it has a certificate of occupancy that it means you’re not going to get value.
That brings me to my favorite point when we’re looking for ADU properties. This is my biggest pet peeve. It is if a realtor prices markets and tries to sell a house with ADU when really, it’s a house with an illegally converted garage. My biggest secret weapon I can share with you is if you see a property that has an ADU, trust your realtor but also do your own verification. Trust but verify.
I would call the city planning department every time. I am like, “We’re looking at making an offer at 123 Adams Street. It’s listed as a house with an ADU. Can you please provide me with the certificate of occupancy for the ADU?” A lot of times, the city will say, “We have no record. This is one house on the tax bill and there’s a carport,” to your point earlier.
When we find that out, we go back to the sellers and say, “This is a great spot and great area. I can see that there’s a mother-in-law cottage or an ADU, but it’s not permitted. It’s going to cost me $15,000 to $20,000 to pay the system development fees. I’m going to have to get a contractor in here to put in GFIs above the outlets in the kitchen. We’re going to have to put a vent fan in the bathroom. We’re going to need a discount on this house. This is not an ADU. This is an existing illegal use and it’s going to become my problem as the buyer. I’m still interested, but I want a discount.”
The biggest takeaway I can give your buyers if they’re looking for a house with an ADU, legal or not, is to call the city, the county, the local municipality, or the authority having jurisdiction, the AHJ. We would call them and ask if there is a legal certificate of occupancy or a COO. I’m like, “I need a COO for this unit.” That’s probably my biggest secret weapon when it comes to searching for these properties.
I’m going to throw a little real estate aside. I’m sure that you’re very aware of this too. For my first-time home buyers, if you’re looking at a home like that, chances are, most of the other buyers are going to be asking about the legality and the permits on that ADU. Talk to your unicorn if you realize that that’s something that you want to do or need to do. I highly suggest you take the discount in the form of a credit for your closing costs. That’s because then, you can move into the home.
You’ve got $10,000, $20,000, or $30,000 extra that you were going to have to pay to purchase the home. You can take your discount that way, still pay the price that they may be offering or want to try to get on the home, and hope that it appraises for that. Take it in a seller credit and you’ve got all that cash left over because you already have it saved. You can use that to help work the conversion or furnish your new home. That is remarkable.75% of the rent that you have can go towards your maximum loan amount. Your DTI is going to decrease greatly because suddenly, you’re going to show a larger amount of income when you’re looking to purchase a home like this. I’m sitting here furiously taking notes.
One thing to unpack on that slightly is if it’s a unit you’ve had in the works, it’s going to be 75% of the actual rent listed on your Schedule E, I believe, of real estate if you’re an entity. If it’s at purchase or at the current time of appraisal, a lot of times, they will give you the current lease rent, which is 100% of the rent, or the appraised rent again. When you’re buying these houses, it’s 75% to 100% of the rent. Keep that in mind. Check with your lender. Rules are going to be different for different loan products.
Something to consider if you’re a first-time buyer with a federally-backed loan, make sure your lender is very clear on these ADUs. If you ask your lender, “Can I use 75% of the DTI to qualify for this home purchase that has a legal ADU? Here’s my CFO,” and they say, “What’s an ADU?” I would maybe consider looking for another lender or going down the road to educate them and send them all the federal documentation that they might need. It’s something to think about. It’s not that all lenders are created equally. If they’re tuning in to you and on your team or in your network, they’re probably not going to have that problem.
That’s one of the things that we do on the show. I had a big huge Zoom with all my unicorns. The number one thing I’ve been hearing for eighteen years of this is everybody says, “I should have done this last year.” Everybody waits until the last minute to plan. We have a program that we’re launching in 2024 called The Last Lease Ever Program. It is where you sign your lease and then you start working with a lender and a realtor twelve months before you’re ready to buy a home.
Within that planning phase, when they read this episode, they’re going to talk to their lender about ADUs and they’re not going to be needing to write an offer that weekend. They’re going to have twelve months to put this plan together. You are the absolute perfect person to talk to my audience because it’s all about planning. We could have opened huge new opportunities.
