BiggerPockets Money Podcast - 550: How My Home Makes Me an Extra $1,400/Month (EVEN In an Expensive Market)

Episode Date: July 30, 2024

Wouldn’t it be nice if your home paid for itself? Every month, you throw a substantial sum of money towards your rent or mortgage payment, but what if you could live mortgage-free? With ADU investments, it’s more than possible. Michael Russell used an ADU (accessory dwelling unit) to make an extra $1,400/month off of his pricey California home. Combined with a bit of house hacking, Michael was getting PAID to live in one of the nation’s most expensive states. And he did it all on an average salary! So, how do YOU use ADUs to lower your cost of living and turn your home into a cash-flowing investment? Today, Michael walks us through exactly how he did it, how much it cost, how long it took, and how much money he ended up making. With high interest rates, will the ADU investing strategy still work in today’s market? How hard is it to build an ADU? And what’s the one mistake Michael wishes he hadn’t made before he built his ADU? We’re answering all these questions in this episode and showing you how to slash your mortgage payment, even if you live in a costly housing market! In This Episode We Cover ADU investing explained and how much it costs to build an accessory dwelling unit Why more local and state governments WANT homeowners to build ADUs How to get paid to live (even in a high-cost-of-living area) with ADUs and house hacking The one mistake that cost Michael months of time (and rent) that you can’t afford to repeat Finding homes with ADU potential and the investor-friendly agent you NEED to spot these opportunities And So Much More! Links from the Show BiggerPockets Money Facebook Group Network with Other Investors on The Path to FIRE Through the BiggerPockets Forums Finance Review Guest Onboarding Join BiggerPockets for FREE Mindy on BiggerPockets Scott on BiggePockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Find an Investor-Friendly Agent in Your Area Find Investor-Friendly Lenders Property Manager Finder Work with Michael BiggerPockets Real Estate 356 - 30+ Rentals (in a Pricy Market) Through BRRRR and Section 8 with Joe Asamoah BiggerPockets Real Estate 575 - Killer Cash Flow with This “Tenant-First” Section 8 Rental Strategy w/Joe Asamoah BiggerPockets Money 37 - Paying Off Student Loan Debt with a Median Income and Two Kids in Northern California with Kyle Renke 00:00 Intro 01:19 Money Snapshot 04:17 Home Run House Hack  06:01 Smart Money Moves Early On 10:47 Surviving on $36K/Year  12:40 Building the ADU 22:12 How Long Did it Take? 24:55 ADU Investing with High Rates  33:37 Starting ADU Side Hustles 37:40 The Right Type of Agent  45:58 Connect with Michael!  46:59 The Housing Solution? Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-550 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

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 Mantica, California, which is about an hour or so east of San Francisco. 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. I'll permit that intro.

I'll permit it. BiggerPockets has a goal of creating one 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 Shirel, 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. Today's guest is Mike Russell, who's investing in Northern California. He sought the council 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. Thanks so much. I'm happy to be here. 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. Yeah, sure. So right now I'm 26 years old. I work in Southern California at a church and I help out in their music program. I make about $52,000 right now in that W-2 income. And I've got a few side hustles that I do. I write music on the side.

I also have an architect and design business that actually came out of the ADU, which I know we'll talk about in a little bit. And then when I first started going to college, my dad set 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 maxing that out. And right now, kind of the main financial goal for me right now is to save up enough for another house here in SoCal.

Awesome. Can you give us a snapshot of your current housing situation and what is going on there? Yeah, right now I actually just moved into a little one-bedroom apartment about a week ago, actually. So I kind of just finally got moved in. So I'm renting right now, which I know 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. Renting is a wonderful decision, especially in parts of California. And it's 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 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. Yeah, yeah. So I live most recently. I lived in the house by myself. It's a five-bedroom house. and then I had the ADU garage conversion in the back that I have rented out. So not quite covering all the mortgage when I was living there, but enough to, you know,

where I could pay it towards the mortgage and it was still cheaper than renting anything in that area. 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. Michael, let's, can we just preview the numbers on that real quick? What is the house worth plus a 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? So right now, I'm hopefully going to get an appraisal done soon,