I like to joke on the show that we talk about the O word a lot, which is Options. This is a gigantic way to make options. I’ve been dealing so much with the West Coast people that I didn’t realize that the stove was the only thing keeping you. H ow do you feel about this? A converted garage is an option, but if you have the land, I would assume that a home is going to have more profitability and be a better sale. Although if you have an ADU, you’re probably holding it forever if you have a garage.
Are you looking specifically for garage conversions because they’re easy? To me, I know that if the garage is in a garage, I have to adjust my price maybe a little bit down based on that unless we can show the rental income if you’re somewhere where it snows or you have a car guy who wants to keep their cars in. Which do you prefer? Is it like everything I say on my show that it depends on what you’re looking at?
You must have a show and do this for a living. It’s going to depend on your market. What do your comps have? I’m doing a lot of stuff in a historic district in my small little town. There’s street parking in the front and alley-loaded parking in the back with garages. Everybody is converting their garages to units or knocking down their garages and building nice little units with a garage. It depends on the marketability of your area.
The contributory value of a garage in our area is about $15,000 aside. A 2-car garage is going to value at $30,000 of contributory value. We don’t sell. We’ve never sold a house. Our mindset or our goggles are looking at it through a tenant’s eye. We’re like, “Is this tenant going to want a garage or do I want another tenant? Does a tenant need a spot to put all their dirt bikes or does a tenant need a place to live?”
In our area where the land is so valuable, a lot of people are opting for accessory dwelling units over a garage. I personally don’t like garage conversions as much for several reasons. I’ll go over it really quickly. It’s because usually, we can’t control the ceiling height that’s already set for us. There’s always a slab. We have some moisture issues occasionally with a slab. Usually, it wasn’t built and designed for a conditioned habitable living space so there’s not a vapor barrier under this slab. There’s no rigid insulation. I would usually opt to build a new unit.
One of my favorite designs is the ADU above garage. We build a 22×26 footprint, so a 2-car garage with a 16-foot garage door, and then above that is a 573 square foot, 1 bedroom, and 1 bath apartment. We can’t always do that. New construction is the time. If anybody’s ever building a garage, it better have an apartment above it period. The contributory value of the garage is so much less than the actual ADU. I would suggest that first-time buyers look at the garage as low-lying fruit to convert into more living space.
One thing I’ll add to that is back to your squinting in our first-time home buyers. They’re practicing. They’re saving up. They’re training for twelve months to go take a crack at a house. We cannot forget to remind them, “This is not your forever home. If you’re looking to build wealth and real estate, you’re going to put this into service, not sell it, as a rental property in the next 1 to 3 years and go repeat it.”
If you’re a first-time buyer, get this out of your head. The first house you buy at 25 with your new wife or new husband is not going to be your forever home. Statistics say it will not, so don’t get tunnel-visioned into, “If I convert the garage, what if in ten years I want to get a hot rod?” Convert the garage so you can get your foot in the door and get on the property ladder. Many people wait and are like, “I wish I would’ve done this before.” Many people wait because the carpet’s not right, the countertop is not right, or the garage ceiling is too low. I tell people, “Take action.”
The average age of first-time home buyers was 36 in 2022 and 35 in 2023. That’s amazing to me. How many 30-year-olds do you know that have their stuff together? There are a lot of people who are 30 years old and are spending $2,000, $3,000, or $4,000 in an apartment. When you were talking about that, the first thing I thought was, “I’m going to reverse it. I’m going to find a place with an ADU on it. I’ll watch all your YouTube videos @ThatADUGuy on YouTube, figure out the process, and find a place with it. I’m going to live in the back and I’m going to rent the front and get more rent. In 3 or 5 years, I’ll move out and keep that property.”
Did you guys all read that? Everyone wants to move up the ladder, play Monopoly, and get their four little greenhouses and a hotel. What Derek has done is keep every single one that he’s had and has passive income forever. I know we’re not an investing show, but there is such a house hackability to this if you only do it once. You can take my philosophy. Live in the small, little 800-square-foot place and rent the front out. You’re going to make a ton of money. In 3 or 5 years, move out the tenant and then you move into the big house and rent out the backside. This is amazing.
This isn’t what I’m just talking about. I’m not a talking head up here saying, “Do this.” If you go to my Instagram and look at the first pinned video, it’s a 524-square-foot ADU that I built that I live in. I live in the little tiny house behind the other little house that I built. I built 2 houses and have moved in the back 1. It’s not an investing show all the time, but do you want to live in a house and not pay a mortgage? Everybody should be going, “Yeah.”
I haven’t paid a mortgage in maybe fifteen years. I don’t pay mortgages. I get paid to live in new houses because of this strategy. You don’t have to do it twenty times. You can do it once and cut out what is, by far, our largest expense, which is housing. You cut out your housing expenses and drive an old car. My main daily driver has 410,000 miles on it. I cut out my two biggest expenses, housing, and transportation. I eat really well. I like organic food. I’d be embarrassed to tell everybody my food bill monthly, but the guilty pleasures.
If you get paid to live in a house and you have zero transportation costs outside of maintenance, insurance, and gas, you can really supercharge your savings, whether it’s to send your kids to MIT, take lots of European vacations, or whatever it is. You can bury it under a tree in your backyard. I don’t care, but you’ll have more income that you can use.
The biggest thing that we’ve been talking about here on the show for the last couple of years is we’ve had so many success stories from people that did this through COVID and post-COVID when everyone was screaming, “The sky is falling.” The one thing that has been a constant is rents keep going up. The new term I’ve been using over and over again to my audience is, “You need a rent replacement strategy because you’re going to pay a high rent anyway.”
Don’t think, “I already pay $3,000 a month. Now, I have to pay $4,000 a month. I can’t afford $4,000 a month.” You can. You’re affording $3,000 a month for something that you’re getting nothing. A rent replacement strategy is the more options you have, the better that strategy can be. Everything you’re talking about and everything that’s on your Instagram and YouTube is going to show people things that they can do while they’re shopping, at the time of purchase, or after they purchase. There’s one thing you can’t change, and that’s the type of land that you buy with the original purchase.
I encourage everybody to dig deep into Derek’s stuff while you’re in your planning phase. Forget about the carpet. Squint. Don’t you dare talk to me about the paint color on the walls. You are buying something that is going to create your financial freedom forever. We’ve added a huge hack, which is to look at the land and look at the ADU options. You’ve got playlists on there. Do you have some basics for the people who are reading about this for the first time? Do you have some basic things that they need to know that we haven’t covered?
Yeah. One thing I would say is to become an expert in your local planning and zoning code. People might be thinking, “What the hell is Derek talking about? I’m trying to buy my first home and get out of a rental where my jerk landlord keeps raising it 10% every year.” The point that I’m making is to make a simple phone call. Your realtor’s probably not going to know. I’m so sorry if you’re a realtor out there and you’re throwing stuff at the screen or turning the radio down. I’m sorry, but most realtors do not understand zoning.
This is what I would suggest you do. If you are in ABC California, I would call ABC city and say, “Can I talk to the planning and zoning department?” You’re eventually going to get a hold of somebody. I always tell people to email, call, and if possible, physically go into the building. You’re going to have to introduce yourself to a planning and zoning official in your market where you’re looking to buy and ask them, “I’m looking to purchase a house with an ADU, purchase a house and convert it into an ADU, or purchase a house that has a garage that I can convert to living space. What are the standards here? What conditions would I have to meet?”
It’s usually a phone call. They’ll send you the code like, “Here’s our ADU code,” or, “Here’s our guest house code,” or, “We have a residency restriction. You can have an ADU and rent it, but you need an off-street parking spot. You can only do it if you’re the primary occupant, so you’re not going to be able to stack these up.” You’re like, “Maybe I need to look at my strategy and look more toward a traditional duplex.” You need to know the rules before you make the offer. By becoming an expert in your local planning and zoning code, call the decision makers, ask them what standards there are when they send them to you, and read them. That’s it. It could take you a couple of hours to become an expert in your zoning code.