but I'm hoping the property is worth around 575 right now. I bought it for 405 with 5% down. So when I first started out and I was house hacking it, I was making a lot more because I was doing room rentals. Right now, the mortgage is 2,500, and I have 1,600 coming in from the ADU rental. So at the time, I was only paying about $900 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,

about $120 for other utilities. So right now, all in all costs is probably around $2,800, and I have got $1,600 coming in every month. And how much do you get for the main house, or how much rent will you get for the main house? Hopefully, anywhere between 2,800 to 3,000. Okay. So you'll be getting, if I'm doing the math, right, you'll get 1,600 plus 2,800 conservatively, which gives us $2,400. $4,400, $4,400 per month that income on approximately $2,800 in expenses, but that's before property management and vacancy and maybe some more maintenance and CAPEX.

But we're still doing really wonderfully on this rental property. And this is a, you know, post-COVID transaction here. Is that right? Yes. 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. Awesome.

Well, let's rewind a little bit and let's go back to your money story. And can you tell us kind of 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 position to buy this house in 2021. Yeah, for sure. Well, growing up, we didn't really ever talk much about money. The two main things that my sister and I were taught as 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 money lessons to learn at such a young age. So I always had that mindset anytime I would work or do chores or something like that,

I would just go directly into a savings account. And then I started to be able to make a little bit more when I got into high school. A buddy of mine, who was a couple years old and me who lived in my neighborhood, had his own lawn care business. And he was graduating and going out of state. He said, hey, I've got a couple of them. Do you want to just take this over? I'm like, sure, why not?

So I ended up taking about three clients from him. And over the remaining three years, I had a high school. I ended up with about 20 clients. So I was making, I charged less than what I could have, but, you know, 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 in McDonald's. So I was kind of working two jobs while I was in high school to be able to save enough to put money down towards college. So that's kind of where my money journey began, mainly in high school is when I really started thinking about money and how much I could save and stuff like that. So what was your financial situation when you graduated high school?

Graduated high school, I ended up graduating with about $8,000 in the bank. So I went to a college in Northern California and that I ended up paying for my first semester, which was pretty cool. And then I got a job and was able to save up enough to pay for the next semester when the second semester came around. What did you graduate college then with in terms of your financial position? Yeah, I graduated college with $28,000 in the business. bank. So then I held on to that and then used that as my down payment to go into my house

hack. So this is this is a self-funded, you know, hard work, sweat, smart, conscious, you know, decisions there. And, and you end up with $28,000. What year do you graduate college? In 2020. 2020. Okay. Oh, welcome. And we know, we know you bought your house in 2021. So walk us through what your career was like post-graduation. Did you start out immediately earning six figures and ballooning that to 250k annual salary? No, not at all. So I, like I said, I work in church ministry now and then I worked in a church ministry directly after college. And I didn't take that job to make money because you just don't make money when you work at churches and that 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. So I I started doing some research on just, you know, side hustles you can use to make other money. I started listening a couple of YouTubers. Graham Stephan was one of them and he had a guy who was a guest on the Bigger Pockets podcast. So he started talking about Bigger Pockets a little bit. I can't remember his name. So anyway, that's what led me to BiggerPockets.com and Brandon and David and the podcast. Read all the books, Scott.

I read your book, which that's one thing that really impacted me back in 2021. one. And so anyway, I decided that house hacking was for me and I really wanted to try and get into a house. So I knew that with only making, I was at the time, it was 36,000 a year. I knew only making that much, there's no way I could afford a mortgage on my own. So I actually went in with my grandfather and I used his name to help me buy the house. So I was able to use my own funds for the down payment. Ended up with about 5% down. which actually, funnily enough, David Green's team was the one who actually helped me buy the house because they're in Sacramento, which is about an hour north of us.