Many people call me from all over the country and are like, “I bought a house with an ADU. I came to find out I bought a house with an illegally converted garage.” Don’t be that person. You have plenty of time. You’re waiting twelve months. You’re learning and educating yourself. You’re training with this team right here. Make that phone call. Even if you haven’t and you put a place under contract, you’ve got fourteen days. Maybe you only have seven days of due diligence. It doesn’t matter. Call the city. One of those days will be a weekday. You’ll be able to get a hold of somebody. Become an expert in your local planning and zoning code.
The other tip that I haven’t really talked about all that much is to consider the long-term. Many people are looking at the cost of capital where interest rates are going up to the edge of their affordability, which I never recommend. If it came down to coming up to the edge of my affordability and having low reserves or waiting forever until I had enough reserves where I thought I was comfortable, I would go with the first. You have to take action. We don’t have to be perfect at this.
I learned so much every single day and I’ve been doing this for 28 years. If I had thought, “I need to know more before I do my first deal,” I would still be a tenant. It’s all about action. Pay attention, keep your eyes open, and take action. Whether it’s the ADU strategy or any strategy for that matter, the one piece of mindset that took me decades way longer than I’d like to admit is the mindset of, “We need to take forward action.”
It’s all about action, action, action. Pay attention, keep your eyes open, and take action.
I couldn’t agree more. When I heard the stat that 36 was the average age of first-time home buyers, I went online and purchased GetOffYourAss.org. If you go to GetOffYourAss.org, it forwards you to the How to Buy a Home website. I was telling people the same things, to take action. Post-COVID when I saw the market was coming back, there’s one giant thing that I tell everyone the reason the crash isn’t going to come. There are 57 other variables and a bunch of nerd data that I know, but it’s 1 thing, which is low inventory. That low inventory has been the reason why we are in this weird market where rates go up and prices still go up. What you are talking about is taking action. Stop listening to the headlines and listen to someone like Derek.
I appreciate the compliment you said to me, which was, “You must be a guy who has a show.” I’m writing copious notes here. You need to do a TED Talk. Talking to you is when I talk to my other realtors who have been doing this for a long time. The verbiage, dialogue, and everything flow right out of your mouth.
I will tell my audience this. What you said was great about calling. I’m going to challenge them to do one thing even further. When you call someone in the zoning and planning at your little local area, you never know if they picked up the phone if they had to pee or if they had another meeting coming up. Stop scrolling. Stop binging. You’ve got twelve months to figure this out. Somewhere at the beginning of your planning process, get in your car, take a little time, and drive down there. If you have the opportunity to see someone face to face, you can get the same information.
Many people spend hours on Reddit trying to figure out what cell phone to buy or what car to buy, but when they want to buy a home, they go to the realtor and say, “Tell me everything.” How about spending as much time as you did in your deep dive going down the matrix and the rabbit hole online when you were trying to figure out what’s the cheapest way to buy your next laptop?
Take a little time and drive down there. When you see these people face to face, you get such incredible information. The guys down there know me in my area. It’s so much fun to talk to them even though I don’t know and understand half the stuff that they’re talking about. That’s the point. It’s like the show. You learn and you get educated.
This was amazing. We’re going to have you back, for sure. I’m going to get this out there to everybody. Readers, this is your thing. At [email protected], email me your questions. I will get them all together and get Derek back on and we’ll have a Q&A. Tell them once again where they find you, you incredible, giving person. I cannot believe you’re giving back with all this stuff.
Thanks. I’m probably the most active on Instagram. Give me a follow there. You can see everything that we’re doing. It’s all free. It’s all open source. The YouTube channel is @ThatADUGuy. You can go to ThatADUGuy.com. We give away our shopping list, like all the supplies we use. We give away plan sets of 2 of our favorite units, including the 1 that we built.
That seventeen-video series, How to Build an ADU with Cost Breakdown, on YouTube, at the end of that series, the plans that are on the resources page, that’s the ADU we built. I ‘m on an excavator cutting the pad. I’m pouring concrete. I’m standing on the wall. We build this house. I teach you all 200 steps, and then we give you the plans. You don’t have to be a builder to enjoy this. At least understand what you’re going to pay your builder for.