So Kyle Ranky, shout out to Kyle. He helped me out a lot. He was my agent for buying that house. And a 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. Fantastic. So use the one brokerage with David Green and Kyle and found this deal.

walk us and I love walk I love the fact that you partner with you 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 are you how were you basically surviving in California on $36,000 a year because I thought that was not possible um you know my parents tell me good financial principles as far as saving and 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. 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. 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 of my English. income and then still, you know, keeping living expenses as low as it could in order to make it. When you were renting out these other bedrooms, were you living for mortgage-free? Yes, I was at, so the average room rented out for about 650. So I had four rooms available for rent in the house and I lived in one and then an actually guy actually ended up living in the garage too. So I had about a total of close to $3,600 a month coming in from those room rentals. and so basically I was getting paid.

Actually, at the time, my mortgage was $2,200. So I was making about $1,400 a month and living for free. There you go. You had a Grand Slam home run house hack. And then did you eventually stop renting out so many rooms? Yes, I did. You know, 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 like, all right, I'm kind of done.

you know, living with this many people. Plus, all the guys were a lot older than I was, so 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. 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. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly,

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Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP Money. 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 act that on paper already seems like a pretty good deal? Yeah, for sure. It really came from wanting to kind of maximize the potential with the property. When I bought the house, I didn't really intend to do anything with the garage, just thought it would be cool to have an extra storage space.

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. But again, I didn't really have that much information about ADUs or what the potential of that could be. 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, you know, figure out a way to still make this work. So I entered at the time listening to the bigger Pockets podcast. and Derek Sherell was on.

And he's the ADU guy up in Oregon. And it was really inspired by his story and how he just kind of rinse and repeat and did the same thing over and over again with either garage conversions or building ADUs from the ground up. So on the podcast, they ended up mentioning his website. So as soon as I was done listening to it,

I sent him a message on his website. He's like, hey, I would love to chat with you a little bit more about how all this works. So anyway, I ended up talking to him. Super great guy. I really enjoyed 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 I could design it, how long is it realistically take, how much you could probably cost. Obviously, construction costs are different state by state and who you have working for you. 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 run for?

And how did you how did you come up with those estimates? Yeah. So like I said, it's a garage conversion. So I know it wouldn't be doing anything from the ground. And kind of based on what Derek kind of advised in his numbers, he said we could probably do anywhere between 50 and 60,000. Because the guys who actually helped me renovate the main house were the same guys that were going to have to do this. And there are some friends of mine who are also really good contractors. And so I kind of hoped that that would be kind of be the number 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. And then obviously it's $1,600 now.

So it jumped up quite a bit, which we can get into all that. Okay. So we have $50, $60,000 in cost for $13 to $1,400 in incremental rent. That's essentially all pass through. 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 on this particular analysis. But for all intents and purposes, we can back on that app can at like, hey, that's a 20-ish, 25% percent 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. So that's an awesome on-paper analysis. What did you actually predict it would do to the value of the property before the project began? You had this $56,000 project. How much is the overall value the home go out by? Honestly, I'm not super sure at the time. I was hoping for maybe around $100,000.

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. If your property is big enough, you can section off your property and sell just your ADU, which is kind of a crazy concept, which is cool. So hopefully I'm going to get an appraisal done soon to see exactly how much the property is worth because actually in my immediate neighborhood, there is about three or four people who are also doing ADUs right now. Am I just aware of where this is again, by the way? This is in Mantica, California.

Manika, okay. For those who don't know California very well, can you describe where Mantica is? Yeah, for sure. 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. This is not like San Francisco market. This is a relatively more affordable part of California, but still expensive. This is a more than median priced home in the United States by a healthy amount.

Yes, for sure. Okay. So you did all these estimates and then let's talk about the project. What happened? How to go? It went really well. So kind of start from the back from the drawing portion of it. There's actually a friend in my Sunday school class at church. 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 she would charge. 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. Let me just do it for free for you just to kind of see how it all works. So I didn't have to pay into paying anything for the drawings. And we worked really well together. Fortunately, the city of Manteca is a wonderful place to submit permits because I got comments back under two weeks. And then a week later, I had my permit. So that was a really nice deal to be able to get the permits so quickly.

And kind of fun fact, we ended working so well together that we actually started a business together. So now we actually do architect and design plans mainly for 80Us. But, you know, we do all the other different kinds of resists. initial projects as well. But anyway, that's not what you think of when you think of California local government there. So that's awesome. Not, not at all. It's insane. Well, I just wanted to say, 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. 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. And hopefully the process will go a little bit quicker as time goes on. But I was about to say earlier, 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 were in July of 2024 and we still don't have it. So it really just depends on this jurisdiction of what you're trying to submit your permit because that has so much to do with how quickly you're going to get it.