Those are the resources. Those are the places you can find me. You can email me or call me. I tell people, “If you’re going to call me or email me, you better be ready to take action.” My phone rings all the time. I pick up probably 2 or 3 calls a week that I pick up the phone and they say, “I didn’t think you were going to answer.” I’m like, “How can I help you?” They don’t even have a question. They called to see if I would pick up. Don’t be that person.
If you respond to any of my comments on Instagram or YouTube, I answer those every single night myself. I have no VA. It’s all me. I really want to help you. You can follow me at those places. You can see what I’m doing here with David. Thanks for giving me the time, everybody. It’s an honor to come into your audience and get to share something that’s maybe a little bit off the beaten path.
It’s off the beaten path, but it’s a house hack. Affordability is going to be the number one issue, challenge, or obstacle as we get into the 3rd and 4th quarters here in 2024 and 2025. We’re anticipating the prices are going to continue to go up. That’s why I finally said, “I’ve got to do this.” You are everything advertised and way more. Thank you so much.
That’s Derek, That ADU Guy. Find him. Check it out. Send me emails at [email protected]. I will get him back on and we’ll have all the ADU questions. He will pick up the phone, but it will be a great way for us to get a deep dive and find out what the audience really wants to know. Thank you so much. This was fantastic.
My pleasure. Thanks for having me.
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I ‘m so excited to have you get an opportunity to read that. I know for some of you, it might be overwhelming because you’re trying to figure out how to get into a home. If you read the details of what Derek had to say, maybe it’s not something you want to do for this first purchase, but it’s something that you could, should, and maybe consider down the line as a way for you to supplement your income.
I’ve said before there’s no time when paying your mortgage is harder or more expensive than the first three years. Those of you guys out there who are freaking out about PMI, I can’t even explain to you how much better the math is. Instead of putting 20% down on a property, you put 10% down on a property that doesn’t have an ADU. Convert it into an ADU for, he said, $30,000. You could convert one of the rooms into a full ADU and collect that rent. I guarantee you that your PMI is going to be maybe a couple hundred bucks. In some places, it’s only going to be $100 depending on how expensive it is.
How much rent are you going to be able to get for a single room in your area? I bet it’s a lot more than that little cost of the PMI. That’s one of the ways that you can combine the How to Buy a Home first-time home buyer knowledge and the ADU knowledge and make buying your first home much more affordable than you ever thought it was. That’s for buying a home that doesn’t have an ADU in it.
If you can look for a home that has an ADU that can qualify, you’re talking about being able to go up 20% or 30% in the amount of home that you can get approved for with your lender. If that doesn’t make sense to you, read that again and think about it a couple of times. People ask me all the time, “What’s the house hack?” That’s the house hack. That is it.
I was really excited about that interview. If you’re new to the show and you’re tuning in to this because you’re into ADUs, that’s awesome. Check out the entire catalog of the show. Episodes 1 to 200 are everything that you could ever look for. If you’re brand new, start at episode 201. That’s the ten basic steps on how to buy your first home.
Thanks so much for tuning in. You can check Derek out. He is @ThatADUGuy all over YouTube and Instagram. The show is at HowToBuyAHome.com. We’re also @HowToBuyAHomePodcast on Instagram, @HowToBuyAHome on TikTok, and @HowToBuyAHomePodcast on YouTube . Derek has inspired me. I’m going to be getting my YouTube up and coming big here in 2024. Thanks so much, everybody. I hope you got some great information out of this. Thank you so much to That ADU Guy. Derek, you’re a gem. You are a real, true, genuine, and wonderful person. You know what I’m going to say. You can do this.
Important Links
- Derek Sherrell
- @ThatADUGuy – YouTube
- Instagram – Derek Sherrel
- GetOffYourAss.org
- [email protected]
- Ep. 201: How To Buy A Home- Step By Step
- @HowToBuyAHomePodcast – Instagram
- @HowToBuyAHome – TikTok
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!
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