So I lucked out in finding out that Manteca was so quick, but there are few and far between for cities that are that quick. Yeah, my dad doesn't like New Jersey either. No, that's one of the states on my list of I Will Never Invest here for several reasons. The permitting process and 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 a 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.

have them all written down in advance. But, you know, 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. 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 buy two. How did you finance this $56,000 construction project? Part of my grandpa coming in with me was he also provided $100,000 to invest in the property.

So you used a portion of that to renovate the house first when I first moved in. 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 have been saving. But from the extra coming in from the room rentals, that that was how I was able to finance the construction of the ADU. Mike, we'd love to get into how the ADU conversion went and some of your lessons learned after this quick break. Bigger Puckets 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 let us know that you're liking what you hear. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look

backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place.

So every decision actually moves in a needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsor jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than non-sponsored posts.

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to all customers. Visit northwest registeredagent.com slash money free and start building something amazing. Get more with Northwest Registered Agent at Northwest Registered Agent.com slash money free. And we're back. Okay, so we get permitting in a couple of weeks. Construction it sounds like goes fairly smoothly for $50,000, $60,000. And what happens next?

How do you stabilize it and how long does it take you to put this property, get this property into its end state? Well, for my situation, a lot longer than it could have gone. So it could have gone about four months from breaking the concrete to installing or attaching the sewer lines to having someone rented out. But instead, it ended up taking about a year and a couple of months. And the reason for that is is PG&E was not able to come out and install power. So PG&E is Pacific Gas and Electric. Is that right? Yeah, sorry, Pacific Gas and Electric, because the power company are here. So as soon as I got my permit, I started doing construction, and I thought, I don't really need to call the power company right now because I'm a ways of ways 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 electrical already.

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 is 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. And I'm like, okay, great. So what's what's that kind of look like timewise? And he says, well, we're about eight months out from being able to do anything like that. So you did not buy this gentleman donuts prior to this meeting per mini earlier suggestion. No, I did not.

I should have. That was the red flag there. That's why. Yeah, those donuts really cost you. 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 little bit longer than a year, a year in five months or so.

But they came out and they did it in a couple hours. So I'm like, man, I had to wait over a year for like six hours worth of work in order to get powered in 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. That's a great point. So this is an awesome story here. We buy the property in 2021. You begin the project in late 2022. The project is completed in 2024.

You're out $50,000 to $60,000, several dozen donuts, and 18 months to get this thing done. And now you have $4,400 a month in income when the property is fully stabilized against the mortgage of $20,000. $2,500, 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, you just vacated. Is that right? That's the current situation.

Awesome. So what comes next for 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? Absolutely. I'm still trying to navigate that. What I'd like to do would be able to utilize the equity that I've built into that property. 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 Helox. 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, probably around 5%. And then just kind of rent and repeat, I'd love to be able to. to, you know, convert another garage or even building it from the ground up. Just because I'm very confident that ADUs are going to become more and more popular as the

years goes on, especially here in California. And I know. And, you know, at the time when I first got into real estate, you know, 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'd 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. 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 in the last house. But in the long run, if I hold on to the property, it will benefit me greatly. 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. 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. 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 7.5% instead of two, three or four percent like it was in years past. And I think that this is the primary hurdle that would that knocks people over essentially and prevent something getting started, especially in the state of California, although maybe not specifically in Mantica, 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 it at the 7%, 7.5% interest rate? And what do you think

that buy box will be? I think it could work. in today's numbers and interest rates, it just depends on what you want to do to the property. So if you have $3,600 a month coming in from room rentals, I think you could afford a mortgage for $405,000 at a higher interest rate. Now, I'm not sure the exact numbers of 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 for a high.

Now, as far as the ADU goes, I think I looked out too with having two friends who were contractors who helped me because I definitely ended up paying a lot less than I could have for a garage conversion, which I actually wanted to bring this up to. I know I had estimated around $50,000 to $60,000 for the renovation, but actually, and all in all, I ended up at around $83,000 for how much I paid to convert the garage, which the way I kind of looked at it, whereas if I have $1,600 coming in a month, I'll have paid off the construction for that in about five years, which is pretty cool. But anyway, you just got to look at 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 room rental and things like that. 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 constrictions 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 $6.50 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. 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, Mike, you mentioned that you moved recently and you're saving up for a house hack again.

Are you currently looking for the – are you currently getting listings sent to you from an agent? Or are you just in, like, hold mode right now? I'm in hold mode right now. I still got a little ways to go before I can save up enough for a down payment. So the market will probably change within six months to each. year. So I've just kind of done a little bit of research on my own right now, but that's kind of where I'm at. 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 this little website called BiggerPockets. It's BiggerPockets.com

slash 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 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 maybe Scott and I are. So I just want to encourage you to talk to an agent sooner than later. Yeah, thanks for that. That's really helpful. I think I'll do that. With regards to Section 8, have you listened to episode 356 or episode 575 of the Bigger Pockets real estate podcast. Both of those feature Joseph Osamoa, who's kind of like the, I don't want to say king of Section 8, but he really, really, really understands Section 8 and has a great way to look at it and a lot of great tips on how to navigate the rules and regulations of the program. Yeah, I remember listening to his podcast. It was a while ago, but if that's the route, I'm going to go

from my main house. I think I'll definitely listen to that and get some more research done on that. I think there's some bad information or misinformation about the Section 8 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. Yeah. If you do it the right way, it's almost like government-sponsored rent. Like what's a more recession-proof strategy than that in a lot of ways? Well, Michael, I would love to hear, you mentioned this casually, but you said a client in New Jersey was not having a good experience.

And you alluded to this earlier, but can you, I think that 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? Yeah, absolutely. So like I said, my friend of mine who drew the plans for my ADU for me, she had talked to me about, you know, wanting to get into this architecture business. And, you know, I was into real estate or I am still under real estate. And we kind of thought it might be a good match to try and start something. So she's kind of the brains behind the business, you know, dealing with the client specifically of design of different construction, different types of construction. and I kind of handle more of the back end on the financial side, you know, systems or processes

and stuff like that. We've been in business, we started in October of 2022. So we're just almost at a two-year mark. And it's gone a lot better than either one of us thought it ever could. You know, California is a great market to be able to do this kind of stuff. And yeah, we're still going strong. We're basically service all of California right now. And just to correct, you said, I might have missposed.

but it's actually in Newark, California. So it's a city in the Bay Area that's relatively close to Manteca up there. So it's a Bay Area city that's given us problems. Awesome. So, yeah, I think that's a really awesome. 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.

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 a 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 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.

Yeah, absolutely. And it's pretty cool with some of the clients that, that we've gotten to work with. You know, as the interest rates have skyrocketed, some people, you know, wanted to live in a house and wanted to buy something else, but that didn't become possible for them. 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 rental.

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. Michael, walk us through the rationale between long-term, short-term and mid-term rental and your choice with respect to that on the ADU? Yeah, absolutely. I've done a little bit of research on mid-term. It 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, like I said,

for the long-term. Short term, I knew I wouldn't have the time to be able to manage it that well. And plus, Mantec is not really a destination city or anything like that. So the market, the little research I did, I didn't think it would be worth, you know, renting, trying to rent that out on an Airbnb or V-R-B-R-B-R-B-O or like that. Like I said, I did a little bit of research into the midterm rental, which obviously you can get a little bit more. But thankfully, I lucked out.

I've got a great tenant in there who's going to be there for a year. He's fantastic better than honestly than I could have hoped for. So it's worked out pretty well as far as the long term aspect. That's kind of why that made sense to me. 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 put that into action?

Because I think it's great that you did that. that a lot of people would struggle with that. For sure. Well, that's something I definitely struggled with. So a little bit of backstory. I had mentioned to a few people, you know, at church like, hey, you know, I might be buying a house soon, just kind of just in casual conversation. Anyway, Ward ended up spreading to this real estate agent who was at the church. And so she approached me and said, hey, you know, I'm a real estate agent here in Mantica. I'd love to work with you. And again, this is my first time working or dealing with a real estate agent at all.

And so I said, sure, why not? 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. Turns out she wasn't an investor. So that was one thing that was kind of a red flag when I found that out. You know, because obviously I'm trying to get into real estate to invest and having an investor-friendly agent is extremely helpful because they know what potential the property has, what the right, the questions you should be asking. 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. 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.

And he said, 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. 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. I would really like to work with him. And I just, you know, I don't think this is a good fit for me right now. And she understood and we're able to move on, you know, like I said, I'm still friends with her and her family this day.

So thankfully it didn't end in bad blood or anything like that. That was just kind of one little difficult conversation I had to have. But it was 100% the right decision to make because Kyle, and his team were so awesome. They made the home buying process so easy, and it was definitely worth the awkward confrontation for one minute. This is a great anecdote. I mean, 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. And it's just they have no idea what they're doing. Often the investors way more experienced and knowledgeable about real estate, even if they're a rookie because they've listened to so much content and have so many good frameworks around this, then 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. 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? Yeah, I would say absolutely. Especially if you're someone like me who was just starting out, you want somebody who's very well-educated in the real estate space because they can ask questions that you don't even know you're supposed to ask. 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 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 and your team to propel you

forward in home buying and investor property buying, you know, as far as contractors go, appraisers, you know, architect's 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 be in partners with a team where everybody wins and everybody helps each other win. 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 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. 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's 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 slash agent. Yeah, I couldn't agree more. This is wonderfully sponsored by the BiggerPockets.com slash agents matchmaking service. Definitely go check that out.

But I'll even go two steps further on this and I'll say, before you reach out to the agent, be serious about this intent to buy. Don't waste anybody's time with this. And 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 lucked out by getting this great relationship with Kyle. But I think that if it, 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 bigger pockets at COPSS agents, five great agents to choose from and now can choose the best one for you from that interview process.

But you should come 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 what's going to work. And in a place like Manteca and a place like Denver, If they're telling you, oh, yeah, you can buy a duplex and just do long-term rentals, 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 EU 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 also opportunity. and hundreds of thousands or millions of dollars to be made through these strategies. So that's 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 news to me on this one. So that's awesome. 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. So I bought it for $405,000. It's a five-bedroom house with a detached garage of 1,400 square feet. So I rented out all of the original bedrooms for about total of $3,600 a month with a mortgage of $2,500.

And then right now, as it stands, I'm going to be renting out the house soon. And I've got $1,600 a month coming in from my ADU rental. And the expected rent from the main house is $2,800 to $3,000, is the rate you're expecting? Yes, correct. Awesome. Michael, where can people find out more about you? So I'm mainly on Instagram with my side business, M-P-Builds, CA. The M stands for Michael and the P stands for Patricia, who's my partner.

We also have our website, mpbillca.com. And if you need help drawing plans for your project, we'd love to help you out. 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. Thank you so much, Michael, for coming on today and sharing your awesome story. Congratulations and the huge success with.

this ADU and definitely tell us about the next one that you do. And when you need your next investor-friendly agent, definitely try Kyle again. And if he's not available, try one of the guys on biggerpockets.com slash agents. 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 today. Thank you, Mike. This was a lot of fun. And we will talk to you soon. All right. That was Mike. Mindy, what did you think? I love this story. Depending on who you're listening to, America is between four and eight 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 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 some other cities that we won't name. If you live in the right city, if you live in a city that has to be 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. Yeah, I love it. And just because we're here and we can wax a little bit about this, the housing affordability crisis in America has many root factors. One of them is the fact that 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 built in ADUs. So states are coming in and 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 states. 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. Absolutely. And I don't have any room in my backyard personally. I have a big swimming pool back there. 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 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. Love it. Well, should we get out of here, Mindy?

Scott, that wraps up this episode of the Bigger Pockets Money podcast. You are the Scott Trench, and I am Mindy Jensen saying goodbye, pumpkin pie. Bigger Pockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content.

Post production by Exodus Media and Chris Mickin. Thanks for listening.